EC excludes ‘non-cooperative jurisdictions’ from state financial support

The EU Commission recommended, on 14 July, that Member States should not grant COVID-19 financial support to companies with links to countries that are on the EU’s list of non-cooperative tax jurisdictions. Restrictions should also apply to companies that have been convicted of serious financial crimes, including financial fraud, corruption or non-payment of tax and social security obligations.

As of 27 February, the EU ‘blacklist’ comprises: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad & Tobago, the US Virgin Islands, Vanuatu and the Seychelles.

The recommendation is designed to provide guidance to Member States on how to set conditions to financial support that prevent the misuse of public funds and to strengthen safeguards against tax abuse throughout the EU, in line with EU laws. By coordinating restrictions on financial support, Member States would also prevent mismatches and distortions within the Single Market.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “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 benefitting from public support engage in tax avoidance practices involving tax havens. 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.”

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. In particular, companies with links to jurisdictions on the EU’s list of non-cooperative tax jurisdictions should not be granted public support.
Should Member States decide to introduce such provisions into their national legislation, the Commission suggests a number of conditions on which they should make the financial support contingent. The EU list of non-cooperative tax jurisdictions, it said, was the best basis to apply such restrictions because it will enable all Member States to act consistently and will avoid individual measures that may violate EU law. The use of this list to implement the restrictions will also create more clarity and certainty for businesses.
Where Member States adopt measures that provide financial support to eligible undertakings in their jurisdiction, they should make the entitlement to such financial support contingent upon a number of conditions. The undertakings that receive the financial support should not:

• Be resident for tax purposes in, or incorporated under the laws of, jurisdictions that feature on the EU list of non-cooperative jurisdictions;
• Be controlled, directly or indirectly, by shareholders in jurisdictions that feature on the EU list of non-cooperative jurisdictions, up to the beneficial owner, as defined in Article 3 point 6 of Directive 2015/849;
• Control, directly or indirectly, subsidiaries or own permanent establishments in jurisdictions that feature on the EU list of non-cooperative jurisdictions; and
• Share ownership with undertakings in jurisdictions that feature on the EU list of non-cooperative jurisdictions.

In order to verify compliance with the rule prescribing the absence of links to jurisdictions that feature on the EU list of non-cooperative jurisdictions, Member States should ensure that not only the immediate shareholders but also the ultimate owner and all other undertakings under the same ownership are not tax resident in, or incorporated under the laws of, such a jurisdiction. The owners of the undertaking that receives financial support may be legal entities (e.g. corporations, partnerships, etc.), legal arrangements (e.g. trusts) or natural persons.

For the purpose of determining whether an undertaking may be granted financial support, it should be irrelevant how many tiers of legal entities or legal arrangements may sit between the undertaking established in the Member State that grants the financial support and the entity in a jurisdiction that features on the EU list.

At the same time, the Commission said it stood ready to discuss with Member States their specific plans for ensuring that the granting of State aid, in particular in the form of recapitalisations, should be limited to undertakings paying their fair share of tax. It also recommended ‘carve outs’ to these restrictions – to be applied under strict conditions – in order to protect honest taxpayers.
Member States may disregard the existence of links to the listed non-cooperative jurisdictions, when the undertaking provides evidence that one of the following circumstances is met:

• Where the level of the tax liability in the Member State granting the support over a given period of time (e.g. the last three years) is considered adequate when compared to the overall turnover or level of activities of the undertaking receiving the support, at domestic and group level, over the same period.
• Where the undertaking makes legally binding commitments to remove its ties to EU listed non-cooperative jurisdictions within a short timeframe, subject to appropriate follow-up and sanctions in case of non-compliance.

Member States should disregard the existence of links to the listed non-cooperative jurisdictions where the undertaking has substantial economic presence (supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances) and performs a substantive economic activity in listed non-cooperative jurisdictions.

Member States should not apply those exceptions if they are not in a position to verify the accuracy of the information. This could be due to the insufficient exchange of information on request with the third country concerned, in particular the absence of a tax treaty allowing exchange of information or the lack of cooperation from the third country jurisdiction concerned.

Finally, Member States should inform the Commission of the measures that they will implement to comply with the recommendation, in line with the EU’s good governance principles. The Commission will publish a report on the impact of this recommendation within three years.