ATAD 3 in the nutshell

The EU Commission’s proposal for a council directive (the “Directive”) laying down rules to circumvent the misuse of so-called “shell entities” was released on 22 December 2021 (the “Proposal”). The Proposal is expected to be adopted in the first quarter of 2022. The aim is that Member States transpose the Directive into domestic law by 30 June 2023, with the rules applying as early as from 1 January 2024.

The Proposal introduces new reporting obligations that may result in the denial of tax advantages to EU entities that are deemed to have no or minimal substance. Such qualification may lead to the denial of Double-Tax Treaty (“DTT”) benefits, the removal of access to EU directives (such as the Parent-Subsidiary or the Interest Royalty Directives) as well as a re-allocation of taxing rights.

A welcome development for Luxembourg’s financial institutions has been introduced in Article 6 of the Directive. Indeed, the Proposal intends to provide for explicit exclusions from reporting obligations for companies listed on a regular stock exchange and regulated financial institutions, such as banks and payment institutions.  

It should be noted that undertakings operating purely domestically and undertakings with more than five employees involved in the operations are also excluded. 

Undertakings that meet the following cumulative “gateways” are considered at-risk undertakings:

  1. Undertakings that derive most (more than 75 percent) of their income from passive sources, such as rents, royalties, interest (including those from crypto assets), dividends, etc.

  2. Undertakings that are mainly (more than 60 percent) engaged in cross-border activities; and 

  3. Undertakings that outsource most of their operations/ administration and that do not have adequate resources to perform core management activities.

  4. Accordingly, an undertaking that cumulatively fulfils all three of the aforementioned gateways will be subject to reporting obligations.

An at-risk undertaking can request an exemption from the reporting obligation if it can prove that it does not reduce the tax liability of its beneficial owner(s) or of its group. This exemption will first be granted for one year with the possibility of extension, upon request, to five years.

Undertakings crossing all gateways will have to report information in their annual tax return in relation to “substance indicators,” namely, whether an undertaking has:

  1. Its own premises for its exclusive use;

  2. An active bank account in the EU;

  3. At least a local director who is adequately qualified and authorised, or local full-time employees.

In the case of an at-risk entity, it will be presumed to be a shell company if it fails at least one of the above substance indicators. An undertaking presumed to be a shell may be able to rebut this presumption if it proves that it has control over its activities and bears the risks of the activities that generated the relevant income or, in the absence of income, its assets.

It should be mentioned that the Proposal also provides for the automatic exchange of reported information between Member States through existing mechanisms of administrative cooperation.

Finally, regarding the tax consequences. entities considered as shell entities will be refused access to DTTs or EU directives (particularly the Parent-Subsidiary and Interest-Royalty Directives) by any other Member States. This may lead to withholding taxes on payments made to shell entities and taxation of the shell company’s shareholder(s) on a look-through basis, as if it had directly accrued to the shareholder(s).

Contact us

Murielle Filipucci

Tax Partner, Global Banking & Capital Markets Tax Leader, PwC Luxembourg

Tel: +352 49 48 48 3118

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