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Published on: 28 februari 2022
Type of publication Insight
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On 22 December 2021, the European Commission presented a proposal for a Directive to combat the use of shell entities in tax planning. The proposed Directive is commonly referred to as ‘ATAD3’. It is expected to be adopted by the European Council in early 2022, and should then be implemented by the EU Member States by 30 June 2023 at the latest.

Aim of the proposal

The main objective of the proposal is to combat the misuse of so-called ‘shell entities’ without economic activities, which are described in the proposal as undertakings that do not have minimal substance. According to the European Commission, undertakings with no minimal substance could be used for improper purposes such as tax avoidance. The Directive will deny certain tax benefits to these shell entities.


The proposal contains a list of three so-called ‘gateways’ with which undertakings are identified that have little or no substance. Shortly put, these gateways are as follows:

  • More than 75% of the undertaking's total income in the preceding two tax years was passive income (income from passive investments, such as interest, royalties, and dividends, as well as income from financial assets, insurance, banking and other financial activities, immovable property and movable property which has a book value of more than EUR 1 million). This income criterion is deemed to be met if the book value of certain assets (movable property with a book value of more than EUR 1 million or immovable property) account for more than 75% of the total assets of the undertaking;

  • At least 60% of the undertaking's income was earned or paid out by means of cross-border transactions, or more than 60% of the book value of immovable property or of movable property with a book value of more than EUR 1 million, was located outside of the EU Member State where the undertaking is established, in the preceding two tax years;

  • The administration of the day-to-day business and of the decision-making about significant functions has been outsourced in the preceding two tax years.

Undertakings that pass all gateways and do not fall within the scope of an exemption, must meet certain documentation obligations when filing their annual tax return. Specific exemptions have been included for certain categories of undertakings. Undertakings that fall within the scope of these categories are not subject to the documentation obligations, regardless of whether they pass the gateways. This concerns, among other things, regulated financial undertakings, and entities with holding activities that are resident in the same State as their shareholders.

Documentation and reporting obligations

Based on the mandatory documentation, the taxpayer must declare that the relevant undertaking meets minimum substance requirements. This documentation should contain information covering the following indicators of minimum substance:

  1. The undertaking has its own premises or premises for its exclusive use in the relevant EU Member State; and

  2. The undertaking has at least one active bank account number in an EU Member State; and

  3. (i) at least one director is resident for tax purposes in the EU Member State where the undertaking is resident for tax purposes or resides at no greater distance than needed to fulfil its duties, is authorised to represent the undertaking and regularly exercises this authority and is not an employee or director of another company that is not an affiliated company; or
    (ii) the majority of the undertaking's employees are resident for tax purposes in the EU Member State where the undertaking is resident for tax purposes or do not live at a greater distance than needed to fulfil their duties.

Additionally, documentary evidence must be provided concerning gross revenue, business expenses and the type of business activities performed to generate the income.


Undertakings that do not meet all substance requirements are considered shell entities. These shell entities are denied certain tax benefits that would otherwise be available under tax treaties and EU Directives. Furthermore, the information contained in the documentation falls within the scope of the automatic exchange of information between EU Member States.


Undertakings that pass the gateways are required to meet the documentation obligations. If the documentation obligations for a tax year are not met, or if a false declaration is made regarding the minimum substance, a fine may be imposed on the undertaking, amounting to at least 5% of the undertaking’s turnover of the relevant year.

How can we help?

Although the proposal has yet to be adopted and implemented, it is expected that the measures concerning shell entities will enter into force soon. As the gateways take into account the situation in previous years, we advise you to address this issue as soon as possible. It is essential to assess the substance of entities located in EU Member States. We can of course assist you in performing such assessments, which will enable you to prepare for the possible consequences relating to ATAD3.

This content was published more than six months ago. Because legislation and regulation is constantly evolving, we recommend that you contact your Baker Tilly consultant to find out whether this information is still current and has consequences (or offers opportunities) for your situation. Your consultant will be happy to discuss the latest state of affairs with you.