ATAD 3 - EUROPE UNSHELLING SHELLS…

The European Parliament has approved Council Directive (EU) 2016/1164 (the “Unshelling Directive”) which now remains to be adopted by the EU Council. The EU Council can still decide not to adopt these amendments; however, it seems at present that the Directive is set to be approved to come into force by January 2024 with a 2 year look back period.

The main amendments approved by the European Parliament are:

1. The proposal to amend the requirement of the 2-year retroactive reference period during which entities must comply   with the gateways in order to assess whether the Directive applies to such businesses has not been implemented. The 2-year period still applies, which, if the Directive is adopted and comes into force by 1/1/2024 as is still currently anticipated, means that the year 2022 comes under examination. Businesses are therefore now in a position where they already need to comply with a Directive which has yet to come into force

2. .The gateways: The relevant thresholds have been lowered so that more entities fall within the Directive: 

   • the relevant income of the entity in the preceding 2 tax years threshold has been lowered from 75% to 65%.the threshold of relevant income generated from cross border activity or

   • the threshold of the book value of assets located outside the EU have been lowered from 60% to 55%.

   • management and administration: the outsourcing must be outsourcing to a third party. Unclear still whether intra-group outsourcing is allowed.

3. Exemptions:

   • the exemption for entities with at least 5 own full-time employees generating relevant income is no longer applicable.  

   • Lack of tax motive exemption: The revised Directive provides that upon application for such an exemption, a response needs to be given within 9 months and upon such 9-month period lapsing, the application will be considered approved, which facilitates having clarity in a timely manner. 

4. Minimum substance indicators:

   •  Premises: shared premises for same group companies allowed;

   •  Bank account: e-money account is sufficient but relevant income must be received in the company’s account;

   • Directors: there is no longer a requirement that the directors use their authorisation actively, independently and regularly and that they are not employees of non-affiliated entities.

   • Full time employee requirements: no longer required to be tax residents in the country of residence of the company but habitual residents (Rome I). 

5. Penalties for non-reporting: reduced to 2% from 5% of company revenue.

6. Penalties for incorrect reporting separated from non-reporting and penalty imposed at 4% of company’s revenue.

7. If revenue below certain thresholds to be imposed by Member States, then total assets of the entity will be taken into consideration.

8. Consequences of being a shell entity: There is no longer the provision that the Member State issues a certificate stating the entity is not entitled to certain benefits. It is still the Member State of residence that decides whether the entity is a shell or not for tax residency purposes.

We still need to wait and see however which version of the Unshelling Directive the EU Council will adopt. We need to keep in mind unanimity by all EU Member States is required for this Directive to be adopted.

The current article is for informational purposes only and does not constitute legal advice.

For specialised legal advice please contact Samantha Hellicar at samantha@messios.com,  or call us at (+357) 22460446.

Samantha Hellicar

C.D. MESSIOS LLC