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European Commission targets misuse of shell entities in its latest anti-tax avoidance directive proposal

  • Europe
  • Tax planning and consultancy

12-01-2022

On 22 December the European Commission published a new legislative proposal for a Council Directive laying down the rules to prevent the misuse of shell entities for tax purposes, known as the “ATAD 3 Proposal”

ATAD 3 Proposal is the sequel to a series of measures adopted by the Commission in the fight against tax avoidance. It will change the current tax landscape by introducing an EU-wide substance test supplemented by a reporting obligation and automatic exchange of information. This will facilitate the tax audits of broader group of undertakings. The ATAD 3 Proposal envisages that if a company meets the definition of a shell company, specific dissuasive tax consequences will be triggered.

ATAD 3 Proposal introduces a seven-step approach Member States must use when assessing whether an undertaking falls within the scope of the ATAD 3 Proposal.

Step 1: Undertakings which must report

An undertaking which meets the following cumulative gateways is an undertaking within the scope of the ATAD 3 Proposal.

  • Revenue source: More than 75% of revenues accruing to the undertaking in the preceding two tax years is relevant income, e.g. passive income and income from financial leasing, immovable property and insurance.
  • Cross border element: The majority of the undertaking’s relevant income is generated by cross-border transactions.
  • Outsourced management and administration: In the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and decision-making in relation to significant functions.

An entity which meets all three gateways should be considered “at risk” and is subject to additional reporting requirements.

The ATAD 3 Proposal has carve-out provisions excluding:

  • undertakings listed on a regular stock exchange
  • regulated financial undertakings
  • undertakings with main activity of holding of shares in operational businesses in a domestic context provided that their beneficial owners are also resident for tax purposes in the same Member State
  • undertakings with at least five full-time equivalent employees carrying out income generating activities

Step 2: Reporting

An undertaking meeting the gateways must declare in its annual tax return whether it meets the following indicators of minimum substance for tax purposes:

  • premises available for its exclusive use
  • at least one active bank account in the EU
  • at least one qualified director resident geographically close to the undertaking or the majority of its employees resident geographically close to the undertaking

Step 3: Presumption of lack of minimal substance

An undertaking which passes all three gateways and cannot confirm it meets the reporting requirements is presumed to be a shell company for the purposes of the ATAD 3 Proposal, unless its interposition does not create a tax benefit for itself or for its ultimate beneficial owners.

Step 4: Possibility of rebuttal

The presumption of shell status under the ATAD 3 Proposal (Step 3) is rebuttable on a case by case basis. An undertaking may provide additional evidence supporting the genuine nature of the structure.

Step 5: Exemption - No tax benefit

An undertaking which passes all three gateways (Step 1) and does not meet the minimum substance requirements of Step 2 can ask the relevant tax authorities to certify it is not at risk of being considered shell company for a tax year provided that its interposition is not reducing a tax liability of its ultimate beneficial owners or of the company group.

Such certification can be extended up to six tax years.

Step 6: Tax consequences

If a company is a shell company, the Member States in which the entity is not resident must adopt a “look through” approach to the entity, which should be disregarded for tax purposes. The shell company will not be able to derive any tax advantage from double tax treaties or European directives (such as the Parent-Subsidiary and Interest and Royalty European Directives).

 In addition, the Member State in which the entity is resident must:

  • refuse to issue a tax certificate; or
  • issue a tax certificate with a warning statement, explicitly denying the entity benefits available under double tax treaties and the Parent-Subsidiary and Interest and Royalty European Directives

Step 7: Automatic exchange of information

The ATAD 3 Proposal recommends that all data collected during the reporting process in Step 2 should be subject to automatic exchange of information between Member States.

Eversheds Sutherland: Our comment

Discussions on the final form of ATAD 3 Proposal should begin in early 2022. It is expected that the text of the proposed directive will require significant amendment during the negotiation process for unanimity to be achieved. Nevertheless, ATAD 3 Proposal is in line with the current initiatives at EU level to increase tax transparency and is a significant as the first step towards harmonising substance requirements within the EU.

Our tax experts are closely monitoring the developments and are ready to discuss with you the developing tax landscape and help you perform an initial impact assessment. 

Click here to read the full briefing

For more information, or to speak to a member of the Tax team, please get in touch.