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EU Commission Recommends No State Aid for Firms in Tax Havens

Posted on July 15, 2020

Member states should not grant financial support to companies with connections to countries on the EU list of noncooperative jurisdictions, according to a European Commission recommendation.

The recommendation, adopted July 14, suggests that member states deny public financing to companies that conduct business in the 12 countries on the EU tax haven blacklist in an effort to curb tax avoidance, fraud, and abuse and prevent distortion of the EU internal market.

"We are in an unprecedented situation where exceptional volumes of state aid are granted to undertakings in the context of the coronavirus outbreak. Especially in this context, it is not acceptable that companies benefiting from public support engage in tax avoidance practices involving tax havens,” Margrethe Vestager, commission executive vice president in charge of competition policy, said in a July 14 release. “This would be an abuse of national and EU budgets, at the expense of taxpayers and social security systems. Together with member states, we want to make sure that this does not happen.”

Member states may decide whether they will implement the commission’s recommendations, the release says, but they must design measures aligned with EU state aid rules and policy objectives. The recommendation “aims at providing a template to member states, in line with EU laws, on how to prevent public support from being used in tax fraud, evasion, avoidance, or money-laundering schemes, or terrorist financing,” the commission said.

“In this regard, this recommendation is certainly more than simply symbolic but indicating that the European Commission will support measures by the member states accordingly,” Salomé Cisnal de Ugarte, a managing partner in antitrust and competition at Hogan Lovells International LLP in Brussels, told Tax Notes in an email.

Cisnal de Ugarte noted that the commission’s recommendation has no binding force and puts the onus on member states to apply the recommendation at a national level. In this context, she said, EU institutions use recommendations “to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed.”

The EU Code of Conduct Group’s list of noncooperative tax jurisdictions, originally approved by the EU Council in 2017, requires that member states take enforcement measures targeting arrangements that involve listed jurisdictions. It also urges member states to adopt legislative measures, including special withholding taxes and restrictions on deductible expenses, for transactions that concern blacklisted jurisdictions.

Member states may create exceptions in laws barring state aid to companies operating in noncooperative jurisdictions for companies that engage in "genuine economic activities" in those jurisdictions, the commission said. Additionally, member states should establish “reasonable requirements" for companies to show they do not have links to a tax haven, the commission said.

The commission’s recommendations also say member states should extend the conditions on state aid to companies with owners who have been convicted of serious crimes or violated obligations to pay taxes or social security contributions.

EU Tax Commissioner Paolo Gentiloni said the COVID-19 crisis necessitates companies paying their fair share of taxes to contribute to the recovery. “Those who deliberately bypass tax rules or engage in criminal activity should not benefit from the systems they are trying to circumvent. We must protect our public funds, so that they can truly support honest taxpayers across the EU,” he said in the release.

Several jurisdictions have implemented measures to deny COVID-19 financial relief to companies based in or doing business with tax havens, including Denmark, France, the Netherlands, Poland, and Scotland. U.K. lawmakers and accounting groups have called for their government to follow suit.

Cisnal de Ugarte said each member state has a different view of whether it is good practice to deny financial support to companies based in or linked to tax havens, with some taking a “more relaxed approach” than others.

Member states that allow beneficiaries of state aid to engage in tax avoidance may inadvertently give those companies double advantages, Cisnal de Ugarte said. Companies might benefit from low taxation through their location in or link to a tax haven, giving them a competitive advantage, and receiving state aid gives companies another advantage as beneficiaries of taxpayer money, she said.

The commission will release a report on the impact of the recommendation in three years, according to the release.

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