Companies that engage in cross-border mergers to lower their tax bill are likely to be stopped in their tracks as EU countries are set to have new powers to reject such moves.

The new powers following a compromise between EU countries and the European Parliament means countries can, for the first time, impose conditions and restrictions on company movements within the single market.

“We fully support companies that move to other member states for genuine economic activity but not for those that do it to pay lower tax rates,” European Parliament member Evelyn Regner told Bloomberg Tax March 14.

Lawmakers agreed on the new powers March 13 as part of efforts to fight letterbox companies, set up in jurisdictions with low tax rates where they’re permitted to have a company’s registration at a mail address, but without a physical presence or actual economic operations.

Legal experts have warned the legislation conflicts with EU single market rules allowing free movement of companies. But Regner, an Austrian parliamentarian who negotiated the final terms of the agreement, said the agreement will allow national authorities to stop a cross-border operations in cases of abusive or fraudulent purposes leading to tax evasion.

Two Years to Implement

The Council of Ministers and the European Parliament are expected to rubber-stamp the agreement before European elections due to be held at the end of May. EU member states will then have two years to implement the legislation into national law.

The agreement is a victory for the European Parliament, which had demanded the rules that will impose conditions on a company move or merger.

The legislation was proposed after a controversial 2017 European Court of Justice ruling struck down a decision by the Polish government blocking a Polish company from moving its company headquarters to Luxembourg. The Polish government insisted the company move was designed to evade corporate taxes.

In what has become known as the “Polbud case,” the ECJ said EU single market laws allowing free movement of establishment prevents member nations from imposing conditions of a cross-border company move.

Legal Challenge?

Edoardo Traversa, a professor of company tax law at the University of Louvain in Belgium, told Bloomberg Tax March 14 the new rules are unprecedented but reflective of a new era tackling corporate tax avoidance.

“There has been a recognition that excessive mobility of companies can lead to tax abuse,” Traversa told Bloomberg Tax. “That said, I am sure these new conditions will eventually be challenged in the EU courts.”

BusinessEurope, which represents more than 10,000 of the largest companies in the EU, didn’t respond to a request for comment. After the legislation was proposed in April 2018, the group criticized the measure, saying it assumed that all companies moving to another EU member state were doing so to pay lower taxes.

The complete terms of the agreement will not be available until the accord has been translated into all EU languages.