ATAD 3 – The “unshell” directive will be the end of shell companies?

In December 2021, the European Commission published a draft of the EU Directive (2021/0434 (CNS)), also known as ATAD 3, which introduces restrictions on preferences for multinational groups that include entities with limited business substance. The directive establishes restrictions on the use of tax preferences and provides for information obligations for taxpayers.

The entities covered by ATAD 3

Companies under the Directive may be considered so-called “High Risk” companies if:

• More than 75% of the company’s revenue in the previous two years was passive income (e.g. interest, dividends, royalties);
• At least 60% of the company’s business is cross-border;
• In the past two years, the company’s management and administration services for essential functions were provided by a third party;

Entities considered high-risk companies must declare in their annual tax return whether they meet the minimum requirements for having business substance in the country of residence. The minimum criteria for having business substance relate to having a bank account in the EU, a local resident(s) as director(s), and the company owning office space.

Implications for entities classified as “High-Risk Companies”

An entity defined as a high-risk entity that does not meet the minimum criteria for having business substance will not be able to take advantage of the tax preferences indicated in:

• Parent-Subsidiary Directive;
• The Interest and Royalties Directive

The Parent-Subsidiary Directive ensures that dividends and other profits paid by subsidiaries to their parent companies are exempt from withholding tax and eliminates double taxation of such income at the parent company level. The Interest and Royalties Directive ensures that payments made between affiliated companies in different countries are not subject to double taxation. The Directive applies to interest and royalty payments. Companies recognized under the ATAD 3 Directive as so-called shell entities will not be able to take advantage of these preferential tax provisions.

Entities excluded from the ATAD 3 Directive

To ensure that the ATAD 3 Directive does not apply to operating holding companies, some companies were excluded from its scope. Holding companies are excluded if they:

• Employ a minimum of five workers;
• Are listed on an exchange;
• Belong to EU-regulated companies;
• Their shareholders are based in the same country;

The ATAD 3 Directive also provides two exceptions for companies that do not meet the minimum criteria for business substance in the country of residence. Companies can benefit from tax preferences if they prove:

• The existence of the business substance of the company;
• The establishment of a particular company considered to be a so-called high-risk company was not determined by a desire to achieve a tax benefit;

Reporting requirements for companies

Entities identified under ATAD 3 as so-called high-risk entities are required to include information on their tax returns:

• Owned premises;
• Their active bank accounts in the European Union;
• Tax residency, qualifications and additional employment of the company’s directors;
• Residence of the majority of the company’s employees;

Coming into force

The Directive only applies to EU Member States, but contains provisions that should be applied to structures involving third country entities. The regulations will enter into force on 1 January 2024. However, ATAD 3 Directive may, in some cases, be retroactive, as the moment of assessing the company may be two years before the Directive enters into force.

The draft law implementing ATAD Directive 3 into Polish law has not yet been published. We will inform you about when the work on the law implementing the ATAD Directive 3 will begin.

Being considered a shell company, according to ATAD Directive 3, will entail several tax consequences.

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ASB specialists can assist to secure the company’s situation by:

• Verifying the conditions for recognizing the company as a so-called high-risk company;
• Verifying the level and structure of the company’s income in the last two tax years;
• Verifying the cross-border nature of the company’s operations;
• Examination of the assets held and their book value;
• Verifications of the company’s management and staffing structure;
• Examination of the nature of the company’s operations and business model;

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