ATAD3 or ‘‘UNSHELL Directive”: How is your business affected?


On 22 December 2021 the European Commission published a draft proposal setting out union rules to neutralise the misuse of shell entities for tax purposes, referred to as Anti-Tax Avoidance Directive 3 (“ATAD 3”). The draft proposal is in line with the reflections undertaken at the Organisation for Economic Cooperation and Development (“OECD”) level, after the communication took place on 18 May 2021 under ‘’Business Taxation for the 21st Century’’.

The draft Directive aims to introduce an EU “substance test” through a reporting obligation for taxpayers to assist Member States in identifying undertakings that are engaged in an economic activity, but which do not have minimal substance and, in the view of the Commission, are misused for the purpose of obtaining tax advantages (shell companies).

The draft Directive is at the negotiation phase among Member States with the aim of reaching a final agreement. In the EU, adoption of tax legislation generally requires unanimity between all 27 Member States. The Commission proposes that the Member States shall transpose the Directive into their national laws by 30 June 2023 for the rules to come into effect as of 1 January 2024.

The draft Directive

The purpose of ATAD3 is to address tax avoidance in the area of direct taxation conducted through the use of low-substance entities. The draft Directive establishes a minimum level of substance and does not contain measures linked to a minimum level of taxation. Another key difference between the draft Directives is that this draft Directive applies to all corporate tax residents of Member States without any materiality threshold.

Gateway classification

The draft directive initially distinguishes undertakings and arrangements that are at risk of lacking substance and may be misused for tax purposes from those with low risk by analyzing three “gateway” criteria. Where an undertaking crosses all three following gateways, it will be required to annually report further information to the tax authorities via its tax return:

  • More than 75% of the revenues accruing to the undertaking in the preceding two tax years is ‘’relevant income’’ as defined by the draft directive.
  • The undertaking is engaged in cross-border activity on any of the following grounds:
  • More than 60% of the book value of the undertaking’s assets that fall within the scope of the draft directive was located outside the Member State of the undertaking in the preceding two tax years,
  • At least 60% of the undertakings ‘’relevant income’’ is earned or paid out via cross-border transactions.
  • In the preceding two tax years, the undertaking outsourced the administration of day-to-day operations and the decision-making on significant functions.

Several undertakings are excluded from the reporting obligations such as several listed entities, specific regulated financial entities, certain holding entities of operational businesses in the same Member State and entities with at least five own full-time equivalent employees exclusively carrying out the activities generating the relevant income.


An entity considered at risk (i.e. crossing all three gateways above) has to report on its substance in its tax return. The entity is obliged to confirm whether the following cumulative criteria are met and to provide documentation in support of its position:

  • The entity has premises available for its exclusive use
  • The entity has at least one EU bank account
  • The entity has at least one director and/or the majority of the full-time employees meet certain conditions.

Undertakings required to report in their tax return would have to substantiate their tax return declaration relating to the above three minimum substance indicators with documentary evidence. The draft directive lists the following documentary evidence to be enclosed with tax returns:

  • Address and type of premises;
  • Amount of gross revenue and type thereof;
  • Amount of business expenses and type thereof;
  • Type of business activities performed to generate the relevant income;
  • The number of directors, their qualifications, authorizations, and place of residence for tax purposes or the number of full-time equivalent employees performing the business activities that generate the relevant income, their qualifications, and their place of residence for tax purposes;
  • Outsourced business activities; and
  • Bank account number, any mandates granted to access the bank account and to use or issue payment instructions, and evidence of the account’s activity.


Under the draft directive, failure to fulfil the requirements would result in penalties. As with all EU directives, it is stated that these penalties need to be effective, proportionate, and dissuasive. Under the draft directive, Member States shall ensure that those penalties include an administrative pecuniary sanction of at least 5% of the undertaking’s turnover in the relevant tax year, if the undertaking that is required to report does not comply with such requirement for a tax year within the prescribed deadline or makes a false declaration in the tax return.

Presumption, rebuttal of the presumption and exemption

Where all the substance requirements are met, the reporting undertaking is presumed to have sufficient substance for the relevant year. Otherwise, the reporting undertaking is presumed not to have sufficient substance. However, this presumption can be rebutted by providing certain specified additional supporting evidence of the business activities which the undertaking performs to generate relevant income, notably detailed information about the commercial, non-tax reason for establishing the undertaking, profiles of employees, and proof that decision-making takes place in the member state of tax residence.

If the presumption cannot be rebutted, an undertaking can request an exemption from its obligations under the draft directive if the existence of the undertaking does not reduce the tax liability of its beneficial owner(s) or of the group as a whole of which the undertaking is a member, by providing evidence.

Such evidence would include information about the structure of the group and its activities and allow a comparison of the amount of overall tax due by the beneficial owner(s) or the group as a whole having regard to the existence of the undertaking and in its absence.

The conditions to grant the exemption would be assessed by the member state of residence of the undertaking.

Tax consequences

The Commission proposes a number of tax consequences for a shell company which either fails to rebut the presumption or falls under the exemption.

The Member State of residence of the shell company should either deny the granting of a tax residency certificate to the shell company or only provide a tax residency certificate with a limitation statement.

In addition, other Member States should effectively disregard such a shell company for the granting of benefits under the relevant tax treaties between Member States and tax Directives (for example the Interest and Royalty Directive). This means that no benefits should be provided due to the interposition of such a shell company and a “look through” approach is provided taking into account the beneficial owner of the shell company (which may result in a (partial) reduction of the tax benefit obtained through the shell company). This “look through” approach should also be applied where a Member State is the state of the beneficial owner.

Information exchange

Besides the tax consequences, the Commission proposes that all Member States shall have access to information on any entities considered at risk (i.e. crossing all three gateways) even if such entities meet any of the exceptions of the other steps. This information will be exchanged automatically. Furthermore, a Member State would be able to request the Member State of the entity to conduct an audit to a tax resident entity if it suspects that this entity lacks the minimal substance.

Next steps

Proposals put forward under this special legislative procedure are subject to the Council’s unanimity, while the European Parliament only has an advisory role and many changes may be made on the proposal during the negotiation process. Consequently, the final Directive, if adopted at all, could differ significantly from the current proposal.

Once unanimity is achieved, the next step would be the publication of the Directive in the Official Journal of the EU. The Commission proposes that the Member States shall bring into force the laws, regulations, and administrative provisions necessary to comply with the provisions of the final Directive by 30 June 2023 and that they shall apply these provisions from 1 January 2024. The Commission proposes to submit a report on the application of the Directive by 31 December 2028.

How can Taxcom help you

While it is not yet known whether Member States will embrace the Commission’s initiative, Taxcom can assist businesses and investors to adopt process for any changes/clarifications in line with the proposal. Businesses that are potentially in scope could already carry out an initial analysis on their corporate structures based on the current draft, as fiscal year 2022 might be in scope.

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