Expanding to Europe? Get your tax compliance right from the start.

Introduction:

Companies expanding into Europe must take into account different factors when deciding to establish themselves within a member state. The European Framework rewards only those which follow and comply with its regulations and directives and in the present article we will provide an overview of general obligations to be regarded when considering moving into the European Union. In brief:

1. Establishing Entities Without Real Substance.

2. Overlooking Anti-Abuse and Substance Requirements for Cross-Border Flows.

3. Ignoring Exit Taxation.

4. Misplacing Decision Making and Creating Residency Risks.

5. Overlooking Pillar II and Minimum Tax Compliance

1. ESTABLISHING ENTITIES WITHOUT REAL SUBSTANCE

A common mistake may be found in the use use of old practices among U.S. investors, in the past it was common to incorporate companies in the Benelux area solely to achieve tax efficiency, without developing genuine local operations.

Nowadays surveillance of the Anti-Tax Avoidance Directive (ATAD) and national anti-abuse measures has been of the special attention of the tax authorities. EU Member States require that entities demonstrate real economic substance including physical presence, local employees, and decision-making power. Structures existing only on paper can lose treaty and directive benefits or be disregarded entirely. The freedom of establishment gives the right to operate in the EU, but not to benefit from it without actual business purpose.

2. OVERLOOKING ANTI-ABUSE AND SUBSTANCE REQUIREMENTS FOR CROSS-BORDER FLOWS

Establishment within the EU does not automatically guarantee for exemptions under the Parent-Subsidiary Directive (PSD) and the Interest and Royalties Directive (IRD).

These instruments eliminate withholding taxes on dividends and interest between EU affiliates, but only when the recipient is the beneficial owner and assumes genuine economic risk. Passive entities that act merely as conduits will not qualify. The freedom of capital encourages cross-border financing but does not protect arrangements designed solely for tax avoidance.

3. IGNORING EXIT TAXATION

Transferring assets, management, or business functions between Member States can trigger exit taxes under ATAD. These taxes are levied on unrealized gains at the time of relocation to prevent erosion of the domestic tax base. Companies moving operations from, for example, France to the Netherlands often overlook that tax may be imposed even without an actual sale, often taking into account the value appreciated or depreciated by the asset at the time it was physically or intangibly located within the member state. Proper planning and valuation are essential to manage the liquidity impact of these charges.

4. MISPLACING DECISION-MAKING AND CREATING RESIDENCY RISKS

European tax systems assess residency based not only on incorporation but also on where management and control are effectively exercised. Further, risks particularly arise with the use of flexible home office policies. If strategic decisions are made outside the country of registration such as a Luxembourg company managed from the United States dual residency or permanent establishment exposure may arise.

This leads to double taxation and loss of directive benefits. Aligning governance, board composition, and meeting locations is essential for maintaining a defensible tax position.

5. OVERLOOKING PILLAR TWO AND MINIMUM TAX COMPLIANCE

With the EU’s adoption of the OECD’s Pillar Two Global Minimum Tax (15%), U.S. multinationals operating in Europe must carefully monitor their effective tax rates. Even if the United States has not fully implemented equivalent rules, EU subsidiaries are subject to top-up taxes when their local rate falls below 15%. Ignoring this requirement may lead to unexpected liabilities and increased compliance burdens across jurisdictions.

Summary:

At MCORE LAW, we guide U.S. companies through the complexities of European tax law. From entity structuring and cross-border financing to compliance with ATAD, EU directives, and Pillar Two, our international tax practice ensures your business expansion is efficient, compliant, and future-proof.