ATAD3 - The Unshell Directive: An overview of the latest developments as at 13 March 2023

Monday 27 March 2023

Véronique Millischer

Baker McKenzie, Paris

Johanna Da Costa

Baker McKenzie, Paris

The initial draft of the proposal for a directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU, otherwise known as the ‘ATAD3 Directive’, was made public by the European Commission on 22 December 2021. On 17 January 2023, the European Parliament approved the European Commission’s draft ATAD3 Directive, as amended by the Committee on Economic and Monetary Affairs (ECON).

Between the technical and implementation date uncertainties, the discussions that follow attempt to synthesise the current state of affairs regarding the ambitious ATAD3 Directive.


The purpose of the proposed ATAD3 Directive, also known as the ‘Unshell Directive’, is to counter the misuse of shell companies as conduit vehicles to take advantage of withholding tax exemptions under the Parent–Subsidiary Directive and the Interest and Royalties Directive (together the ‘Directives’), and under double tax treaties.

In order to do so, ATAD3 introduces a minimum substance test as well as reporting requirements for EU tax resident companies and improves the exchange of information between national tax administrations.


ATAD3 targets any entity engaged in an economic activity, regardless of its legal from, if it is resident in an EU Member State and meets three cumulative conditions, namely the ‘gateways’, which are assessed in reference to a two-year lookback period.

There are companies expressly excluded from the scope of the directive, such as certain regulated entities (eg, undertakings for collective investment in transferable securities (UCITS), alternative investment funds (AIFs) and alternative investment fund managers (AIFMs)), companies with transferable securities listed on a regulated market and domestic holding companies.

Without entering into too much detail as there is already significant literature on it, an entity will satisfy the gateway tests if during the preceding two tax years: (1) it derives more than 65 per cent of its income (75 per cent prior to the ECON amendments) from passive sources (notably, interest, royalties and dividends), (2) it is mainly involved in cross-border activities and (3) its day-to-day management and decision-making has been outsourced to a third-party.

Entities that do not pass the gateway tests are not considered at risk and have no further obligations. An entity that meets the gateway tests is considered at risk and presumed to be a shell entity. It may request an exemption from its reporting obligations under ATAD3, if it can evidence that the entity’s existence does not reduce the tax liability of its beneficial owner(s) or of the group as a whole.

Once the three gateway tests are satisfied (and assuming there is no applicable carve-out or exemption), entities must report on three indicators of minimum economic substance in their annual tax returns regarding their premises, active bank accounts in the EU and the local tax resident directors and employees. In that respect, in scope entities that are subject to the reporting requirement must supply certain documentary evidence with their tax returns.

Potential consequences

Exchange of information

Once a company falls within the scope of ATAD3, the information on minimum substance, with the relevant documentary evidence, will be automatically exchanged among all the EU Member States. The latter will have access to the information on the assessed EU shell entity at any time without the need for recourse to make a request for information.

The information received from entities, as part of the ATAD3 substance reporting requirements, will be shared with all other EU Member States automatically within 30 days from receipt of the information.

Request for tax audits

A Member State that has reason to believe that an entity, which is a tax resident in another Member State, has not met its obligations under ATAD3, may request the tax authorities in that second Member State to conduct a tax audit of the entity. The ECON amendments make provision for the request for a joint tax audit of the entity. If the requesting competent authority is not able to conduct a joint tax audit due to legal reasons, the competent authority of the requested Member State shall in such a case initiate a national audit within one month from the date of receipt of the request and conduct it, in accordance with the rules governing tax audits in the requested Member State.

Tax consequences

If an entity does not meet the minimum substance tests in its Member State of residence, the Member State of residence of that company should deny the granting of a tax residency certificate. This denial of a certificate of tax residence should not set aside the national rules of the Member State of the undertaking with regard to the tax residence and the relevant obligations linked thereto, ie, the rules do not change the shell entity's tax residency or prevent that Member State from taxing the entity. Moreover, the entity will be denied access to the Directives and treaty benefits.

Here, the tax consequences are still unclear especially when a non-EU country is involved, which could lead to double taxation in such a case.


To discourage initiatives that enable companies to avoid complying with the ATAD3 Directive, severe financial penalties are envisaged.  

Under the European Commission’s proposal, Member States would be required to apply a minimum administrative pecuniary sanction of at least five per cent of an entity’s turnover in the relevant tax year if that entity does not comply with its substance reporting requirements or if it makes a false substance reporting declaration.

The ECON amendments split this penalty into two: (1) a penalty of at least two per cent of the entity’s revenue in the relevant tax year will apply if that entity does not comply with the substance requirements; and (2) a penalty of at least four per cent of the entity’s revenue in the relevant tax year will apply if that entity makes a false substance reporting declaration. Where an undertaking has zero or low revenue, the penalty will be based on the entity’s total assets.

Here again, there are a lot of uncertainties on whether a financial penalty will eventually be applicable and to what extent.


The EU set a very ambitious calendar.

As a next step, the EU Council will now have the final say on the ATAD3 Directive’s adoption. The EU Council does not have to accept the version of ATAD3 as adapted by the EU Parliament, meaning that the changes made by the ECON last January are not final and should only be viewed as recommendations.

The aim is still officially for EU Member States to implement ATAD3 into their national legislation by 30 June 2023, with 1 January 2024 being the effective date. The two-year reference period envisaged to apply for determining whether ATAD3 is applicable to an entity (the gateway tests) has not been changed either, which means that the facts and circumstances as per 1 January 2022 are still relevant for this purpose.

The ATAD3 Directive is being adopted under the special legislative procedure with consultation. That means that the adoption of ATAD3 is subject to the unanimous vote of all 27 Member States, which is currently not guaranteed.

Practical implementation - what to expect? An overview of some EU Member States

Officially, all Member States are of course in favour of a rule limiting the misuse of shell companies within the EU. That being said, on 21 February 2023, the Swedish presidency of the EU Council highlighted the fact that some EU countries are reluctant to maintain the ATAD3 Directive’s consequences. These countries would be in favour of limiting the consequences to the denial of benefits under EU directives only or even removing all mention of the tax consequences from ATAD3. The only consequence would then be that shell entities would be subject to reporting requirements and the exchange of information among the Member States.  

It is logically expected that the implementation deadline of 30 June 2023 will be extended, as based on the latest update available, the representatives of Member States are still working out the technical details. The risk here of course is that Member States may take different approaches when implementing the rules into domestic law and also, there is a risk of double taxation arising especially when non-EU countries are involved.

The proposed directive explicitly states that it does not seek to replace national and international rules to combat shell entity tax abuse in the EU, but rather aims to reinforce and complement such existing measures by providing objective substance criteria and a uniform set of rules. However, when looking more closely, it is not guaranteed that all Member States will take the same approach.

As regards France, there are already extensive substance requirements in the country’s domestic anti-abuse provisions and tax treaties. The substance requirements in France are not only formal and objective, but they are also subjective and focus on the economic substance of the company, namely whether its interposition is justified by economic and valid business reasons. The most likely outcome here is that ATAD3 in France will work as a first cleaning for all entities that pass the gateway tests and do not reverse the presumption, for those who are denied the benefits of the tax treaties and Directives. For the others, those who pass the gateway tests but reverse the presumption, it is likely that the French tax authorities will not consider themselves bound by the rules and will be able to challenge their tax residency on the basis of the other (numerous) general domestic and specific anti-abuse rules. And in doing so, the French tax authorities will have a decisive advantage that they didn’t have before: the automatic exchange of information with the other Member States and the right to request an audit of these companies.

As regards Germany, it already has extensive substance requirements in its domestic anti-abuse provisions (in particular, in the domestic anti-treaty shopping provision and the general anti-abuse rule). Due to the existence of the anti-abuse rule and how it is interpreted with respect to shell companies, a recent publication in German literature even takes the view that ATAD3 could be regarded as a Europeanisation of German case law on the application of the German anti-abuse rule to shell companies. However, the recently revised German anti-treaty shopping provision seems to be stricter than the draft directive and may therefore remain in force after implementation of the directive into German law. It is not expected that ATAD3 will replace the German anti-abuse provisions, but it is unclear how the interpretation of the general anti-abuse rule in Germany with respect to shell companies will be impacted by ATAD3.

Likewise, the Netherlands has ‘minimum substance requirements’, which function as a burden of proof allocator. If a taxpayer meets these criteria, the taxpayer will not be deemed artificial unless the tax authorities prove the opposite. If a taxpayer does not meet these criteria, they are still able to prove that the structure is not artificial. However, such burden of proof allocator is only relevant in certain cases due to the specifics of the Dutch domestic dividend withholding tax exemption. Generally, a foreign company that only meets these substance requirements (and has nothing more) is at high risk of being challenged by the Dutch tax authorities if the presence of that foreign company results in the avoidance of Dutch taxes. It is currently unclear whether ATAD3 is likely to be viewed as a mere additional anti-abuse mechanism (to those already existing) in the Netherlands or whether it is likely to replace the existing one(s).

As regards Spain, it has in its domestic law general anti-abuse provisions, which already focus on substance requirements. That being said, the country does not have a list of substance requirements in its tax regulations and the tax residence certificate is usually the main evidence used for these purposes. Based on the prior position of the Spanish tax authorities in other anti-abuse rules (eg, abuse of law in the Danish cases), ATAD3 should be viewed as an additional anti-abuse mechanism to those already in existence. However, depending on the final requirements of ATAD3 and its implementation in domestic regulations, there could be arguments to suggest that complying with ATAD3 should work as a safe harbour to avoid the application of other anti-abuse rules.

In Belgium, it is likely that ATAD3 will have an impact. Shell entities covered by the draft directive are not yet, in all circumstances, captured by other Belgian legal provisions. Belgium currently has no specific provisions regarding the necessary minimum substance (besides the vaguely formulated Article 5/1, §3 ITC92, which solely relates to the Cayman tax regime (transparency regime), and which refers to the premises, personnel and equipment in order to pursue an economic activity). Thus, Belgium does not have standardised substance requirements, which would result in the denial of benefits from treaties and the Directives. There is only a list of criteria used by the Belgian Ruling Commission and this list is only relevant if one wants to obtain a ruling. In certain instances, withholding tax relief may be denied on payments to foreign shell or conduit entities on the basis of the Belgian general anti-abuse rules, specific anti-avoidance rules and/or the beneficial ownership condition. Especially since the Danish cases, the Belgian tax authorities have been attentive to economic substance indicia, but if ATAD3 is implemented, Belgium will for the first time have to implement rather technical rules to determine whether an entity has sufficient economic substance.

Likewise, in Luxembourg, it is likely that ATAD3 will have a significant impact. Currently in Luxembourg, the concept of substance is based on facts, as it is not defined under Luxembourg law as such. The Luxembourg tax authorities issued a circular (Circulaire L.I.R. 56/1 - 56bis/1) on 27 December 2016 on substance requirements with respect to intra-group financing operations, which is commonly used to assess the level of substance required for Luxembourg companies. The circular provides principles that may apply to all Luxembourg companies. In assessing the substance of a Luxembourg holding company, the Luxembourg tax authorities may pay attention to certain conditions (the residency of the members of the board, tax residence of the Lux entity, presence of qualified employees to supervise the transactions carried out by the entity, place where the key decisions and shareholder meetings are held and minimum equity at risk).


It is likely that ATAD3 will be implemented sooner or later. While there are still a lot of uncertainties about its scope and the tax consequences, what is sure is that ATAD3 will have, in any case, an impact on the burden of proof. Indeed, when applying the current general or specific anti-abuse provisions, it is up to the tax authorities to prove that the entity is a shell. Under ATAD3, it is the taxpayer, however, who will have to demonstrate that it is not a shell entity, based on the criteria of ATAD3. Moreover, once within the scope of ATAD3, even if the entities can prove otherwise that they are not shell companies, it will not be possible to avoid the automatic exchange of information of the concerned entities between the Member States, thus triggering potential additional risks concerning the denial of the Directives’ and treaty benefits in any case.

Finally, it is worth noting that the proposed directive will significantly increase the administrative burden and therefore, the compliance costs for in-scope entities. Indeed, once an entity has determined it is within the scope of the measures, broad new reporting requirements will apply, obliging the latter to collect supporting documentation, which it would otherwise not necessarily need to provide.

As a result, international groups, including entities possibly in scope of ATAD3, urgently need to assess the impact of ATAD3 on their group structure and make changes where appropriate.