This article reflects the position and information available as at 19 January 2023.
There was a time when international tax planning could be relatively straightforward.
Establish a company in a low-tax jurisdiction.
Move certain income there.
Use a holding company.
Take advantage of a favourable treaty.
Choose an attractive residence regime.
The result could be a materially lower overall tax burden.
That world is disappearing.
Not because international tax planning has become impossible.
It has become more complicated.
And, importantly, it has become much more dependent on **substance**.
The Old Model
For decades, European businesses and wealthy individuals benefited from differences between national tax systems.
That was partly the attraction of Europe.
Countries competed for capital by offering different combinations of corporate tax rates, holding-company regimes, participation exemptions, investment incentives and residence programmes.
An investor could compare jurisdictions and choose the most efficient structure.
There was nothing inherently wrong with that.
But the distinction between legitimate tax planning and artificial profit shifting became increasingly important.
The European Union responded with a series of measures designed to make aggressive tax planning more difficult.
The Anti-Tax Avoidance Directive introduced rules covering interest limitation, exit taxation, controlled foreign companies, general anti-abuse and hybrid mismatches. The final hybrid-mismatch provisions became applicable from January 2022.
Then came greater transparency.
Then automatic exchange of information.
Then mandatory disclosure.
And now the global minimum tax.
The direction of travel is clear.
Transparency Changed Everything
The most important change may not actually be the tax rate.
It is information.
Under the EU’s DAC framework, tax authorities increasingly exchange information with each other.
DAC2 established automatic exchange of financial account information.
DAC6 went further by introducing mandatory disclosure of certain cross-border arrangements that meet specified hallmarks of potential tax risk.
This changes the psychology of tax planning.
Previously, a structure could be technically compliant but relatively invisible.
That is becoming much harder.
The question today is increasingly not only whether a structure works.
It is whether the structure can withstand scrutiny from several tax authorities looking at the same facts.
Substance Matters
This is perhaps the biggest change for international investors.
A company incorporated in one country but managed entirely somewhere else is going to attract more questions.
A holding company with no employees, no premises, no meaningful activity and little commercial purpose is harder to defend than an operating business with genuine management and economic activity.
The European Commission’s proposed Unshell rules were explicitly aimed at entities with minimal or no economic activity that are used to obtain tax advantages. The proposal contemplated substance indicators involving income, premises, staff, management and administration.
The message is straightforward.
A legal entity is not the same thing as a business.
The Holding Company Is Not Dead
This does not mean that holding companies are obsolete.
Far from it.
A properly structured holding company can have perfectly legitimate commercial reasons to exist.
It can facilitate acquisitions.
It can centralise ownership.
It can provide financing.
It can simplify governance.
It can hold investments across several countries.
It can provide a platform for future transactions.
The difference is that the structure increasingly needs to make commercial sense.
The question is no longer simply:
“Can I put this asset into a company in another country?”
The better question is:
“Why is this company in this country?”
That is a much more difficult question to answer if the only reason is tax.
The HNWI Has the Same Problem
This is not just a corporate issue.
High-net-worth individuals are facing the same structural change.
Residence regimes remain important.
Tax incentives remain important.
Citizenship and residence programmes remain important.
But the days when a wealthy individual could simply acquire a residence permit, declare a tax residence and assume that the rest of the world would ignore the underlying facts are becoming increasingly difficult.
Tax residence is determined by rules.
Substance matters.
Days spent in a country matter.
Family circumstances can matter.
Business activities matter.
Centre-of-life considerations can matter.
And increasingly, information is exchanged between jurisdictions.
The wealthy investor therefore needs to think about **where he or she actually lives**, not simply where a certificate says they live.
Europe Is Becoming More Connected
This is one of the paradoxes of the European Union.
The member states remain fiercely competitive on taxation.
But the tax authorities are becoming increasingly interconnected.
A person may live in one country.
Own a company in another.
Hold investments through a third.
Maintain bank accounts in a fourth.
And own property in several others.
Ten years ago, the investor might have considered these separately.
Today, tax authorities are increasingly capable of looking at them collectively.
That makes cross-border planning more sophisticated.
The Global Minimum Tax Adds Another Layer
Pillar Two now adds another dimension.
The 15% global minimum tax is designed for large multinational groups, generally those meeting the €750 million consolidated revenue threshold.
It establishes a minimum effective tax rate rather than simply imposing a universal 15% statutory corporate tax rate.
For the largest international businesses, the implications are significant.
The tax rate of an individual jurisdiction is no longer the only relevant number.
The interaction between jurisdictions becomes critical.
And that is exactly where tax planning becomes more complicated.
Tax Planning Is Becoming More Operational
This is the real change.
The old tax-planning model was often based around location.
Where should the company be incorporated?
Where should the intellectual property be held?
Where should profits be booked?
Where should the investment vehicle sit?
The new model is increasingly about operations.
Where are the employees?
Where are decisions made?
Where does management take place?
Where does the business actually generate value?
Where are the risks?
Where is capital deployed?
Where are the directors?
Where is the investment manager?
Where is the underlying economic activity?
The tax structure increasingly follows the commercial structure.
At least, it needs to be capable of explaining why it does not.
This Could Actually Be Good for Smaller Jurisdictions
There is an important consequence for smaller European financial centres.
The end of purely artificial tax planning does not necessarily mean the end of tax competition.
It may make genuine jurisdictions more valuable.
A country that offers good infrastructure, competent professionals, political stability, access to the EU, an effective legal system and an attractive tax regime can still compete successfully.
But it needs to offer a complete proposition.
This is particularly relevant for countries such as Cyprus and Malta.
Their future competitiveness cannot depend exclusively on being cheaper from a tax perspective.
It needs to be based on being better as a place to do business and manage capital.
The Investor’s Cost of Complexity
There is another issue that receives less attention.
Complexity has a cost.
International structures require lawyers.
They require accountants.
They require tax advisers.
They require administrators.
They require directors.
They require compliance.
They require documentation.
And increasingly, they require evidence of substance.
For a large multinational, these costs may be insignificant.
For a smaller business or private investor, they can materially reduce the benefit of a tax structure.
This creates a natural economic filter.
If a structure saves €100,000 of tax but costs €150,000 a year to maintain and defend, it is not tax efficient.
It is simply expensive.
The New Tax Arbitrage
I believe this will lead to a different form of tax arbitrage.
The opportunity will increasingly be found not in the lowest headline rate, but in the interaction between:
tax + residence + regulation + investment + substance + infrastructure.
A country with a moderately attractive tax system and an excellent business environment may ultimately be more valuable than a country offering an extremely low rate but little else.
That is a very different investment proposition.
Private Equity Will Adapt
Private equity investors are already accustomed to analysing jurisdictions carefully.
Where is the fund?
Where is the manager?
Where is the portfolio company?
Where is the intellectual property?
Where is the debt?
Where are the employees?
Where is the exit?
The new European tax environment reinforces this approach.
Investment structures will increasingly need to be designed with the entire investment life-cycle in mind.
Acquisition.
Ownership.
Financing.
Management.
Distribution.
Exit.
Tax planning can no longer be treated as an isolated exercise at the beginning of the transaction.
It has to be part of the investment architecture.
The End of Easy Does Not Mean the End of Efficient
This distinction is important.
I do not believe Europe is entering a world in which tax efficiency disappears.
Businesses and investors will always have legitimate reasons to choose one jurisdiction over another.
Tax is one of those reasons.
But it is no longer sufficient by itself.
The strongest structures will be those that combine tax efficiency with genuine commercial purpose.
That is a much more durable model.
What Investors Should Be Asking
The international investor should now ask a different set of questions.
Where do I actually live?
Where is my business actually managed?
Where does the investment activity take place?
Does the company have genuine substance?
Does the structure have a commercial purpose?
How will the arrangement look if two tax authorities compare information?
What happens if the rules change?
And, perhaps most importantly:
“Would I still use this structure if the tax advantage were reduced?”
If the answer is yes, the structure may have real economic value.
If the answer is no, it may have been relying too heavily on tax arbitrage.
The New European Tax Environment
Europe is not becoming a no-tax environment.
It is becoming a high-information environment.
Tax authorities have more information.
Countries cooperate more closely.
Cross-border arrangements face greater disclosure.
Artificial structures face greater scrutiny.
And the largest multinational groups are moving toward a new global minimum tax framework.
The result is not the end of international tax planning.
It is the end of easy international tax planning.
The future belongs to structures that can demonstrate substance, commercial logic and long-term value.
For investors, that may ultimately be a good thing.
The best structure is increasingly not the one that looks best on a tax spreadsheet.
It is the one that still makes sense when somebody asks:
“Why is it structured this way?”