1. ATAD 3 Directive: an overview
    1. Entities in scope
    2. Excluded entities
    3. Determination if an undertaking is “at risk” – cumulative conditions to be assessed during the two preceding years (look-back period)
    4. Reporting obligations when an entity is considered “at risk” – if one of the substance elements is not met it will be considered as a “shell”.
    5. Carve Outs
    6. Tax Consequences for “shell” entities
    7. Other Member States
    8. Exchange of information and request for joint tax audit
    9. Implementation

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ATAD 3 overview
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ATAD 3 Directive: an overview

In 2021, the European Commission issued the proposal of ATAD 3 directive which sets out indicators of minimum substance for undertakings in EU Member States and aims to increase scrutiny of “shell” companies within the European Union to prevent them from being used for tax evasion and avoidance. In 2022, the Committee on Economic and Monetary Affairs of the European Parliament proposed some amendments (to the initial draft directive) which were approved by the European Parliament on 17 January 2023.

Entities in scope

Any undertaking that is considered tax resident and is eligible to receive a tax residence certificate in an EU Member State, regardless of its legal form

Excluded entities

  • Listed entities
  • Undertakings whose main activity is holding shares in operational businesses in the same Member State where their beneficial owners are also resident for tax purposes
  • Undertakings with holding activities that are resident for tax purposes in the same Member State as their shareholder(s) or the ultimate parent entity (as defined in DAC)
  • Certain regulated financial undertakings

Determination if an undertaking is “at risk” – cumulative conditions to be assessed during the two preceding years (look-back period)

  • Relevant income: more than 65% of the revenues must be passive / mobile income such as interest, royalties or dividends
  • Activity: either (i) more than 55% of the book value of the undertaking consists of qualifying assets located outside the Member State of the undertaking or (ii) more than 55% of the undertaking’s relevant income is earned or paid out via cross‑border transactions
  • Outsourcing of functions: the day-to-day operations and the decision-making on significant functions is outsourced to a third party

Reporting obligations when an entity is considered “at risk” – if one of the substance elements is not met it will be considered as a “shell”.

The undertaking must evidence:

  • It has its own premises, premises for its exclusive use or premises shared with entities of the same group
  • It has at least one own and active bank account or e-money account in the Union through which the relevant income is received
  • Indicators related to the directors (residence and authority to take decision) or full-time equivalent employees (resident and qualification to carry out the activity

Carve Outs

Rebuttal procedure: rebut the presumption of being a shell company by (i) ascertaining the business rationale behind the establishment of the undertaking in the Member State where the activity is performed, (ii) providing information about the full-time, part-time, and freelance employee profiles and (iii) providing evidence that decision-making is taking place in the undertaking’s Member State. The request shall be considered within 9 months.

Exemption for absence of tax motives: provide evidence that the interposition of the presumed shell company does not lead to a tax benefit for its beneficial owners or the group as a whole. That evidence shall include information about the structure of the group and its activities (including a list of its employees working on full-time equivalence).

Tax Consequences for “shell” entities

  • Tax residence certificate denied or
  • The Member State will have to issue an official statement duly justifying such decision and prescribing that the undertaking is not entitled to the benefits of the double tax treaties and EU tax directives (Parent-Subsidiaries Directive and Interest and Royalties Directive)

Other Member States

  • Benefits under the double tax treaties and EU Directives (Parent-Subsidiaries Directive and Interest and Royalties Directive) denied
  • Presumed “shell” entity treated as “flow-through” entity
  • Allocation of taxing rights between the Member State of the source jurisdiction and of the undertaking’s shareholder(s)

Exchange of information and request for joint tax audit

All Member States will have access, at any time, to information on EU shells, even for those which have rebutted the presumption or are exempt for lack of tax motives. The information will be exchanged automatically. Joint tax audit may be requested by the competent authority of a Member State when the latter has reason to believe that an undertaking tax resident in another Member State has not met its obligations under the Directive.

Implementation

Member States will be required to implement the Directive by 30 June 2023 for an application as from 1 January 2024 – This means that the “look back” period started on 1 January 2022.