1: What is ATAD3?
On December 22, 2021, the European Commission (“EC”) published a proposal for a Directive “laying down rules to prevent the misuse of shell entities for improper tax purposes and amending Directive 2011/16/EU.” This Directive is also referred to as the ATAD 3 Directive or “ATAD3”.
ATAD3 should ensure that entities within the EU that have no or minimal economic activity (so-called “shell entities”) cannot benefit from certain tax advantages as per the EU and national tax treaties. The clear objective is to discourage the use of shell entities which are often used for tax planning or tax evasion purposes.
2: What are Shell Entities?
A shell entity is a company or corporation with limited economic activity. I.e., has no office and no employees but may have a bank account, hold passive investments, or be the registered owner of assets, such as intellectual property or ships. Shell companies may be registered to the address of a company that provides a service setting up shell companies and which may act as the agent for receipt of legal correspondence (such as an accountant or lawyer). The company may serve as a vehicle for business transactions without any significant assets or operations. Sometimes shell companies are used for tax evasion, tax avoidance, and money laundering or to achieve a specific goal such as anonymity. Anonymity may be sought to shield personal assets from others, such as a spouse when a marriage is breaking down, from creditors, from government authorities, besides others.
Shell companies can have legitimate business purposes. They may, for example, act as trustees for trust and not engage in any other activity on their own account. This structure creates limited liability for the trustee. A corporate shell can also be formed around a partnership to create limited liability for the partners and other business ventures or to immunize one part of a business from the risks of another part. Shell companies can be used to transfer assets from one company into a new one while leaving the liabilities in the former company.
3: What are the ATAD3 reporting deadlines?
The EU Member States will need to implement the proposed measures into their domestic tax legislation by June 30, 2023, and apply them by January 1, 2024. To determine if a company falls within the scope of the Directive, a 2-year look-back rule shall be applied. Therefore, as of January 1, 2022, the company’s position may already be a reference point, and entities may want to consider appropriate actions on a current basis.
4: Does ATAD3 affect my business?
In scope are entities residing in the EU, predominantly generate passive income and/or predominantly hold real estate, operate cross border, and have engaged third-party service providers to act as external directors for their EU tax-resident companies will be impacted by these new rules.
Exemptions from these rules will apply to entities with certain profiles, such as regulated investment funds and entities with at least five relevant employees that conduct relevant activities.
Despite the specific carveout available, the investment funds industry may be especially affected, which does not apply to intermediate holding companies held directly or indirectly by an investment fund. Other multinationals may also fall within the scope of these newly proposed rules.
5: What are the ATAD3 reporting obligations?
In-scope shell entities will be obligated to report, together with their tax return, so-called substance indicators plus evidence. If they do not, then they will, in principle, be presumed abusive shell entities, as a result of which various adverse consequences should apply. In-scope shell entities that do not meet all substance indicators will still have the possibility to rebut the presumption of being an abusive shell entity or ask for an exemption if it can prove that there was no tax advantage
6: Is there already ATAD3 software available?
After our successful DAC6pro tool, we consider building a second tax regtech tool that eases and audit trails the assessment whether an entity is in scope and to relieve the reporting burden. Interested? Please download our ATAD3 flow chart via the button below and subscribe if you are interested in becoming an early bird user of our upcoming ATAD3pro tool.