Draft Directive for preventing the misuse of shell entities (ATAD 3)

On 22 December 2021, the European Commission published a draft EU Directive (2021/0434 (CNS), called ATAD3. ATAD 3 is a key initiative to fight against the misuse of shell entities, i.e. entities without sufficient business substance to obtain unjustified tax benefits. 

The directive defines the criteria – so-called substance conditions – for additional reporting obligations. In particular, an entity that fulfills the following conditions will be subject to the reporting obligation:

• more than 75% of its income over the two preceding tax years constitutes passive income (deriving from interest, royalties and dividends, financial assets, etc.),
• engages mainly in cross-border activities, and
• has outsourced its day-to-day administration and decision-making relating to significant functions in the two preceding tax years.

An entity that does not fulfill at least one of the above criteria will automatically be considered a shell company.

Entities that are not considered as used for aggressive tax purposes, including certain regulated financial, companies with financial assets listed on a regulated market, and those with at least five or more employees in charge of managing the activities generating the passive income.

An entity that meets these criteria will not be able to benefit from the advantages of tax treaties and EU directives. Member States will refuse to issue certificates of residence or issue a statement qualifying such entity as a shell company.

Importantly, Member State authorities will exchange information automatically on all entities covered by the Directive.

An entity that meets the above criteria may also request an exemption from reporting if it can provide evidence that it has sufficient substance. An exemption is granted for one year and may be extended up to 5 years.

New regulations should be implemented in the Member States by 30 June 2023 with effect from 1 January 2024.

European Commission release