A summary of ATAD 3

In December last year the EU published a draft directive called ATAD 3. Based on this proposed directive, as of 2024, so called “shell companies” can not benefit from the parent subsidiary directive and can not obtain treaty benefits. We would like to inform you about this new directive and the possible tax consequences.

ATAD 3 sets out a list of features, referred to as “gateways”, to filter entities at risk of lacking substance. High risk entities will be required to report on their substance in their annual corporate income tax return. Companies failing to meet certain substance indicators, as set out under the Directive, would be deemed to be “shell entities” and would be denied certain tax benefits otherwise available based on double tax treaties and EU directives. The lack of substance can be rebutted and if there are business reasons the status of a "shell" can be avoided. The data reported by entities in scope would be covered by the automatic exchange of information between Member States and could be subject to tax audits.

The Gateways:

Legal entities that satisfy each of the following ‘gateway tests’ will be required to report under the directive:

1. 75% of the income is passive income (interest, royalties, dividends, rental income capital gains on shares);

2. Engaged in cross-border activity such that more than 60% of their income is earned or paid by cross-border transactions or more than 60% of the value of their assets are located outside the relevant Member State; and

3. Where in the preceding two years, the undertaking allowed the administration of day-to-day operations and the decision-making on significant functions to be outsourced.

The directive is planned to be implemented as of January 1st, 2024. However, for the analysis of being a shell a two year reference period is proposed, so effectively the situation in 2022 already needs to be taken into account if the Directive is being ratified.

If you would like to plan a teams meeting to discuss the details of the directive and see what could be the impact and more importantly, what can be done to avoid application of the Directive, please contact me.