Prepare for ATAD 3, the EU’s latest anti-tax avoidance directive

New European Commission proposals seek to crack down on the misuse of shell companies. Antonello Argenziano, Product Director, Daan van Leeuwen, Senior Tax Counsel, and Brecht Guldemont, Senior Business Development Director, explain the impact of ATAD 3 and how to get ready for it.

The European Union plans to introduce the Anti-Tax Avoidance Directive 3, or ATAD 3, early in 2024. That may seem some way off, but firms should start preparing now to avoid getting caught out.

Tax avoidance and evasion have come under intense EU scrutiny in recent years, particularly following the Panama Papers and other revelations, as well as Brexit.

The European Commission published a draft of ATAD 3 on 22 December 2021. It aims to prevent the use of shell companies for tax evasion and avoidance. The EU estimates that it loses about EUR 20 bn a year through misuse of shell companies.

As it stands, ATAD 3 will come into effect on 1 January 2024, but much is still unclear.

The proposals are expected to increase reporting requirements and compliance costs. They could affect holding companies resident in the EU that enjoy double tax treaty benefits but have only limited economic substance.

It’s important not to act prematurely by making sweeping changes until the directive’s final text becomes clearer. However, companies must make themselves aware of developments and determine whether their entities pass the “gateway tests” to identify whether they risk being classified as a shell company.

ATAD 3 gateway tests to identify shell companies

A series of tests is proposed to determine whether an entity needs to report additional information to tax authorities, based on its operational structure in the two years preceding the year of reporting.

An entity will be at risk if it meets all the following:

• More than 75% of revenues in the preceding two tax years are passive income, including dividends and capital gains on shares, interests and royalties.
• More than 60% of relevant income is from cross-border activities or is passed to foreign entities.
• The entity has outsourced the administration of day-to-day operations and decision-making on significant functions.

Companies should already be able to assess which entities will be affected.

If the gateways are met, entities will have to report whether they meet minimum substance requirements. These include having:

• Their own premises
• A bank account in the EU
• Their own authorised and qualified directors or sufficient FTEs

If it does not meet these requirements, an entity can be denied a certificate of residence and the tax benefits of EU tax directives and tax treaties by other member states. It will also be subject to additional withholding taxes. Direct shareholders of the shell company resident in an EU jurisdiction will also be subject to extra taxes.

A non-compliant entity will have to pay an administrative fine of at least 5% of turnover in the case of a missing or incorrect report.

What are the ATAD 3 exemptions?

We believe the gateways will remain largely as set out, but a number of concepts within ATAD 3 still need clarification.

For example, there is no exact definition of “outsourcing”. Depending on its interpretation, some companies may fall outside the regulation’s scope. The need for a qualified and authorised director at a distance compatible with the proper performance of their duties – to summarise the directive’s requirements – is also open to interpretation.

The proposals contain an exemption for alternative fund managers, but it is still unclear whether this applies to funds’ holding companies.

The directive should also be considered within the context of other tax initiatives, such as the global minimum tax under the Organisation for Economic Co-operation and Development (OECD) Pillar Two and the reallocation of taxing rights under OECD Pillar One.

ATAD 3 directives face tight timeline

While the essential proposals should be finalised this year, the original timeline is starting to look unfeasible.

Consultation on the proposals ended on 6 April 2022, but the results are yet to be published. For the directive to apply from 1 January 2024, member states will need to integrate it into national laws by 30 June 2023.

The Commission is currently evaluating the consultation responses and there should be more clarity by the fourth quarter of this year.

However, the implementation of Pillar Two, which introduces a global minimum tax of 15% on multinational corporations, is the current priority for both the Commission and the Council of the European Union under the French presidency.

ATAD 3 is just the most recent stage of the EU’s tax avoidance crackdown and the sheer number of initiatives can be overwhelming. That is why it’s important for firms to get a head start on understanding them.

How Intertrust Group can help:

• Intertrust Group is a publicly listed company with more than 70 years’ experience providing world-class trust and corporate services to clients around the world.
• We keep abreast of the latest regulatory developments to help clients mitigate the impact of ATAD 3 on their organisation.
• We can manage complex regulatory requirements and report additional information to the tax authority as part of your filing.
• We can support you in meeting minimum substance requirements by helping you find appropriate office space and connecting you with independent directors.