Panama Papers, paradise papers….few are not familiar with these terms. These so-called mailbox companies were covered by news outlets for days and by now present a well-known tax evasion construction.

Below is a short overview of how these mailbox companies are created and how the Belgian tax authority handles these, along with the consequences.

Why and what?

Mailbox companies are set up in countries with low(er) tax rates. If every country had the same tax rate these types of constructions would be useless.

So, a mailbox company is a company that is registered in a country with a low tax rate. But even though it is registered there, the reality is that it is not actually active in that country. In other words, the reality is quite different from what is presented on paper.

How is a mailbox company established?

A mailbox company is established when a company purchases an address in another country and then registers at this address. However, these are often ‘empty’ addresses, since the true offices of the company are not actually there. No real activity takes place there either, which is the reason for the term ‘mailbox company’.

Let’s illustrate this by use of an example. Someone wants to set up a company and of course wants to pay as little taxes as possible. Their solution then is to establish the company in a tax friendly country. The person purchases an address abroad and establishes the company there. (S)he him/herself does not wish to move there so (s)he runs the company from his home country. Of course no employees are employed abroad, nor is there any degree of operation there.

The company is subject to the tax rate of the country where it is registered, even though it does not engage in any activities there. If this country has a tax rate of, for example, 12,50%, then this set up abroad offers a big financial advantage as compared to establishing in Belgium where we have much higher tax rates. Even the recently approved reduced business tax rate cannot compete with the tax rates in a lot of other countries.

The scandals concerning the Panama and paradise papers don’t necessarily involve start ups as in the above example. But it works the same way. The company is registered in a fiscally advantageous country.

Fiscal watchdog on the lurk

The Belgian tax authority has been on the lurk for years. The goal is obvious. It wants to be able to tax these mailbox companies as in-country companies. Of course this requires reclassification of the mailbox company as a Belgian company.

The tax authority can accomplish this by use of the actual place of business of the company. In the event that the actual place of business does not coincide with the registered office, then this actual place of business trumps the registered office, for tax purposes.

Reality trumps (substance over form)

Case law, influenced by tax practice, has developed several points that are taken into account in determining the actual place of business. In the event one of these points is positive, the tax administration will easily come to the determination that the mailbox company is in fact a local company. This when the registered address is deemed not to coincide with the actual place of business.

  • Place where the majority of the Board/management lives
  • Authority of the local Board/ management
  • Place of the general meetings and counsel of the Board/management
  • Place where the company’s accounting is performed
  • Place where the company has its bank account(s)
  • Place where the fiscal obligations are fulfilled
  • Place where the company has offices

If we apply these points to our example above, then it is clear that the tax administration can easily reclassify the company. The mere fact that the sole manager lives in Belgium provides the tax authority with a possible reason to reclassify the company.

Reclassification will always be a factual matter in which all relevant facts have to be taken into account. The presence of a Belgian Board member in a foreign company does not by definition make it a Belgian company. In the event actual business activities are conducted out of the country, and the actual decisions of the business are made in such country, then the place of living of the Board member will not be decisive. So it is very much a factual matter, but we think it is important to emphasize that the Belgian tax authority keeps a strict eye on these companies.

Consequences

In the event that the tax authority wins, then the company will be deemed to be a Belgian company. This of course means that it will have to pay the applicable Belgian taxes.

Reclassification comes at a high price. Often, the Board members, shareholders and possibly even the advisors will be prosecuted for fiscal fraud, money laundering and forgery. The consequences are not to be underestimated.

Conclusion

Establishing a mailbox company is quite simple. But the consequences for doing so can be serious. As a result of increased international transparency and data exchange, it becomes increasingly difficult to stay out of the watchful eye of the tax authority.

The only feasible conclusion is: think before you begin and when you do begin, do it well. Substance over form is after all not an insignificant concept.