EU UNSHELL DIRECTIVE ATAD 3
TAX MEASURES ON EU LEGAL ENTITIES ENGAGED IN CROSS-BORDER TRANSACTIONS WICH HAVE NO ECONOMIC SUBSTANCE - SHELL COMPANIES
The EU Directive ATAD 3 was approved by the EU Parliament on 17 January 2023 and the EU Member States need to implement the Directive into their national legislations by 30th June 2023 whereupon it will come into effect on 1st January 2024.
Scope of the Directive
To identify the entities of the EU that are engaged in cross-border activities but have no economic substance and apply tax measures to such legal entities.
EU legal entities which are engaged in cross-border activities but have no economic substance shall face several tax consequences such as forfeiture of any tax advantages out of the double tax treaties or EU Directives and refusal to issue a tax residency certificate and other.
LEGAL PERSONS TO WHICH THE DIRECTIVE APPLIES
The Directive provides for three criteria - gateways by which it is determined whether a legal person is regulated by the Directive. A legal entity is governed by this Directive if it meets all three of the following criteria:
1. More than 65% of the revenues accruing to the legal entity in the preceding two tax years is the relevant income.
The relevant income means one of the following kinds of income:
• interest or any other income generated from financial assets (including cryptos);
• royalties or any other income generated from intellectual or intangible property or tradable permits;
• dividends and income from the disposal of shares;
• income from financial leasing;
• income from immovable property;
• income from movable property, other than cash, shares or securities, held for private purposes and with a book value of more than €1 million;
• income from insurance, banking and other financial activities;
• income from services which the legal entity has outsourced to other associated entities.
2. A legal entity falls under the following conditions:
· More than 55% of the book value of certain assets of the legal entity (immovable property, and movable property other than cash, shares or securities, held for private purposes and with a book value of more than €1 million) was located outside the Member State of the legal entity in the preceding two years;
· More than 55% of the legal entity’s income is earned or paid out cross-border transactions;
3. In the preceding two tax years, a legal entity outsourced the administration of day-to-day operations and the decision-making on significant functions to a third party.
This outsourcing gateway focuses on legal entities that do not have adequate own resources and engage third party providers of administration, management, and legal compliance services. If it is an outsourcing of certain ancillary services only, such as bookkeeping services alone, whilst keeping the core activities within the legal entity, then the legal entity will not fall under this gateway.
REPORTING AND ECONOMIC SUBSTANCE INDICATORS:
All legal entities, submitting an annual tax declaration, will report on their status as a legal entity within the framework of the ATAD 3 Declaration, and will have to confirm their economic substance, specifically compliance with all the following indicators of economic substance (economic substance indicators):
• office of a company of exclusive use or shared with the legal entities of the same group;
• confirmation of having at least one own and active bank account or crypto account in the EU, through which the relevant income is received.
One of the below two criteria is met:
* One or more directors of a legal entity:
- are tax residents of the jurisdiction of the legal entity or reside no further away from that country that the distance involved would still allow for the proper performance of their duties;
- is authorized to make decisions in relation to the activities that bring the corresponding income, or in relation to the assets of the company;
* Most of the employees of the legal entity have their habitual residence in the country of jurisdiction of the legal entity or reside no further away from that country that the distance involved would still allow for the proper performance of their duties, and the said employees are qualified to carry the activities that generate relevant income for the company.
The above economic substance indicators will need to be supported by documentary evidence.
PRESUMPTION AND EXEMTIONS:
• Legal entities listed on a regulated market;
• Regulated financial institutions (e.g. alternative investment funds, banks, insurance companies pension funds, investment funds etc);
• Legal entities having as main activity the holding of shares in operational businesses in the same Member State while their beneficial owners are also resident for tax purposes in the same Member State;
• Legal entities with holding activities that are resident for tax purposes in the same Member State as their shareholder(s) or ultimate parent entity;
· A legal entity may provide the tax authority with supporting evidence that it has operated, controlled, and assumed the risks associated with a business that generates the relevant income (or, in the absence of relevant income, business assets). After submitting the request, the tax authorities will have the right to consider the issue for nine months. If there is no response after the nine-month period, the request is considered approved;
· A legal entity may request from its tax authority an exemption from the provisions of the Directive on the grounds that its activities do not generate a tax benefit. After the request is submitted, the tax authorities will have the right to consider the request for nine months. If there is no response after the nine-month period, the request will be considered approved.