Press Room

2 Feb 2022

ATAD 3 & Shell Entities

Senior Manager Helen Siqin provides an overview of ATAD 3, the European Commission’s proposal targeting shell companies.

On 22 December 2021, the European Commission (EC) presented an initiative to fight the use of shell companies. The objective of the initiative is to ensure that companies that have no or minimal economic activity are unable to benefit from any relevant tax advantages, thereby discouraging their use.

Shell companies, in the view of the EC, are often used for aggressive tax planning or tax evasion purposes. Businesses can channel financial flows through shell companies to tax havens or jurisdictions where taxes can easily be circumvented. Similarly, individuals can use shell companies to shield assets (e.g. real estate, intellectual property etc) from taxes, either in their country of residence or in the country where the property is located.

The proposal

Although the proposal is consistent and stands alongside other EU tax initiatives, including the Pillar 2 Directive, there are a few key differences. Firstly, this proposal establishes a minimum level of substance for entities to enjoy certain tax benefits, without reference to the level of taxation. The second is that no materiality threshold is included in the proposal, and it seems to apply to all EU corporations regardless of their size.

The proposal sets out three gateways. If a company passes through all three gateways, it will need to satisfy the minimum substance requirements otherwise it will be classified as a shell company.

The three gateways

  1. is the bulk of the company’s income passive (i.e. dividends, interest or bonds, etc)? In this context, more than 75% of the entity’s overall revenue in the previous two years does not derive from the entity’s trading activity or more than 75% of its assets are real estate property or other private property of particular high value;
  2. cross-border element – the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad; and
  3. outsourcing – the company outsources its corporate management and administration services.

From the above, it’s obvious that corporate service providers are in the crosshairs and will be beefing up their substance offerings.

The proposal includes several caveats and exceptions including:

  1. listed entities;
  2. specific regulated financial entities;
  3. certain holding entities of operational business in the same Member State; and
  4. entities with at least five dedicated full-time employees exclusively carrying out the activities generating the relevant income.

Minimum substance requirements

Entities passing through each gateway will be required to report information on their tax return to prove they meet the minimum substance requirements:

  1. premises available for the exclusive use of the entity;
  2. the entity has at least one active bank account in the EU; and
  3. the entity has at least one director/or the majority of relevant employees being resident close to its undertaking.

If an entity fails at least one of the above indicators, it will be presumed to be a ‘shell’.  Such a shell entity then has two opportunities to rebut this presumption as follows:

  1. to prove that the entity has substance (despite not satisfying the minimum substance requirements); and
  2. to prove it is not misused for obtaining tax benefits.

Consequences of being a ‘shell’

Shell entities face the following consequences:

  1. tax benefits under relevant tax treaties between Member States and tax Directives (e.g. Interest and Royalty Directive, Parent subsidiary Directive) are denied;
  2. a new CFC style charge applies to the shareholders of the shell company; and
  3. the Member State of residence of the shell company will not issue a certificate of residence so that tax benefits cannot be claimed.

Perhaps unsurprisingly the proposal also includes an information exchange section which suggests all Member States have access to information on EU shell companies, at any time and without a need to request for information.

Although the proposed legislation leaves it to Member States to establish penalties, the EC recommends a minimum penalty for non-compliance of at least 5% of the entity’s turnover.

What’s Next

The EC has suggested a commencement date of 1 January 2024; however, the proposal needs to be adopted by all 27 Member States. As with previous Directives on direct taxation, it is expected that a number of Member States are likely to push back. Consequently, the final Directive, if adopted at all, could be very different from the current proposal.


Whilst this new proposal puts the ability of an EU Directive to override existing tax treaties to test, it may nonetheless indirectly help Member States with the application of the Principal Purpose Test (by applying the minimum substance requirements in the proposal).

Another aspect worth mentioning is that the proposal has significant compliance implications for both taxpayers and tax authorities in Member States.

As mentioned earlier, the proposal will now move to the negotiation phase among Member States. While it is hard to predict what the final agreement will look like, businesses that are potentially in scope could carry out an initial analysis based on the current draft.

Please contact Miles Dean or Helen Siqin for additional information with respect to this article.

Helen Siqin

Helen Siqin is a Senior Manager at Andersen in the UK.

Email: Helen Siqin