ATAD3 update: significant amendments recommended by the European Parliament

The European Parliament proposes significant amendments to the Anti-Tax Avoidance Directive, commonly known as ATAD3. ATAD3 seeks to prevent the misuse of shell companies for tax purposes. Compared to the initial draft Directive, the proposed amendments may provide relief for international organisations.

In essence, ATAD3 imposes increased reporting obligations and denial of tax benefits under double tax treaties and EU Directives for entities that are considered shell companies. To identify whether ATAD3 applies to you, the following approach applies:  

1. Gateways: identify whether a company is a shell or not by assessing whether it meets all three gateway tests (see table). A typical example of a shell in international group structures is when management and administration of a subsidiary are outsourced. 
2. Substance indicators: shell companies must annually report whether minimum substance requirements are met.
3. Presumption and rebuttal: not meeting the minimum substance requirements results in the presumption of lack of substance. This presumption can be rebutted by providing additional information to the local tax authorities on the substance. 
4. Sanctions: if the presumption is not rebutted, EU tax benefits and tax treaty benefits are denied to the shell company. 

Proposed amendments

The proposed amendments of the European Parliament seek to establish a further framework to combat the misuse of shell companies. In some ways, it broadens the scope for application of ATAD3, while simultaneously the amendments provide more possibilities to demonstrate substance. We have summarised the most significant changes below.   

Step 1 – Gateways 

The European Parliament proposes to reduce the thresholds of gateways one and two. To be considered a shell company, the following amendments are being proposed:

1. The company must have at least 65% (previously 75%) relevant passive income; and
2. more than 55% (previously 60%) of the income or investments are cross-border, or 55% (previously 60%) of the assets are located outside the entity’s state of residence. 

Additionally, it is proposed that an entity only meets the third gateway if it outsources its administration and decision-making to a third party. Outsourcing these functions to an associated company will no longer trigger the application of ATAD3. Generally, companies are regarded as associated if there is a direct or indirect ownership relation of at least 25%.

Whilst included in the initial draft Directive, it is proposed that companies with at least five employees generating passive income are no longer exempted from the increased reporting obligations of ATAD3.  

Step 2 – Substance indicators  

The proposed amendments seem to relax ATAD3’s minimum substance requirements.

Under the proposed amendments, office spaces may be shared with companies within the same group and bank accounts held through e-money institutions in the EU contribute to demonstrating substance.

In contrast to the initial draft Directive, the proposals provide that local resident directors may be employed by third parties and perform directorships for non-associated companies.  

Step 3 – Presumption and rebuttal  

The proposed amendments stipulate that Member States should consider a request to rebut the presumption of lack of substance within nine months of the submission of the application. This request is considered to be accepted in the absence of an answer from the Member State after the expiry of this nine-month period. 

Step 4 – Sanctions 

ATAD3’s proposed revisions also address the consequences of being treated as a shell company. If adopted, Member States will have to justify the refusal of a tax residency certificate in an official statement, increasing the administrative burden on local tax authorities. 

What’s next?

The amendments proposed by the European Parliament will be included into ATAD3 as non-binding recommendations.  If adopted, ATAD3 should be implemented into national legislation of the EU Member States by 30 June 2023 and come into effect by 1 January 2024. The expected one-year deferral to 1 January 2025 has not been included in the non-binding recommendations.

ATAD3 requires unanimity for adoption. It is not yet clear whether all Member States will reach an agreement on ATAD3 and in what form it will be implemented. Nonetheless, it is critical to assess the implications of ATAD3 for international tax structures and act now to prevent adverse tax consequences moving forward. Should the directive be put into effect speed will be vital since the gateways use a reference period of the two previous tax years, meaning the clock has already begun to tick.