On December 22, 2021, the European Commission issued a proposal for a Directive aimed at fighting the use of shell entities and arrangements for tax purposes (the Directive). The proposal comes in the form of amendments to Council Directive 2016/1164/EU – the EU Anti-Tax Avoidance Directive (ATAD) and to Council Directive 2011/16 on administrative cooperation in the field of taxation (DAC). 

The Directive (also described as “ATAD 3”) sets out a list of features, referred to as “gateways”, to filter entities at risk of lacking substance. High risk entities – meeting all three gateways based on a self-assessment and not benefiting from a carve-out – will be required to report on their substance through their annual tax return. Companies failing to meet all substance indicators, as set out under the Directive, would be deemed to be “shell entities” and, unless able to rebut this presumption, would be denied certain tax benefits otherwise available based on double tax treaties and EU directives. The data reported by entities in scope would be covered by the automatic exchange of information between Member States and could be subject to tax audits.  

For more details about this proposed Directive you may wish to refer to this EU Tax Flash prepared by KPMG’s EU Tax Centre.