EU sets its sights on tax havens

The number of Czech-owned companies that registered their seats in more tax-friendly countries was up nearly a quarter on the year in 2009, one of many tax-evading moves the EU has recently vowed to tighten restrictions on as governments suffer from dropping revenues.

Amid tax hikes and pressure to cut costs, Czech companies are looking to save money by avoiding the tax burden of stationing their headquarters in the Czech Republic, instead moving abroad to countries considered tax havens.

According to a Jan. 26 release from the Czech Capital Information Agency (ČEKIA), research for 2009 showed there was a 24 percent increase in the number of Czech-owned companies based in tax-haven countries - a jump of 2,153 to a total of 11,143.

One of the most popular countries for business owners is the Netherlands, with 1,077 new businesses registered in 2009, housing a total of 4,551 Czech-owned companies. The other top countries are Cyprus and Luxembourg, which host a combined total of 567 new businesses. This rise represents the largest annual gain in four years, the period for which ČEKIA has compiled data.

"Interest is growing among Czech companies to move their headquarters to destinations with a more favorable fiscal situations," said ČEKIA analyst, Petra Štěpánová. "In the first half of last year, we observed only a low interest, when only 154 companies moved to tax havens, but, in the second half of 2009, that number increased sharply."

She added that the exodus is related partly to the Czech Republic's recent "pressure to increase taxes to reduce the deficit in the state budget."

Some advocates for foreign business practices said the growing number of Czech-owned companies in tax havens is not necessarily motivated by tax breaks.

"ČEKIA has a totally misleading point of view because they think tax evasion is happening when somebody moves a parent company to tax havens," said Tomáš Pelikán, director of Terrinvest, a company that helps Czech entrepreneurs set up businesses abroad. "When somebody does it, it is usually to hide ownership structure, which is probably 30 percent to 40 percent of such cases ... and has nothing to do with taxes."

This theory might apply to those such as Czech politicians who would want to keep their business dealings out of the limelight.

Regardless of the motivation, countries are becoming more aggressive about guarding their income recently as member states struggle to reduce deficits borne of stimulus spending and waning tax revenues. EU finance ministers, led by Taxation and Customs Union Commissioner László Kovács, announced in Brussels Jan. 19 an agreement to increase the transparency of financial information and the cooperation between member states.

The Economic and Financial Affairs meeting, attended by Finance Minister Eduard Janota and Deputy Minister Tomáš Zídek, drafted a series of directives that will be passed on to the European Parliament for approval. The key points include an attempt to recover unpaid taxes by increasing data requirements of member states that have engaged in mutual assistance of tax evasion since 1976. Additional directives will clamp down on tax havens themselves, such as a draft decision authorizing the commission to negotiate anti-fraud agreements with Andorra, Monaco and San Marino, as well as a new anti-fraud agreement with Switzerland.

"National provisions on tax recovery are limited in scope to national territories, and fraudsters have taken advantage of this to organize insolvencies in member states where they have debts," said Spanish Finance Minister Elena Salgado. "Member states therefore increasingly request the assistance of other member states to recover taxes. However, existing provisions have only allowed a small proportion of debts to be recovered. ? It is intended to provide for more flexible conditions in requesting assistance and requiring a more efficient exchange of spontaneous information."

The directive would also cite rules for transparency of information from banks and other financial institutions.

For the moment, analysts acknowledge that, for some cash-strapped businesses in the Czech Republic, moving abroad can be a smart financial decision.

"It's true that, while corporate taxes have decreased in recent years in Czech Republic, the tax burden here is still much higher than [in certain countries abroad]," said Marek Hatlapatka, head of research at Cyrrus brokerage firm. "And, of course, the financial crisis has forced companies to look for any way to reduce costs."

Many countries are also adopting newer technologies to streamline tax collection, making it more effective and easier for companies to file.

"This can mean a better selection of the entities being audited based on data analysis, which tax authorities will have at their disposal even before starting the actual audits," said Jan Linhart, partner at KPMG Czech Republic.

- Petr Cibulka Jr. contributed to this report.

Philip Heijmans can be reached at
pheijmans@praguepost.com