ATAD3 – Disrupting the international real estate, holding and financial services industry

ATAD3 in a Nut-”Shell”

In essence, ATAD3 imposes increased reporting obligations and denial of tax benefits under double tax treaties and EU Directives for entities who are considered ‘Shell Companies’.

To identify whether ATAD3 applies to your company, the following step plan applies:

1. Gateways: determine whether a company is a ‘shell’. This is usually  the case when management and administration are outsourced in international groups.
2. Substance indicators: mandatory annual reporting for ‘Shell Companies’ on whether minimum substance requirements are met.
3. Presumption, rebuttal and exemption: if the minimum substance requirements are not met, there is a presumption of lack of substance. This presumption can be rebutted by providing additional information to Dutch revenue regarding substance. An exemption applies if no tax benefit is obtained. 
4. Sanctions: if the presumption is not rebutted and no exemption applies, tax benefits derived from EU Directives and double tax treaties benefits are denied. 

Summary of the ATAD3 4-step approach and the relevant tax consequences

Gateways: Is your company considered a ‘shell’?

A company is considered a ‘shell’ if, in the preceding two tax years, it meets the following three criteria or ‘Gateways’:

• More than 75% of revenues consist of passive income / investments. Passive income includes dividends, royalties, interest and income from immovable property/real estate.
• More than 60% of income / investments are cross-border, or more than 60% of the book value of the entity’s assets (including real estate) is located outside the entity’s state of residence.
• The entity outsources it’s administration and decision making.

Certain exemptions apply where the ‘Gateways’ do not trigger reporting obligations. In summary, these exemptions include certain:

• regulated financial entities
• entities with transferable securities listed on a regulated market
• purely domestic situations
• entities with at least 5 employees generating the passive income

Substance indicators: Which information should ‘shells’ report?

If an entity passes the three ‘Gateways’, it would be obliged to report whether it meets the following three substance indicators:

• Own premises in the state of residence, or premises for its exclusive use.
• Active bank account in the EU.
• The entity should meet one of the following two indicators:
  • At least one director of the company:
    • Is resident of or lives close to the jurisdiction of the entity;
    • Is qualified and authorized to make relevant decisions;
    • Actively, independently and on a regular basis, takes use of their authorization; and
    • Is not an employee of an unrelated party and is not a director of any other unrelated entity.
  • The majority of the entity’s employees are resident or live close to the jurisdiction of the entity, and those employees are qualified to carry out the income-generating activities.

Not meeting the substance indicators results in the automatic exchange of certain information between EU Member States.

Presumption and rebuttal: Can the ‘shell status’ be challenged?

If an entity does not meet all substance indicators or does not provide sufficient supporting evidence, it is assumed that the entity has no minimum substance and is therefore a ‘Shell Company’. However, there is a rebuttable presumption. An entity may provide additional evidence, for example by showing that there are commercial and non-tax driven reasons for its establishment in an EU Member State, and may therefore argue that it should not be regarded as a ‘Shell Company’.

An EU Member State shall treat an entity as having rebutted the presumption if the evidence that the entity has provided proves that the entity has performed and continuously had control over, and borne the risks of, the business activities that generated the relevant income or, in the absence of income, the entity’s assets.

Sanctions: What are the tax consequences for ‘shells’?

The following tax consequences apply to ‘Shell Companies’:

• No access to the benefits of double tax treaties between EU Member States.
• No access to the benefits of EU Directives (such as the Parent-Subsidiary Directive or the Interest and Royalty Directive).
• Not being granted of a tax residency certificate or a certificate showing the entity being classified as a “Shell Company”. In practice, this will make it harder to avoid double taxation.

In essence, ATAD3 aims to ignore the Shell Company’s existence for tax purposes in a number of situations and may allow EU Member States to impose penalties when reporting obligations have been violated.

What’s next?

If adopted, ATAD3 should be implemented into national legislation of the EU Member States by 30 June 2023, and come into effect by 1 January 2024. Since the ‘Gateways’ use a reference period of the two previous tax years, this reference period may have already started for your organization.

ATAD3 can only be adopted by unanimity. It is not yet clear whether the EU Member States will easily reach an agreement on ATAD3 in its current form. Nonetheless, it is critical to assess the implications of ATAD3 for your international tax structure and act now to avoid adverse tax consequences in the future.

Impact for your real estate, holding or financial investment structure

International real estate structures, holding structures and financial investment structures could be impacted by ATAD3. Especially if they have outsourced the day-to-day administration and decision-making. As a result, tax benefits under double tax treaties and EU Directives may be denied. Mazars closely monitors the developments regarding ATAD3 and is happy to review your structure(s) in light of ATAD3.