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 or 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, 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 provisions and hybrid mismatches. The reverse-hybrid provisions became applicable from January 2022, adding another layer to an already more sophisticated anti-avoidance framework.
Then came greater transparency, automatic exchange of information, mandatory disclosure and, increasingly, a global minimum tax.
The direction of travel is clear.
The question is no longer simply where tax can be reduced. It is whether the structure can be justified by reference to the underlying business, investment and economic activity.
That is part of the broader transformation of international wealth and jurisdictional competition that I examined in The New Geography of Wealth.
Transparency Changed Everything
The most important change may not actually be the tax rate.
It is information.
Under the EU’s Directive on Administrative Cooperation framework, tax authorities increasingly exchange information with each other. DAC2 established automatic exchange of financial account information between EU countries, while DAC6 introduced mandatory disclosure of certain reportable cross-border arrangements.
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, but whether it can withstand scrutiny from several tax authorities looking at the same facts.
That is a fundamental change in the environment for internationally mobile capital.
Substance Matters
This is perhaps the biggest change for international investors.
A company incorporated in one country but managed entirely somewhere else is likely 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 Unshell proposal, presented in December 2021, was explicitly directed at entities with minimal or no economic activity that could be used to obtain tax advantages. The proposal contemplated objective indicators concerning income, premises, staff, management and administration. At the date of this article, however, Unshell remained a proposal rather than an adopted EU directive.
The message is straightforward.
A legal entity is not the same thing as a business.
This is also where the broader European tax competition becomes relevant. As I argued in The European Tax Competition Nobody Wants to Talk About, jurisdictions are still competing for capital and wealthy individuals, but the nature of that competition is changing. The most attractive jurisdiction is increasingly not necessarily the one offering the lowest headline tax rate. It is the one offering the strongest overall combination of tax, infrastructure, stability, regulation and economic opportunity.
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, centralise ownership, provide financing, simplify governance, hold investments across several countries and 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 applicable legal 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.
That issue is particularly relevant to the broader wealth-migration trends discussed in HNWIs Seeking to Leave the UK and Is the UK Becoming Unfriendly to Wealth? Both articles predate this one and illustrate why residence, taxation and jurisdictional choice increasingly have to be considered together.
Europe Is Becoming More Connected
This is one of the paradoxes of the European Union.
The member states remain fiercely competitive on taxation, but their 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. It also makes inconsistencies between the different parts of an individual’s affairs considerably more difficult to ignore.
The Global Minimum Tax Adds Another Layer
Pillar Two adds another dimension.
The OECD’s global minimum tax framework is directed principally at large multinational groups meeting the €750 million consolidated revenue threshold. It establishes a 15% minimum effective tax rate, rather than simply imposing a universal 15% statutory corporate tax rate.
In December 2022, EU Member States reached agreement on implementing the Pillar Two rules across the European Union.
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.
As I argued in The 15% Global Minimum Tax: What Happens Next?, the global minimum tax does not eliminate tax competition. It changes its character.
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.
That is a much more durable proposition.
The Investor’s Cost of Complexity
There is another issue that receives less attention.
Complexity has a cost.
International structures require lawyers, accountants, tax advisers, administrators, directors and compliance systems. Increasingly, they also require evidence of substance and documentation capable of demonstrating why the structure exists and how it operates.
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.
It is also consistent with the argument developed in The European Tax Competition Nobody Wants to Talk About: tax remains important, but it is increasingly only one component of the jurisdictional decision.
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 and 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 same principle applies to the global minimum tax. As discussed in The 15% Global Minimum Tax: What Happens Next?, the relevant question is increasingly how the entire group or investment structure operates across jurisdictions rather than which jurisdiction has the lowest headline rate.
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?”