The European Commission has published a draft Directive, Unshell (also referred to as ATAD III), designed to prevent ‘the misuse of shell entities for improper tax purposes’. This initiative was announced by the Commission in its Communication on Business Taxation for the 21st century published in May 2021.
The proposed new measures will establish transparency standards around the use of shell entities, so that their abuse can more easily be detected by tax authorities. Using a number of objective indicators related to income, staff and premises, the proposal will help national tax authorities detect entities that exist merely on paper. The proposal introduces a filtering system for the entities in scope, which have to comply with a number of indicators. These levels of indicators constitute a type of ‘gateway’. Three gateways are proposed:
The first level of indicators looks at the activities of the entities based on the income they receive. The gateway is met if more than 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s trading activity or if more than 75% of its assets are real estate property or other private property of particularly high value.
The second gateway requires a cross-border element. If the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad, the company crosses to the next gateway.
The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.
An entity crossing all three gateways will be required to report information in its tax return related, for example, to the premises of the company, its bank accounts, the tax residency of its directors and that of its employees (so-called ‘substance indicators’). If an entity fails any of the substance indicators, it will be presumed to be a ‘shell’, and it will not be able to access tax relief and the benefits of the tax treaty network of its member state and/or to qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives.
European Commissioner for Economy, Paolo Gentiloni, said: ‘Our proposal establishes objective indicators to help national tax authorities detect firms that exist merely on paper: when that is the case, the company will be subject to new tax reporting obligations and will lose access to tax benefits. This is another important step in our fight against tax avoidance and evasion in the European Union.’
The draft Directive will move to the negotiation phase among member states with the aim of reaching a final agreement. It is proposed that the member states transpose the Directive into their national laws by 30 June 2023 for the rules to come into effect on 1 January 2024.
The European Commission has published a draft Directive, Unshell (also referred to as ATAD III), designed to prevent ‘the misuse of shell entities for improper tax purposes’. This initiative was announced by the Commission in its Communication on Business Taxation for the 21st century published in May 2021.
The proposed new measures will establish transparency standards around the use of shell entities, so that their abuse can more easily be detected by tax authorities. Using a number of objective indicators related to income, staff and premises, the proposal will help national tax authorities detect entities that exist merely on paper. The proposal introduces a filtering system for the entities in scope, which have to comply with a number of indicators. These levels of indicators constitute a type of ‘gateway’. Three gateways are proposed:
The first level of indicators looks at the activities of the entities based on the income they receive. The gateway is met if more than 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s trading activity or if more than 75% of its assets are real estate property or other private property of particularly high value.
The second gateway requires a cross-border element. If the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad, the company crosses to the next gateway.
The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.
An entity crossing all three gateways will be required to report information in its tax return related, for example, to the premises of the company, its bank accounts, the tax residency of its directors and that of its employees (so-called ‘substance indicators’). If an entity fails any of the substance indicators, it will be presumed to be a ‘shell’, and it will not be able to access tax relief and the benefits of the tax treaty network of its member state and/or to qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives.
European Commissioner for Economy, Paolo Gentiloni, said: ‘Our proposal establishes objective indicators to help national tax authorities detect firms that exist merely on paper: when that is the case, the company will be subject to new tax reporting obligations and will lose access to tax benefits. This is another important step in our fight against tax avoidance and evasion in the European Union.’
The draft Directive will move to the negotiation phase among member states with the aim of reaching a final agreement. It is proposed that the member states transpose the Directive into their national laws by 30 June 2023 for the rules to come into effect on 1 January 2024.
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