The implications of ATAD3 in the EU launched

Increased reporting obligations

One consequence of the shell Directive is the potential for an increase in reporting obligation, which is automatically exchanged with other EU Member States through the systems currently in place. This reporting concerns an entity’s “undertakings”, defined as “any entity engaged in economic activities, regardless of its legal form, that is a tax resident in a Member State”.

An undertaking will be required to report further information if it meets three criteria, called “gateways”, which (at a high level) includes:

• more than 75% of revenues consist of passive income / investments;
• more than 60% of income / investments is cross-border; and
• the undertaking outsourced the administration and decision making in the last two years (currently, the earliest date this can be calculated is from 1 January 2022).

Certain exemptions apply where the gateways do not trigger reporting obligations. To summarise, these include:

• the entity in question is transparent from a regulatory standpoint;
• certain purely domestic situations;
• the entity in question has employed enough employees generating the relevant income; and
• the situation does not lower the tax liability of those involved. This exemption only applies upon request.

Reporting

An undertaking will have to report information on substance indicators in its tax returns if it meets the three gateway criteria. In broad summary, the substance indicators which need to be reported are:

• the undertaking has its own premises in the Member State, or premises available for the exclusive use of the undertaking;
• the undertaking has at least one own and active bank account in the EU; and
• if at least one director of the undertaking is:
• qualified, authorised, and close-by to take decisions in relation to the activities generating the relevant income;
• makes use of its authorisation;
• is not employed by a non-associated enterprise;
• and does not perform the function of director for another non-associated enterprise.

Alternatively, the majority of the qualified full-time employees of the undertaking are tax residents in the Member State of the undertaking (or reside sufficiently close to the Member State in order to perform their duties).

The tax return must include documents proving whether or not the substance indicators have been met. Based on this information, the tax authorities will then assess whether or not the substance indicators (or domestic similar rules) are met, but permit taxpayer’s assessed as having failed the substance tests the opportunity to overturn this assessment if sufficient and appropriate further information can be provided. If an entity fails to meet the substance indicators, it is deemed to be a shell entity.

Tax consequences

If you are identified as a shell entity, the following tax consequences apply to you:

• the shell entity will not have access to the benefits of double tax treaties between Member States;
• the shell entity will not have access to the benefits of EU Directives. A tax residency certificate will either not be granted, or will be granted with the inclusion of the shell qualification on that certificate. In practice, this will make it harder to avoid double taxation.

At the same time, the shell Directive proposes rules to essentially ignore the shell entity’s existence for tax purposes in a number of situations. Also, the shell Directive proposes that Member States impose penalties when reporting obligations have been violated.

When will the Directive be implemented?

In the current form, the shell 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. It is critical that relevant entities understand and prepare for its implications.