In late 2021, the European Commission proposed the Anti-Tax Avoidance Directive 3, or ATAD III, to prevent cross-border tax fraud practices using shell entities in the EU. This, after the EU Parliament has raised concerns that shell entities with little to no economic substance or commercial purposes are being exploited for aggressive tax planning. Hence, the directive is known as the “Unshell Directive”.
ATAD III covers holding corporations in the EU with no economic substance and that benefit from tax breaks. ATAD III establishes:
- Substance test for businesses in the EU;
- Reporting obligations and tax repercussions for businesses that do not meet minimum substance requirements;
- Non-compliance consequences, such as loss of tax benefits under tax treaties, not being granted a certificate of tax residence and taxation at the level of shareholder(s);
- Automatic information sharing between EU member states and cooperation between member states to commence tax audits where the undertaking is located;
- Gateway tests to detect high-risk or shell firms.
In January 2023, the EU parliament proposed several amendments to the directive, summarised in this previous Bolder article.
Initially, the directive is set to be enacted on 01 January 2024.
A few weeks before the directive is expected to take effect, ATAD III may not push through. Based on the latest ECOFIN report of the EU, which laid down the conclusions of different EU tax-related meetings of Member States, technical aspects of the directive need to be clarified and polished.
Here are the key points of the ECOFIN report related to ATAD III:
- The Czech presidency submitted compromise texts on certain parts of the proposal:
- Identification of entities with no minimum substance
- Exchange of information
- The Swedish presidency further discussed:
- The scope of the directive
- Criteria of minimum substance
- Tax consequences for non-compliance with the directive
- Tax residency certificates
- The Spanish presidency explored:
- Tax consequences of the directive
- Links of the directive to domestic anti-abuse legislation
- Entities excluded or not covered by the directive
- Definition of minimum substance
- Rebuttal of the presumption and reduction of administrative burden
- Tax residency certificate
- Exchange of information between member states
- The Spanish presidency also submitted a compromise text covering the entire draft of the directive.
- The Spanish presidency suggested a two-stage approach for member states to reach an agreement on the directive.
- First stage: the directive would include AEOI based on agreed hallmarks, which will be applied alongside domestic tax consequences.
- Second stage: member states would exchange best practices about using information in applying tax consequences. These practices would then be evaluated for the launch of a potential new proposal.
- Relevant to the two-stage approach, several delegations raised that this will not solve the pending issues and require further analysis. The Commission suggested an alternative way based on a minimum standard approach and a toolbox of consequences.
- No agreement has been reached regarding this new proposal. Further discussion is needed.
The report also covered other tax-related issues, including:
- VAT in the Digital Age
Read full report here.
Please contact your usual Bolder representative for any questions related to ATAD III or your compliance requirements in the EU.