Tax EU Directive: ATAD3

On December 22 2021, the European Commission published a proposal for a Directive also known as ATAD3, which sets out rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU. The new Directive is expected to be implemented by member States by June 30, 2023 and to be applicable as from January 1, 2024.

The proposal targets EU tax-resident companies involved in cross-border activities and eligible to receive a tax residency certificate in a Member State. A company is considered a high-risk entity for the application of the Directive and therefore treated as a shell company, if all the following requirements are met:

• If more than 75% of the company’s income in the previous two tax years came from mobile or passive income, as defined in the Directive
• if the company conducts cross-border activities
• If the company has outsourced the management of day-to-day operations and decision-making for essential functions in the two previous tax years.

REPORTING REQUIREMENT

High risk entities are required to report additional information in their tax returns, including:

• If the company has at least one office space
• If the company has at least one active bank account in the EU and
• If the company meets either of the following two criteria:
  • At least one company director:
    • is resident in the jurisdiction of the company
    • is qualified/authorized to make relevant decisions; is not an employee or a director of any other unrelated party
  • Most of the company’s employees live near the company’s jurisdiction and are engaged in income- generating activities.

Entities that, due to the nature of their activity (e.g., listed companies) or that are considered to have a low risk of low economic substance are not subject to the reporting obligation.

CONSEQUENCES OF NOT MEETING SUBSTANCE REQUIREMENTS

If a company established in the EU does not fulfil the minimum substance condition, this has the following consequences:

• Non-recognition by the EU Member States when applying the tax treaties and other instruments that eliminate double taxation. However, the Member State concerned may make use of the “look- through” treatment
• the EU shareholder is taxed as if the income had accrued under domestic rules
• the reporting company no longer receives a tax residence certificate.

EXCHANGE OF INFORMATION, PENALTIES AND TAX AUDITS

• Creation of a central database with information on EU companies that are considered reporting companies and are required to disclose additional information in their tax returns
• penalties of up to 5% of annual revenue for companies that fail to file reports or submit incorrect reports
• Member States may request other Member States to undertake a tax audit if they suspect that an EU company is not complying with the Directive

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