No white smoke on ATAD III proposal in 2023


As a reminder, on 22 December 2021, the European Commission issued its proposal for a directive to prevent the abuse of shell entities for tax purposes (ATAD III proposal). After several amendments, the ATAD III proposal was adopted by the European Parliament on 17 January 2023 but is still awaiting a vote by the Council of the EU for final adoption. However, despite months of negotiations, a unanimous agreement by the EU Member States on the latest version of the proposed directive seems unlikely.

The disagreement between Member States relates notably on the substance criteria and the tax consequences of being qualified as a shell entity. According to the Council of the EU (FISC 276 ECOFIN 1294, points 18 and 19) the following alternatives have been envisaged under the current Spanish presidency in order to move forward in the ongoing negotiations.

  • A first alternative was to adopt a two-stage approach. Under this approach, it was intended that in a first stage ATAD III would be limited to exchange of information on the basis of agreed hallmarks.  Then, at a second stage ATAD III would entail that , Member States would exchange best practice on the use of this information, potentially allowing tax consequences to be applied through national, EU or international anti-abuse rules. This, if need be, with evaluation of these practices in the future.
  • A second alternative was to consider the substance criteria as a minimum standard and to apply a toolbox of consequences:
    • Minimum standard – The idea was to consider the substance criteria defined by the ATAD III proposal as a minimum standard, which would not prevent Member States from applying stricter criteria.
    • Toolbox of consequences – It was anticipated that EU Members States would be able to apply a range of tax consequences which would include among others (i) detailed reporting of transactions with shell entities to apply full withholding tax (no availability of exemption or reduce rates), (ii) refusal of deduction of costs and payments to a presumed shell entity and (iii) refusal of the application of the participation exemption regime for dividends or other profits derived from such entity.

However, EU Member States were unable to agree on the above alternatives and considered that there was still a need for more technical work before issuing a new version of the ATAD III proposal.

The European Parliament, in a resolution adopted on 12 December 2023 invited the Council to continue negotiations on the proposed directive without further delay.


In conclusion, whichever the trend or approach is chosen, given the delay in adopting the proposed directive, an application of the provisions in the domestic law of EU Member States from 1 January 2024 is to be ruled out.

However, any new proposal should be carefully monitored to ascertain whether such proposal maintains a two-year look-back period for the gateways’ assessment (i.e., criteria for assessing whether an entity falls within its scope). That being said, one would always expect that the application of the tax consequences of being considered as a shell entity would not have retroactive effect.

Our tax team is available should you require further information.