EU Shell Directive - Is your business "at risk"?

In December 2021, the European Commission published its proposed Anti-Tax Avoidance Directive (“ATAD-3”) to combat the misuse of so-called shell or postbox companies. In May 2022, the European Parliament’s Committee on Economic Monetary Affairs (“ECON”) released its Draft Report with a number of recommended amendments, including postponing the effective start date by one year.

While this latest recommendation does potentially give companies more time before it comes into force, the time to assess if you are affected and act on that is now.

The Directive – commonly referred to as the “Shell Directive” – aims to ensure entities in the European Union with no or minimal economic activity are denied access to any tax treaty or benefits from other EU Directives. The legislation will apply to all EU “undertakings” engaged in economic activities (regardless of its legal form). Certain EU undertakings, like stock-listed companies or regulated funds (and their SPVs as recommended by the ECON), are excluded from the scope.

EU undertakings meeting three specified criteria – or “gateways” – in the two years preceding the relevant tax year will be considered “at risk” under the Directive.

All such “at risk” entities will then be required to disclose in their annual corporate tax return whether or not they meet three minimum substance indicators in their home EU country. If any “at risk” undertaking fails to meet or fulfill any of the minimum substance indicators, it will be deemed to be a “shell” entity. Designated shell entities will be denied a tax residency certificate (TRC) by the resident country, as well as any tax benefits of an applicable tax treaty or EU Directives.

While it is yet to be finalised, under the proposal and subsequent ECON recommendation, the Shell Directive is expected to come into full force on 1 January 2025 – but with a two-year lookback period to start on 1 January 2023.

To find out whether your EU entity will be “at risk”, talk to our team of experts. We offer a full impact assessment, to quickly identify any implications, plus we can provide a full support service to help you address and manage the potential impact of the Shell Directive.

You can contact our Tax Compliance Helpdesk here or you can download a copy of our full guideline report on the new proposed Shell Directive here.