Shakira and substance
What is the public reaction when companies run their business through Luxembourg, Luxembourg tax expert Georges Bock asked his foreign colleagues of the consulting firm KPMG.
"All warning lights come on" was the unanimous opinion of the experts from France, Germany, Spain and Great Britain.
A few days after the release of the Paradise Papers this reaction also shows the deep divide between the assessment of experts who find a holding company in Luxembourg completely normal, and a European public that has no understanding for it.
The world-famous singer Shakira recently experienced how negative that view is. In the context of the revelations surrounding the Paradise Papers, French newspaper "Le Monde" reported on the Luxembourg-based company ACE Entertainment, which belongs to the singer.
When the company was founded in 2008 it managed €31.6 million in assets. These were mainly music rights. In 2016, the company employed three part-time employees, according to the annual report filed to the commercial register. In the meantime, the number has reportedly grown to four.
The holy grail of "substance"
Any company with fewer than ten employees appears to the public as a letterbox company, said Georges Bock. In the recent case of Volkswagen, there are five employees who manage assets worth billions. From the perspective of the experts, this can -- depending on the case -- be sufficient.
While a few years ago there were indeed letterbox companies without employees, that is changing. New international OECD and EU rules established in the context of the BEPS project mean that companies in Luxembourg also have to think differently.
It is all about so-called anti-abuse rules. The tax benefits must not be one of the main reasons why a company has a holding or a subsidiary in Luxembourg.
They must be able to conclusively explain the economic reasons to the Luxembourg tax authorities and foreign authorities, according to KPMG tax expert Flora Castellani.
The right people
However, the demands are not very high: it is often sufficient to refer to the safe economic situation in Luxembourg due to the country's "triple A" rating or the multilingual staff.
The second point is more difficult: the employees in Luxembourg must be able to actually carry out the tasks drawn up by tax advisers. This includes the necessary training and experience.
For example, Shakira employs Luxembourger Carlo Schneider, who on his website claims to be an experienced intellectual property and rights management manager.
On Tuesday, Sophie Boulanger of KPMG stated that tax authorities require managers of a Luxembourg society to develop intellectual property rather than simply having to administer it in order to accept such structures.
Whether this is true in the case of Shakira, can not be easily judged from the outside. However, an expert who is familiar with the dossier emphasised that the singer does not benefit from the Luxembourgish tax base, which frees 80% of income from trademark rights from taxes.
This regime has since been abolished and, according to a bill, is to be limited to patents.
"Character assassination" or "witch hunt" are terms used by experts in the case of Shakira.
"The cases contained in the Paradise Papers no longer reflect the current situation," says Bock as rules have become much stricter in recent years.
What the numbers say
Ultimately, what substance means in tax matters is something that experts and courts will argue about for years to come.
The French economist Gabriel Zucman is, with numbers, trying to get to the bottom of the tax avoidance world. The University of Berkeley researcher published a study in the context of the Paradise Papers.
His conclusion: 63% of the $450 billion in profits that United States corporations made outside the US in 2016 ended up in "tax havens." This includes not only Luxembourg, but also the Netherlands and Ireland.
It is worth noting that after the LuxLeaks scandal Luxembourg's share fell only slightly from the end of 2014, from 9% in 2014 to 8% in 2016. According to Zucman, the high profits that companies in Luxembourg make according to their own statements are striking.
"For every euro that a company pays in the form of salary, it earns around 50 cents on average worldwide," he wrote in the Süddeutsche Zeitung. In Luxembourg, however, the profit amounts to €3.50.
Both the Luxembourg statistics authority Statec and the Chamber of Commerce declined to comment on the numbers..