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ATAD 3 or the importance of adequate substance

08 August 2022

At its dawn, the ATAD 3 Proposal and its adverse tax consequences were considered by some as the demise of international investment and holding structures. Others pointed out the uncertainties surrounding key terms related to this proposal. A few optimists saw it merely as a measured extension of ATAD 1 and ATAD 2 targeting merely the so-called “letterbox” vehicles. Needless to say that caution should be taken nowadays on any scheme planned by the EU Commission to tackle aggressive tax planning. However, given the resistance of some Member States to the content and even the legality of this proposal, not only its current challenging timing but also its final content, and as such its real impacts, remain uncertain at this date. Indeed, seven months after its publication, nothing has moved since then. An overreaction does thus not seem to be appropriate, although its possible impacts may be analysed as of now to assess the presence of any risks even in its current wording.

On 22 December 2021, the European Commission (the “EU Commission”) published a proposal directive, which aims to prevent the misuse of shell entities for improper tax purposes (the “ATAD 3 Proposal”). The ATAD 3 Proposal aims to tackle cross-border tax avoidance and evasion practices by means of so-called “shell entities”, which in a nutshell can be defined as legal entities or arrangements with no or low substance and lacking commercial rationale. Such entities are indeed viewed by the EU Commission as vehicles likely to be used for aggressive tax planning or tax avoidance purposes. It is indeed considered that by means of shell entities, businesses may channel financial flows towards jurisdictions that have no or very low taxes, or where taxes can easily be circumvented, whilst the shell entity may rely on EU directives or other international agreements to reduce overall taxation of its group.

More concretely, the ATAD 3 Proposal introduces reporting obligations (the “Reporting Obligations”) for potential shell entities that will automatically be exchanged by its jurisdiction to all other Member States of the European Union (the “Member States”) to improve transparency standards around the use of such entities so that their abuse can more easily be detected by relevant tax authorities. Further, the ATAD 3 Proposal denies the access to the benefits of double tax treaties (“DTTs”) and EU directives to entities considered a “shell” within the meaning of the proposal. Finally, the ATAD 3 Proposal imposes penalties in case of non-compliance or false indications in relation to the Reporting Obligations.

Below will be addressed the 10 most relevant questions that the ATAD 3 Proposal may raise.