The European Parliament and the Danish Presidency have agreed a new definition of ‘tax haven’ which will disqualify Venture Capital Funds (VCF) who are either domiciled or invest in companies established in tax havens from obtaining a ‘EU Passport’. The passport is the product of a new regime for venture capital to access the EU market and demonstrates the Fund’s compliance with the single EU rulebook.
An Expanded EU Definition.
Normally when the EU describes a ‘tax haven’ it uses two criteria based on the findings of the Financial Action Task Force (FATF) and the work of the Organisation for Economic Development and Cooperation (OECD) on tax information exchange; the satisfaction of either will normally lead to a country’s classification as a ‘tax haven’.
As a result, for the purposes of VCFs a non-EU country is generally considered to be a ‘tax haven’ if it:
- is listed as a Non-Cooperative Country and Territory by FATF; or
- has not signed an agreement with the home Member State of the venture capital fund; manager and with each other Member State in which the units or shares of the qualifying venture capital fund are intended to be marketed, so that it is ensured that the third country fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements;
Back to the Future?
Rapporteur of the new VCF rules and ‘Green’ Party member of the European Parliament Philippe Lamberts successfully argued that an expanded definition of ‘tax haven’ was warranted because the existing criteria based on the FATF was biased and incomplete; and the work of the OECD had been proven to be ineffective in practice because among other things, they do not provide for automatic exchange of information and, secondly, there are still many obstacles to information exchange to date because, for example, the burden of proof still lies on the requesting country; and secrecy jurisdictions enact domestic legislation to impede compliance with information requests.
So in addition to satisfying either one of the two established criteria mentioned above, under the VCF rules a non-EU country is also considered to be a ‘tax haven’ if:
- it provides for tax measures which entail no or nominal taxes; or
- grants tax advantages even without any real economic activity and substantial economic presence.
The inclusion of these two elements is a significant development because it is the first time that they have appeared in EU legislative text and will no doubt be used as the basis of revisions to existing EU text where reference is made to ‘tax havens’.
More importantly however it revives the debate started more than a decade ago surrounding the OECD’s discredited ‘Harmful Tax Competition’ initiative.
The UK to the Rescue?
Predictably along with eleven other EU members the United Kingdom, home to a large Offshore Financial Centre (OFC) and with not insignificant OFC-dependencies, has opposed the new EU definition.