On 22 December 2021, the European Commission (“EC”) published a proposal for a directive to prevent the abuse of shell entities for improper tax purposes (hereafter: “ATAD3 Directive”). The ATAD3 Directive is expected to enter into force on 1 January 2024, whereby a two-year look-back rule is in place.
At first sight, the directive seems to target substance-less shell entities, often managed by corporate service providers. However, upon closer inspection of the details of the proposal, the directive may have a broader scope and (unconsciously) target all kinds of businesses, applying more often than probably expected. For example, private equity as well as fund structures and multinationals that make use of central management companies (from which activities are performed for the rest of the group) may also be in scope. Is this an (unintended) overkill?
Here we further discuss the details of the ATAD3 Directive and our takeaways.
The draft ATAD3 Directive introduces the following three “gateway” criteria to determine whether a shell entity is in place:
If all three gateways are met, the entity is considered a shell entity and is subject to further reporting obligations. This reporting obligation requires the shell entity to include specific information about its substance in its tax return (e.g. own premises, own active EU account, a qualified director, employees).
If the minimum substance indicators are not met, the entity will qualify as a presumed abusive shell entity for the purposes of the ATAD3 Directive. In practice, this means that certain tax benefits may be denied. Furthermore, we note that in-scope entities can provide counter evidence in cases of assumed misuse.
We have listed below some questions and takeaways that we identified when discussing the possible impact of the ATAD3 Directive with our clients.
With this newsletter, we inform multinational companies on changes in international tax law and country-specific tax law developments with respect to cross-border transactions.
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