Proposed amendments to ATAD 3 (January 2023)
On 17 January 2023, the EU Parliament proposed a number of amendments to the Anti-tax avoidance directive 3 (ATAD 3) or what is known as the Unshell Directive. Under the directive, EU entities that engage in cross-border activities must comply with a minimum economic substance to prevent tax evasion.
The directive is set to take effect on January 2024. We discussed this directive in detail in a previous article. Bolder Group has also previously organised a webinar discussing ATAD 3 and its impact on companies, where HCSD Tax Advisors Partner Wiet Crobach was invited as a speaker. Watch the discussion here.
Here are some of the proposed amendments introduced this January:
| Recital/Article | Original | Proposal |
|---|---|---|
| Recital 1a | New recital | There can be valid reasons for using companies with minimal economic substance. Therefore, it is important to guarantee a proportionate legal framework that safeguards the position of small and medium-sized enterprises (SMEs) that use legal structures to promote investments, comply with national laws or operate in different national markets while, at the same time, legislating in concrete terms on the misuse of shell entities to avoid taxation. The quality and completeness of data are therefore essential in order to reap the greatest benefits from this Directive. |
| Recital 1b | New recital | The lack of an international instrument on the misuse of shell entities for tax purposes creates a significant loophole in the global efforts to combat tax fraud and evasion and aggressive tax planning. In addition, it creates an uneven playing field among businesses. The absence of such an instrument confirms the importance of the legal standards laid down in this Directive. It is essential to guarantee that the obligations provided for in this Directive are proportionate and effective from a taxation point of view, preserving the competitiveness of Union undertakings. |
| Recital 1c | New recital | The misuse of shell entities for tax purposes leads to a reduction in tax liability and tax loss within the Union. It is therefore essential that this Directive sets ambitious and proportionate standards for the definition of common minimum substance requirements, for the improvement of exchange of information between national tax administrations and for the dissuasion of the use of shell entities promoted by certain intermediaries. |
| Recital 2 (additional text) | It is acknowledged that undertakings with no minimal substance may be set up in a Member State with the main objective of obtaining a tax advantage, notably by eroding the tax base of another Member State. While some Member States have developed a legislative or administrative framework to protect their tax base from such schemes, the relevant rules often have a limited effect, as they only apply in the territory of a single Member State and do not effectively capture situations that involve more than one Member State. Furthermore, the national rules that apply in this field significantly differ across the Union while some Member States have no rules at all, to tackle the misuse of undertakings with no or minimal substance for tax purposes. | It is acknowledged that undertakings with no minimal substance may be set up in a Member State with the main objective of obtaining a tax advantage, notably by eroding the tax base of another Member State, creating a window of opportunity for aggressive tax planning. While some Member States have developed a legislative or administrative framework to protect their tax base from such schemes, the relevant rules often have a limited effect, as they only apply in the territory of a single Member State and do not effectively capture situations that involve more than one Member State. Furthermore, the national rules that apply in this field significantly differ across the Union while some Member States have no rules at all, to tackle the misuse of undertakings with no or minimal substance for tax purposes. It is therefore important to create a Union-wide legal approach to ensuring a framework for safeguarding the integrity of the internal market, fully respecting the highest standards of accessibility, simplicity and transparency |
| Recital 3a | New recital | To achieve the aims of this Directive, increasing the capacity of tax administrations and improving the exchange of information across the Union is of the utmost importance. It is necessary that Member States share the relevant information to which they have access, implement systems supporting the exchange of that information and, as a final step, enforce proposed sanctions against non-complying entities. In support of this Directive, the Commission should suggest specific activities within the Fiscalis programme. |
| Recital 6 (additional text on exclusion of companies with transferable security trading or listed on a regulated market) | Undertakings that engage an adequate number of persons, full-time and exclusively, in order to carry out their activities should equally not be considered to lack minimal substance. While they are not reasonably expected to pass the gateway criterion, they should be excluded explicitly for purposes of legal certainty. | That exclusion applies expressly to undertakings that are regulated or presenting little risk of lacking substance. The exclusion should be seen as entity-byentity and not broadened to cover a whole group |
| Recital 9 (additional text) | In order to allow Member States to allocate the resources of their tax administrations efficiently, Member States should be able to determine a period during which the undertaking is presumed to have minimum substance, provided that the factual and legal circumstances of the undertaking remain unchanged during that period. | |
| Recital 13a | New recital | The Commission and Member States should make sure that those tax consequences are articulated in a consistent manner with existing bilateral tax agreements concluded between Member States and third countries. |
| Recital 16 (additional text on recommendation of joint audits between member states) | The Commission and Member States should make sure that those tax consequences are articulated in a consistent manner with existing bilateral tax agreements concluded between Member States and third countries. | |
| Article 6 – paragraph 1 – subparagraph 1 – point b – point ii | at least 60% of the undertaking’s relevant income is earned or paid out via cross-border transactions | more than 55% of the undertaking’s relevant income is earned or paid out via cross-border transactions |
| Article 6 – paragraph 2 – subparagraph 1 – point e | undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income | deleted |
| Article 7 – paragraph 1 – point b | the undertaking has at least one own and active bank account in the Union | the undertaking has at least one own and active bank account or e-money account in the Union through which the relevant income is received |
| Article 7 – paragraph 2 – point g b (new) (Indicators of minimum substance for tax purposes) | a summary report of the documentary evidence submitted under this paragraph, containing in particular: – a brief description of the nature of the activities of the undertaking; – the number of employees on a fulltime equivalent basis; – the amount of profit or loss before and after taxes | |
| Article 7 – paragraph 1 – point c – point i – point 4 (Indicators of minimum substance for tax purposes) | are not employees of an enterprise that is not an associated enterprise and do not perform the function of director or equivalent of other enterprises that are not associated enterprises; | deleted |
| Article 9 – paragraph 2 – point b (Rebuttal of the presumption) | information about the employee profiles, including the level of their experience, their decision-making power in the overall organisation, role and position in the organisation chart, the type of their employment contract, their qualifications and duration of employment | information about the full-time, part-time, and freelance employee profiles, namely the level of their experience, their decision-making power in the overall organisation, role and position in the organisation chart, the type of their employment contract, their qualifications and duration of employment, safeguarding high levels of data protection and privacy |
| Article 9 – paragraph 3 a (Rebuttal of the presumption) | New point | The Member State shall consider a request for the rebuttal of the presumption within a period of nine months after the introduction of the request and it shall be considered to be accepted in the absence of an answer from the Member State after the expiry of that nine-month period. |
| Article 10 – paragraph 2 (Exemption) | A Member State may grant that exemption for one tax year if the undertaking provides sufficient and objective evidence that its interposition does not lead to a tax benefit for its beneficial owner(s) or the group as a whole, as the case may be. That evidence shall include information about the structure of the group and its activities. That evidence shall allow to compare the amount of overall tax due by the beneficial owner(s) or the group as a whole, as the case may be, having regard to the interposition of the undertaking, with the amount that would be due under the same circumstances in the absence of the undertaking. | A Member State may grant that exemption for one tax year if the undertaking provides sufficient and objective evidence that its interposition does not lead to a tax benefit for its beneficial owner(s) or the group as a whole, as the case may be. That evidence shall include information about the structure of the group and its activities, including a list of its employees working on full-time equivalence. That evidence shall allow to compare the amount of overall tax due by the beneficial owner(s) or the group as a whole, as the case may be, having regard to the interposition of the undertaking, with the amount that would be due under the same circumstances in the absence of the undertaking |
| Article 10 – paragraph 3 a (Exemption) | New point | A Member State shall consider the exemption request within a period of nine months after the introduction of the request and it shall be considered to be accepted in the absence of an answer from the Member State after the expiry of the nine-month period. |
| Article 12 – paragraph 1 a (Tax consequences of not having minimum substance for tax purposes in the Member State of the undertaking) | New point | When denying a request for such certificate, the Member State shall issue an official statement duly justifying such decision and prescribing that the undertaking is not entitled to the benefits of agreements and conventions that provide for the elimination of double taxation of income, and, where applicable, capital, or of international agreements with a similar purpose or effect and of Articles 4, 5 and 6 of Directive 2011/96/EU and Article 1 of Directive 2003/49/EC. |
| Article 13 – paragraph 1 – point 2 | the VAT number, where available, of the undertaking required to report pursuant to Article 6 of Directive [OP]; | In the case of lack of TIN, the VAT number, where available, of the undertaking required to report pursuant to Article 6 of Directive [OP]. |
| Article 15 – paragraph 2 (Title change) | Request for tax audit | Request for joint tax audit |
| Article 15 – paragraph 2 | The competent authority of the requested Member State shall initiate it within one month from the date of receipt of the request and conduct the tax audit, in accordance with the rules governing tax audits in the requested Member State. | If the requesting competent authority is not able to conduct a joint tax audit due to legal reasons, the competent authority of the requested Member State shall initiate a national audit within one month from the date of receipt of the request and conduct it, in accordance with the rules governing tax audits in the requested Member State. |
| Article 17 – paragraph 1 (Reports) | By 31 December 2028, the Commission shall present a report to the European Parliament and the Council on the implementation of this Directive. | By … [five years after date of transposition of this Directive] the Commission shall submit a report to the European Parliament and the Council on the implementation and operation of this Directive. Where appropriate, the report shall be accompanied by a review with a view to increasing the effectiveness of this Directive and a legislative proposal amending this Directive. |
| Article 17 – paragraph 1 a | New point | The report shall review and assess the impact of this Directive on tax revenues in Member States, on tax administration’s capacities and in particular, whether there is a need to amend this Directive. The report shall also assess whether it would be appropriate to add a substance indicator based on pre-tax profit per employee in Article 7 and to extend the obligation to report on indicators of minimum substance for tax purposes set out in that Article to regulated financial undertakings and, if necessary, review the exemption granted to them in Article 6 (2b). |
How can these proposed amendments to ATAD 3 affect the way you do business or comply with the laws? Contact info@boldergroup.com to reach out to us.
The proposals mentioned above were compiled in collaboration with Mr. Crobach.
