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ATAD 3: What next for the “Unshell Directive”?

by Piotr Prokocki

The European Union’s anti-tax avoidance directive (ATAD 3) – the “Unshell Directive” – was meant to have been implemented by all EU members by the end of June 2023, and enter into force on 01 January 2024. 

The initial deadline was not met, however, that does not mean that we should forget about it and ignore its huge impact on cross-border capital groups.

The general purpose

ATAD 3 was meant to create a common set of rules determining what is considered “insufficient substance”, and define the specific tax consequences thereof. Individual jurisdictions differ in terms of the requirements they place on companies in the area of business substance. The directive will set the minimum standard applicable in all EU countries.

Draft regulation

The draft directive was based on a test aimed at identifying entities with insufficient business substance. The first one is aimed at identifying “high-risk” entities, based on three criteria: (i) high percentage of “passive” revenues, (ii) the cross-border nature of the business, and (iii) outsourcing of business administration and decision-making processes for important functions. 

High-risk entities must pass a minimum business substance test based on criteria such as: (i) having a bank account in the EU, (ii) owning premises for their own use, and (iii) employing a local director and/or local employees. Failure to meet these requirements results in the presumption that a given entity is a shell company, and incurs negative tax consequences.


Changes to the draft directive were adopted, and included lowering the criteria for identifying high-risk entities. The threshold of passive revenues was lowered from 75% to 65%, and passive income from cross-border transactions was reduced from 60% to 55%. The value of assets which are a source of passive income located outside the country of residence has been similarly reduced. One criterion has been tightened: business administration and decision-making functions must be outsourced to third parties. 

The introduced changes will cause a potentially larger group of entities to be classified as high-risk, and they will be obliged to report indicators of minimum business substance. In terms of substance, the requirement to own premises has been relaxed and premises may be shared with other entities from the group.

Time to prepare

The delayed ATAD 3 assumes a 2-year lookback period, which means that the identification of high-risk entities and verification of minimum business substance will be carried out based on data for the last 2 years preceding its entry into force. Even if this moment is postponed to mid-2024 or early 2025, this year’s data will be of key importance.

Piotr Prokocki specialises in comprehensive tax services for M&A, develops effective and tax-safe structures for financing transactions, capital withdrawal and profit distribution.

16 October 2023