The Proposed new EU “UNSHELL” Directive

The Unshell Directive is not yet in force, however, the Unshell Directive should be implemented into the national legislation of the EU Member States by 30 June 2023, and come into effect by 1 January 2024.

In essence, the Unshell Directive mandates an increased reporting obligation and a number of tax consequences for “shell entities”.

What is the aim of the proposed Directive?

The draft Directive aims to identify and penalise entities that do not maintain sufficient substance within the EU.

Additional reporting requirements would be imposed on entities that do not meet the substance requirements (or one of the exemptions), and such entities would also be denied the benefits of double tax treaties relief and EU Tax Directives (such as the EU Interest and Royalty Directive and the EU Parent-Subsidiary Directive). 

The draft Directive is likely to increase communication between Member States through the automatic exchange of information on all entities within scope, regardless of whether they are shell entities are not.

When will an entity be considered within the scope of the Directive?

Potentially in-scope entities will be identified by the use of three “gateway” tests. The gateway tests include shell entity indicators such as passive income, cross-border assets or income, and outsourced management of the day-to-day business. Certain entities are excluded by derogation from the gateway tests.

What are the reporting requirements for entities within the scope of the Directive?

Entities that meet the gateway test will be required to report via their tax returns on whether they meet minimum substance requirements. The minimum substance requirements include the existence of premises for its exclusive use in the Member State; at least one active bank account of its own in the EU; that the managing director is qualified, authorized, and is not employed by another unassociated entity; or that the full-time employees are resident in the same Member State as the entity.

Entities that have passed the gateway tests and do not meet the substance requirements will be presumed to be shell entities for the purposes of the Directive. The proposed Directive allows the presumption of lack of substance to be rebutted by entities under certain circumstances.

What are the tax consequences for shell entities?

The tax consequences for anentity of being deemed a shell entity include the following:

• The Member State in which the shell entity claims tax residence will either not issue a tax resident certificate or will issue a tax resident certificate which includes a warning.
• Advantages conferred by double taxation agreements and EU Directives (such as the EU Interest and Royalty Directive and the EU Parent-Subsidiary Directive) could be disallowed by other EU Member States.
• New tax rights over the income allocation of taxn rights to other Member States, for example:
  • the Member State in which the shell entity’s shareholders are resident is now entitled to tax the relevant income of the shell entity (and entitled to take a deduction for any tax paid by the shell entity) and
  • income deriving from immovable property being taxed by the Member State in which that property is situated.
  • If the shell’s shareholders are not resident in the EU, Member States will withhold tax on payments to the shell entity.
  • The imposition of penalties if the shell entity does not meet the relevant reporting obligations. The Directive broadly leaves the penalties at the discretion of the individual Member States but proposes a penalty of at least 5% of the shell entity’s turnover.

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