ATAD3 - The Unshell Directive: An overview of the latest developments

STATUS UPDATE AS PER NOVEMBER 2023

Latest developments indicate a removal of ATAD 3 from the Ecofin agenda for the November meeting. The possible changes that were to be discussed during this meeting should therefore not be implemented on the short term. The directive was removed from the agenda of ECOFIN’s November 2023 meeting. We conclude from this that ATAD3 will not be implemented on a short term as there is no consencus about the rules and conditions. as mentioned in this Directive. This is a positive development in our view. The current anti abuse rules in Tax treaty's (MLI), the Parent Subsidiary directive and all kind of national anti abuse rules are already sufficient ammunition for tax authorities in western countries to challenge any abusive structures. The countries in the EU may need more time to change the directive in order the text to be accepted by all countries. This may be continued OR we will never hear from it again...

STATUS UPDATE PER SEPTEMBER 2023

Regarding recent developments, optimism about the Unshell Directive has risen at the European Region conference of the International Fiscal Association in Amsterdam. A representative from the current Spanish Presidency expressed a commitment to achieving an agreement, with the goal of political alignment on this matter by the ECOFIN meeting in November 2023. The expectation nowadays is that some of the above conditions and part of the consequences for being a Shell will be less strict.

Despite the prevailing uncertainties, one thing is certain: if ATAD3 is approved, it will significantly impact the burden of proof. Currently, when applying general or specific anti-abuse provisions, tax authorities are responsible for demonstrating that an entity qualifies as a Shell company. Under ATAD3, the burden of proof shifts to the taxpayer, who must show that their entity does not meet the criteria of a shell company as defined by ATAD3.

GENERAL INFORMATION ATAD 3 ("Unshell Directive") On December 21, 2021, the ATAD3 directive proposal, also known as the "Unshell Directive," was released. ATAD3, set to take effect on January 1, 2025, essentially aims to deny tax benefits to substanceless pass-through companies. In contrast to Pillar 2, ATAD 3 is not restricted to international or domestic groups with global revenues surpassing EUR 750 million. Consequently, it will have repercussions for numerous small and medium-sized enterprises that operate within the EU, leading to an escalation in administrative responsibilities. In the event of its approval, ATAD3 is poised to exert a significant influence on European holding structures.

ATAD3 follows a funnel-shaped, step-by-step approach and can be summarized as consisting of the following steps:

To qualify as a shell entity, the following three conditions must be met:

1.      The income of the entity in question is primarily passive (65% or more).

2.      The activities of the entity in question are predominantly cross-border (55% or more).

3.     The management and administration of the entity in question are outsourced to third parties (outsourcing).

The proposal intends to provide for explicit exclusions from reporting obligations for companies listed on a regular stock exchange and regulated financial institutions, such as banks and payment institutions. For them it is not necessary to assess whether the gateway criteria have been met.

If an entity crosses all three gateways, it will have to provide information on the level of substance in its jurisdiction by reporting its own status with respect to the following 3 minimum indicators:

      i. Own premises in its jurisdiction (shared office space also counts).

     ii. At least one active bank account in an EU member state.

    iii. The qualifying director/manager are based in the same jurisdiction ( Specific rules apply).

If you have a yes to all these questions there is a low risk under the current draft of ATAD3, having said that there is always a risk that the Dutch authorities will enforce more strictly. The Dutch State Secretary indicates that the government is committed to a prompt processing of the EU directive proposal.

The EU Member States currently lack a consensus on key aspects of the Unshell Directive, leading to ongoing uncertainty about the final version of the compromise text, which has not yet been made public. As of the date of this publication, there has been no official change to the proposed effective date of 1 January 2025. It's important to note that once the Directive is adopted, each Member State may choose its own timeline for incorporating it into their internal legislation, potentially resulting in a fragmented implementation.