EU takes Action Regarding Use of Shell Companies for Tax Fraud

investigate shell companyThe European Parliament (EU) has voted to strengthen its ability to “unshell” companies suspected of tax evasion.


In January, EU leaders ratified legislation proposed in December 2021 to identify so-called shell companies. Shell companies are entities that have little to no economic activity. They do not operate as a going concern with staff and business objectives. Instead, shell companies are often used to hold, shelter, and transfer money into secrecy jurisdictions where taxes are minimal and anonymity is great. Shell companies are not illegal but can be used to launder money and evade taxes.


The proposal recently approved by the EU had its roots in the revelations that followed the publication of the “Pandora Papers,” a 2.94 terabyte data leak that exposed the offshore banking habits of politicians, celebrities, and businesses that sought to reduce their tax liabilities by hiding and holding their wealth in shell companies and other financial arrangements around the world. The Pandora Papers, like the early data leak known as the “Panama Papers,” was exposed by the International Consortium of Investigative Journalists (ICIJ).


The slow drip of data leaks involving the use of foreign bank accounts, tax shelters, and shell companies has spurred action on many fronts—including the EU. The 2021 proposal by the EU, called “Unshell,” provides for the following types of activities to unmask empty holding companies:

  • The legislation will introduce a reporting system for EU entities to identify shell companies that have no ongoing business purpose and mandate.
  • Companies will be assessed on reviewed for staff, business purposes, production, and premises in order to identify shell companies.
  • Following review, companies that are unable to realistically prove they are a viable, commercial entity will lose tax advantages otherwise available to entities under tax treaties or EU law.


Essentially, the initiative aims to take the profit out of using shell companies. When identified, money going into the shell company will be taxed in the state of the owner of the shell company.  Shell companies are usually located in regions with low to no taxation to avoid just this sort of tax liability. Likewise, shell companies holding real estate will pay taxes based on the location of that property—not where the shell company holding it is incorporated. By removing the “shell,” the initiative creates more transactional transparency, reduces tax evasion, decreases revenue flowing to secrecy jurisdictions, and may result in increased tax revenues in the original state of the company owner.


Member states must now weigh in on the directive. If all goes as planned, the proposal will go into effect on January 1, 2024. We will see.


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