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ATAD III (Shell Companies)

Potential impact on fund structures

At the end of 2021, the European Commission published a proposal to prevent the abuse of shell companies for tax purposes in the form of a proposed EU Directive called "Anti- Tax Avoidance Directive III" (the "ATAD III"), which is scheduled to enter into force on January 1st, 2024.

ATAD III aims to combat the abuse of investment structures that do not carry out actual economic activities, known as shell companies (the "shell companies").

ATAD III proposes the introduction of a "minimum substance test" and reporting requirements to identify shell companies, which could have serious consequences for investment structures that do not engage in actual economic activity.

The draft guidance outlines gateway indicators that help determine whether a company is at risk of being a shell company. If these indicators are met, the company is considered at risk and is subject to further reporting to determine if it meets the "minimum substance" requirements.

A company is considered to be at risk if it meets the following conditions:

  • More than 75 % of the income in the two previous tax years is relevant income (mainly license fees, dividends and income from assets);
  • Exercise of a cross-border activity;
  • Outsourcing the management of day-to-day operations and decision-making.

Companies at risk must then indicate in their annual tax return whether they meet the following "minimum substance" indicators:

  • Own business premises in a Member State;
  • An active bank account in the European Union;
  • At least one local general manager working exclusively for the company or local full-time employees;
  • Be considered tax resident in an EU member state ("EU tax resident").

If the company does not meet these requirements, it would be treated as a shell company for ATAD III purposes. The Member State concerned could then take measures against the shell company, including refusing to issue a tax residency certificate and restricting contractual freedoms.

In practice, this means that certain tax benefits may be denied and shell companies may not be able to claim tax relief in other countries.

Although the final form of the Directive and its application to international fund structures is still uncertain, it is highly likely that the Directive will be adopted in some form. Therefore, urgent consideration should be given to whether legal entities typically involved in such structures could be affected by these provisions.

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