ATAD 3 Proposal approved by the European Parliament

On 17 January 2023, the European Parliament (EP) approved almost by unanimity the proposal for a Council directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (the ATAD III Proposal) with certain amendments proposed by its Committee on Economic and Monetary Affairs (ECON Committee) on 9 December 2022.

Generally speaking, the ECON Committee has (i) lowered gateways’ threshold (i.e., cumulative conditions to be met by entity to be considered as “at risk” and subject to reporting obligations) (ii) reduced the number of exclusions (entities outside the scope of ATAD III Proposal) and (iii) relaxed and in some cases clarified/specified the minimum substance indicators to be reported by an “at risk” entity. In relation to the rebuttal and exemption for absence of tax motives procedures, it has been specified that the competent authority will have nine months as from the date of receipt of the request to analyze it. A failure to provide an answer after the expiry of the period will be considered as an approval. Finally, it is worth noting that the implementation deadline remains unchanged (i.e., 1 January 2024) meaning that the look-back period has started already on 1 January 2022. We refer to our previous article on ATAD III for further background.

In order to be definitively adopted, the text will need to be approved by the Council of the European Union. A tentative and non-exhaustive list of the main novelties is listed below in bold.


The scope of the ATAD III Proposal remains unchanged - The provisions of ATAD III Proposal would be applicable to any undertaking that is considered tax resident and is eligible to receive a tax residency certificate in a EU Member State, regardless of its legal form.

Undertakings excluded

Undertakings outside the scope of the ATAD III Proposal and do not need to assess whether they cross the cumulative gateways as detailed in the next section:

  • Companies listed on a regulated market;
  • ‘Regulated financial undertakings’ as specifically identified and listed by the ATAD III Proposal (e.g., alternative investment funds within the meaning of the AIFMD);
  • Undertakings having as main activity the holding of shares in operational businesses which are in the same Member State (MS) as their beneficial owner;
  • Undertakings with holding activities that are resident for tax purposes in the same MS as their shareholder(s) or ultimate parent entity;

The voted amendments further clarify that a group approach for the assessment of the regulated financial undertakings’ exception should be excluded, with preference for an entity-by-entity approach. This seems to exclude the carve out for holding companies held for AIFs, on such basis.

It is also worth noting that the exclusion for entities with at least five own full time equivalent employees has been removed.

Gateways (undertakings subject to reporting obligations)

  • Relevant income – In the preceding two years, more than 65% (initially 75%) of revenues accruing at the level of the undertaking is passive / mobile income (i.e., interest, royalties, dividends etc.);
  • Cross-border activity – In the preceding two years, more than 55% (initially 60%) of the book value of the undertaking is composed of qualifying assets located outside the Member State of the undertaking in the preceding two years or more than 55% (initially at least 60%) of the relevant income of the undertaking is earned/paid out via cross-border transactions.
  • Outsourcing of functions – In the preceding two years, the undertaking outsourced the administration of the day-to-day operations and the decision-making on significant functions to a third party.

An undertaking crossing the above cumulative gateways will be considered as being “at risk” and will be subject to reporting obligations unless it benefits from the exemption for absence of tax motives as further detailed below.

Reporting and presumption

 An undertaking “at risk” should declare in its yearly tax returns information related to its substance, and concerning in particular:

  • Use of its own premises or premises shared with entities of the same group,
  • Existence of an active bank account or e-money account in the Union through which the relevant income is received.
  • Information regarding its management (tax residence and authorization to take decisions in relation to the undertaking’s relevant income or assets) and its employees (place of habitual residence and qualification).

This reporting should be duly documented allowing tax authorities to perform any audit (e.g., including address and type of premises of the undertaking, its gross revenue, business expenses, bank account number, overview of its structure and associated enterprises as well as any significant outsourcing arrangement and description of the nature of its activity, as well as a summary report with the nature of activities, number of employees, profit or losses before and after taxes.).

If an undertaking declares or is considered (based on such documentation) to fail to meet one of the substance indicators, it will be presumed to be a shell (i.e., not to have minimum substance for the tax year).

Rebuttal of presumption

Undertakings deemed to be a shell, will have the possibility without undue delay and excessive administrative cost to rebut such presumption. In this regard, the taxpayer will be required to produce concrete evidence of the business activity it performs and how it proceeds. To this effect, the taxpayer will be expected to provide information on (i) the business rationale for its setting up and maintenance, (ii) its human resources (i.e., full-time, part-time and freelance employees) as well as (iii) any element that will allow to verify the nexus between it and the Member State where it claims to be resident for tax purposes (e.g., place where its decisions are taken in relation to activities generating the relevant income). The tax authorities of the jurisdiction where the undertaking is resident should consider the request for rebuttal within nine months after its introduction. The absence of answer after the expiry of the nine-month period will be considered as an approval.

Exemption for lack of tax motives

Undertakings which do not meet a certain level of substance or which cross the “gateways” but carry out genuine business activities without creating tax benefits for their beneficial owners or their group, will have the possibility to evidence and request an exemption from their reporting obligations. These undertakings will be expected to evidence that their interposition does not lead to a tax benefit for their beneficial owner(s) or the group as a whole. To that respect, they will have to provide information about the structure of their group and their activities (including a list of its employees working full-time) allowing to compare the tax liability of the structure or group to which they belong with or without their interposition. Similarly, as for the procedure for the rebuttal of presumption, the tax authorities of the jurisdiction where the undertaking is resident will have to consider the request for exemption within 9 months after its introduction. The absence of answer after the expiry of the 9 months will be considered as an approval.

Consequences if an undertaking is deemed to be a shell

If an entity is considered to be a shell, the undertaking will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or to qualify for the EU Parent-Subsidiary and Interest and Royalties Directives. Accordingly, the Member State of residence of the shell company will have to deny the request for tax residence certificate and will have to issue an official statement justifying its decision and prescribing the entitlement to the benefits of the double treaties and the Parent-Subsidiary and Interest and Royalties Directives.

It is also expected that an allocation of taxing rights between the source countries and the residence countries of shareholders takes place, operating only between EU Member States. Effects as to third countries should be closely analyzed based on applicable treaties and domestic laws.

Exchange of information and joint tax audits

All Member States will have access, at any time, to information on EU shells even for the ones that have rebutted the presumption or have benefitted from an exemption for absence of tax motives. The information will be exchanged automatically.

In addition, the competent authority of a Member State will have the possibility to request for a joint tax audit when the latter has reasons to believe that an undertaking tax resident in another Member State has not met its obligations under the Directive. The reasons for a joint tax audit will have to be specified in the request. If for legal reasons a joint tax audit cannot be conducted, the requested Member State shall initiate a national audit within one month from the date of receipt of the request.


Member States will be free to impose penalties which shall include an administrative pecuniary sanction of at least 2% (initially 5%) of the undertaking’s revenue in case of failure to comply with its reporting obligations and a pecuniary sanction of at least 4% of the undertaking’s revenue in case of false declaration in its tax return. If the undertaking has zero or low revenue, the penalty should be based on its total assets.


If adopted, Member States will be required to implement the Directive by 30 June 2023 for an application as from 1 January 2024. Timing is very tight.


If implemented, the ATAD 3 Proposal will be a major shift for non-regulated fund structures in Europe. A close and careful analysis of the implications at source, the potential shell jurisdiction, and the investors’ jurisdiction is recommended.

From the perspective of the potential shell jurisdictions, anticipation as well as proper documentation and reporting would be crucial to mitigate the risk of sanctions being imposed as well as to check the need for restructuring on a case-by-case basis.

Frédéric Feyten
Managing Partner | Avocat

Alejandro Dominguez

Ali Ganfoud

Delphine Danhoui
Knowledge Lawyer