World news
23 February 2022

European Commission has proposed a directive to prevent the misuse of shell entities

On 22 December 2021, the European Commission („EC“) has published a proposal Directive „Unshell“, which sets out the rules to prevent the misuse of shell entities for improper tax purposes. The new measures will introduce a more transparent system for detecting and reporting shell entities in the EU. This initiative will ensure that companies with no- or minimal economic activity are unable to benefit from any tax advantages.

Marianna Dávidová
Soňa Vojteková

As we have already informed you in our previous Article, one of the key measures of the international tax reform presented by the EC is to resolve the issue of shell companies. The Directive, also known as "ATAD 3" (Anti-Tax Avoidance Directive), introduces a seven-step frame of several features to identify shell companies within the EU.

Step 1: Indicators used to determine the economic substance

The new mechanism will enable to detect at-risk companies in three „gateways“:

  • Is the bulk of the company’s income passive (dividends, interest on bonds, etc.)? - more than 75% of the company's turnover for the two previous years is passive income or more than 75% of the value of its assets is real estate or private property exceeding EUR 1 million;
  • Are a majority of transactions cross-border? - the company generates most of its revenues from cross-border transactions or the other way round, pays most of its income to abroad;
  • Are management and administration outsourced? - the administration of day-to-day operations and the decision-making on significant functions was outsourced;

If the company meet the cumulative criteria, it will be subject to new reporting under ATAD 3.

Step 2: Reporting obligation

Companies that meet all three criteria are required to disclose additional information in their annual corporate income tax return (e.g. own premises, existence of an active bank account within the EU, the tax residency of its directors and employees). These three indicators are defined in the Directive as „minimum substance indicators“ that demonstrate the economic activity of taxpayers. The tax return should be accompanied with documentary evidence.

Step 3: Presumption of minimum substance for tax purposes

If one of the substance requirements isn't met, the entity will be considered as a shell company.

Step 4: Rebuttal of presumption

The proposal for the Directive does provide for possibility of requesting an individual examination of their business activities and thus to rebut such presumption that the company has been set up for reasons of tax avoidance. The tax authority will thoroughly check the specific evidence and circumstances (detailed information about the profiles of their employees, undertaking commensurate control over, bearing the risks of the business activities, generating the relevant income).

Step 5: Exceptions

There are a number of specific exclusions from the scope of the ATAD3, such as for some regulated financial entities, companies listed on a regulated stock exchange, holding companies with shareholders or entities with at least five full-time employees engaged exclusively in the activity generating the income. Moreover, the tax authority provides a general exemption where a shell entity exists but does not create a tax benefit. Company found to be “at-risk”, as per the above, can request an exemption from its reporting obligation if it can provide evidence that its existence does not reduce the tax liability of the beneficial owner or of its group.

Step 6: Tax consequences

If a company is deemed as shell company and fails to counter-prove this presumption, it will not be able to access tax relief and benefits under double taxation treaties and European directives. Member States will not issue a tax residence certificate to such entities, which means that payments (interest, dividends) may be subject to withholding tax.

Step 7: Exchange of information

Tax authorities will share data on shell companies as part of the automatic exchange of information between Member States, which will contribute to transparency and detect companies that exist merely on paper. This will result in creating a new EU central database on administrative cooperation in the field of taxation. The data reported by entities could be subject to tax audits.


Member States shall set penalties, a minimum penalty for non-compliance is provided consisting of at least 5% of the entity's turnover.


The draft Directive is now being negotiated by Member States and could potentially be subject to further amendments. The ATAD 3 will have to be transposed into Member States’ national legislation by 30 June 2023 for the rules to come into effect as of 1 January 2024.

In addition, the European Commission will present in 2022 a new initiative to respond to the challenges linked to non-EU shell entities.

We will continue to monitor the current development of changing international rules.

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