On 22 December 2021, the European Comission published the Proposal for a Council Directive 2021/0434, also known as the Anti tax Directive III („ATAD III“), with the stated intention being to prevent the misuse of so-called „shell“ entities for the tax purposes. ATAD III aims to highlight the importance of minimal substance requirements and is applicable to all entities that can be considered resident in a Member State for tax purposes, regardless of their legal form.
An entity that falls within the scope of Directive will be considered „at risk“ and subject to further reporting if: (i) more than 75% of the revenues accruing to an entity is relevant income (royalties, dividends and income from assets); (ii) an entity is engaged in cross-border activity; (iii) an entity outsourced the administration of day-to-day operations and decision-making on significant functions.
What are the minimal substance requirements?:
Entities considered „at risk“ will then be required to report on minimal substance in their tax returns with focus on three elements:
- premises available for the exclusive use of entity;
- at least one own and active bank account in the European Union;
- at least one director resident close to entity’s employees that are normally present in entity that performs substantial economic activity.
In the case that at least one of the substance elements is not satisfied, an entity will be presumed to be a shell for the purpose of Directive and shall be exposed to a number of tax consequences.
Once adopted as Directive, the Proposal should be transported into the national law of the Member States by 30 June 2023 and come into effect as of 1 January 2024 while having a de facto retroactive effect as the years 2022 and 2023 will already be relevant for the purpose of Directive.