ATAD 3: European Commission's proposal targeting shell companies


On 18 May 2021, the European Commission published a communication which contained the EU Tax Policy Agenda and the actions to adopt in 2021 and in the coming years to increase transparency and substance requirements. One of the most relevant proposals was the initiative on the fight against the misuse of shell companies meaning companies with no or minimal substantial presence and real economic activity. In this context, on 22 December 2021, the European Commission made available a proposal of Directive (the Directive). By laying down indicators of minimum substance for undertakings in Member States, the proposed Directive aims to increase scrutiny of shell companies within the EU to prevent them from being used for tax evasion and avoidance. This Directive also enhances and completes the efforts of previous EU measures including anti-tax avoidance directives (ATAD) and directives on administrative cooperation (DAC) and is therefore also referred to as ATAD 3.

The main provisions of the proposed Directive can be summarized as follows.


The provisions of the proposed Directive would be applicable to any undertaking that is considered tax resident and is eligible to receive a tax residency certificate in a Member State, regardless of its legal form. The targets are entities without real economic activities used within a scheme to avoid and evade taxes and allow their beneficial owners or group to access a tax advantage. Undertakings performing certain activities are explicitly carved out, including without limitation, companies listed on a regulated market, certain regulated financial undertakings as specifically identified and listed by the Directive (e.g., alternative investment funds within the meaning of the AIFMD), and undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income. According to the impact assessment carried out in the framework of this initiative, it is expected that less than 0.3% of all EU companies will be in scope.

Indicators to determine if a company has a real economic activity

The proposed Directive establishes a so-called “substance test” with “gateway” criterion (to be assessed on the basis of the 2 previous tax years) of three cumulative conditions to determine whether an undertaking is sufficiently at risk to be subject to reporting requirements:

  • The undertaking derives predominantly passive income;
  • The undertaking is mainly engaged in cross-border activities; and
  • The undertaking has no or inadequate own resources to perform core management activities which are outsourced.

Accordingly, entities meeting the above three conditions are considered “at risk”.

Reporting and presumption

Undertakings “at risk” should declare in their tax returns information related to their substance (e.g., own premises, existence of an active bank account within the EU, place of residence for tax purposes and qualification of the directors and/or employees). This reporting should be duly documented allowing tax authorities to perform any audit. If an undertaking fails to meet one of the substance indicators, it will be presumed to be a shell company (i.e., not to have minimum substance for the tax year).

Rebuttal of presumption

Undertakings deemed to be a shell, will have the possibility to rebut such presumption. In this regard, the taxpayer will be required to produce concrete evidence of the activity it performs and how it proceeds. To this effect, the taxpayer will be expected to provide information on (i) non-tax or commercial reasons for its setting up and maintenance, (ii) its resources (i.e., human) as well as (iii) any element that will allow to verify the nexus between the undertaking and the Member State where it claims to be resident for tax purposes (e.g., place where its decisions are taken in relation to value generating activities). The taxpayer will have to demonstrate that it has performed and continuously had control over and born the risk related to its business activities that generate the relevant income (or in the absence of income, its assets). Tax authorities of the jurisdiction where the undertaking is resident should, when satisfied, certify the outcome of the rebuttal for the relevant tax year. The validity of the certificate can be extended for another 5 years (with a total 6 year maximum) provided the legal and factual circumstances remain unchanged.

Exemption for lack of tax motives

Undertakings which do not meet a certain level of substance or cross the “gateways” but carry out genuine business activities without creating tax benefits for its beneficial owner or its group, will have the possibility to evidence and request an exemption from their reporting obligations. These undertakings will be expected to evidence that their interposition does not lead to a tax benefit for their beneficial owner(s) or the group as a whole. To that respect, they will have to produce elements allowing to compare the tax liability of the structure or group to which they belong with or without their interposition. Similarly, as for the procedure for the rebuttal of presumption tax authorities of the jurisdiction where the undertaking is resident should, when satisfied, grant the exemption for the relevant year. Validity of the exemption can be extended for another 5 years provided the legal and factual circumstances do not change.

Consequences if an undertaking is deemed to be a shell

If an entity is presumed to be a shell without any rebuttal or exemption applicable, the undertaking will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or to qualify for the Parent-Subsidiary and Interest and Royalties Directives. Accordingly, the Member State of residence of the shell company will be compelled to either not issue a tax residence certificate or to issue a certificate with a warning statement that the company is a shell.

It is also expected that an allocation of taxing rights between the source countries and the residence countries of shareholders takes place, operating only between EU Member States. Effects as to third countries should be closely analyzed based on applicable treaties and domestic laws.

Exchange of information

All Member States will have access, at any time, to information on EU shells even for the ones that have rebutted the presumption or are exempt. The information will be exchanged automatically. To this effect, the proposed Directive will amend DAC.


Member States will be free to impose penalties against the violation of the reporting obligations. These penalties should be effective, proportionate and dissuasive and should include an administrative pecuniary sanction of at least 5% of the entity’s turnover.


If adopted, Member States will be required to implement the Directive by 30 June 2023 for an application as from 1 January 2024.

In conclusion, the proposed Directive establishes transparency standards and indicators for minimum substance around the use of EU shell entities, so that their misuse can more easily be detected by tax authorities. Transparency is indeed the cornerstone of fair taxation. Also, the Directive introduces defensive measures to limit the access to exemption, and other tax benefits derived from (certain) EU tax directives and tax treaties, which in practice create new conditions for certain tax frameworks (e.g., participation exemption). The next step, according to the EU Commission, will be to target shell undertakings established outside the EU.

How is this relevant for groups structuring their investment via Luxembourg holding companies?

International groups, investment or fund structures involving the use of Luxembourg holding companies will be required to anticipate the impact of the Directive if adopted. Given that the gateway criterions (i.e., indicators to determine whether an undertaking is a risk or not) will be assessed based on information available in the preceding two years, it is advisable to proceed with an evaluation of existing structures already in 2022. In particular, the criterion related to the administration of the day-to-day operations should be monitored carefully and be properly documented.