The anti-tax avoidance Directive 3 addressing the abusive use of shell companies


In brief

In a communication dated 18 May 2021, referred to as "Business Taxation for the 21st Century"1, the European Commission announced a tax reform project aimed at pursuing an international tax transformation, in consistency with the reflections undertaken at the Organisation for Economic Cooperation and Development ("OECD") level. One of the projects announced by the European Commission was the release of a draft proposal setting out union rules to neutralise the misuse of shell entities for tax purposes, so called anti-tax avoidance Directive 3 ("ATAD 3"). In this respect, the European Commission has published its draft Directive on 22 December 2021.


Objectives of the proposal

The main objective of the legislative proposal is to address the abusive use of so-called shell companies, being referred to in the Commission communication as legal entities with no or only minimal substance and economic activity.

According to the European Commission, despite all recently introduced anti-tax avoidance rules at European Union ("EU") and internal level, shell companies could still be used for improper purposes, such as aggressive tax planning, tax evasion or money laundering. The objective of the proposal is therefore to define common tax related substance requirements to be met for entities operating within the EU.

EU companies may therefore be required to provide the tax administration with the necessary information to determine whether they have a substantial presence and a real economic activity. In the case where a company does not comply with these substance requirements, the tax administration may have the possibility to deny tax advantages linked to the misuse of qualifying shell companies.

What’s next?

Once adopted, this proposed Directive should be transposed into national law by the Member States before 30 June 2023 to come into effect from 1 January 2024. Given the European Commission’s packed legislative agenda for 2022, and the significant time required to consider the international tax reforms proposed by the OECD Inclusive Framework, this appears to be an ambitious timeline.

How can we help?

While the ATAD 3 new rules are yet to be released, proper follow-up and substance assessment can help anticipate potential impact that may arise upon implementation of the new rules.

We at PwC Luxembourg, can assist you in this assessment, notably by:

  • Providing you with an update of the latest trends (such as ATAD 3), in order to raise your knowledge and understanding of the importance of these rules;
  • Conducting a sanity check of your structure in light of the latest OECD standard; and
  • Performing substance reviews of your investment companies.

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