Draft ATAD3 Directive: Further restrictions on the use of artificial tax structures

High risk entities

According to the draft Directive, the identification of shell companies will involve two stages. The objective of the first stage will be to identify those companies showing a risk of having no substance and are being used in order to abuse for tax purposes. Companies showing a risk of having no substance will be considered to be:

• those in which, in the previous two tax years, more than 75% of its revenue was so-called passive income, i.e., among other things, income from interest, dividends, from the disposal of shares, from real estate, from royalties, or from services outsourced to affiliated entities;

• those with cross-border activities, i.e.:

• companies in which at least 60% of the aforementioned passive income is generated in cross-border transactions, or

• companies where more than 60% of the book value of its assets have been located outside the company's country of residence in the previous two tax years; or

• those which, in the previous two tax years, outsourced the management of its day-to-day operations and decision-making concerning significant functions.

Additional reporting obligations

In the second stage, companies meeting the above criteria jointly will have to demonstrate that they have a minimum asset-personality substrate sufficient in order to carry out the activities they perform, i.e.:

• that they have their own premises or premises in their country of establishment for their exclusive use;

• that they have at least one own active bank account in the EU;

• that they meet one of two criteria:

• at least one director of the company:

• is a tax resident of the company's country of establishment, or resides no further away from that country that the distance involved would still allow for the proper performance of his or her duties,

• is qualified and authorised to make decisions in respect of the activities generating the so-called passive income of the company, or in respect of the company's assets,

• actively and independently exercises the power referred to in the preceding point,

• is not an employee of an undertaking that is not an affiliated undertaking and does not hold a directorship or any equivalent position in any other undertakings that are not affiliated undertakings;

• the majority of the company's employees, on a full-time equivalent basis, are resident for tax purposes in the company's country of residence or reside no further away from that country than a distance which would allow them to perform their duties adequately, and that said employees are qualified to carry out those activities generating so-called passive income for the company.

The circumstances indicated above will need to be supported by documentary evidence which the company will have to attach to its tax return.

Presumptions and tax implications

In principle, companies that demonstrate that they have a minimum asset-personality substrate will still be able to benefit from the tax preferences provided for from, among other things, the so-called Interest Directive, the Parent-Subsidiary Directive, or the agreements and conventions in force in the country of residence of the company concerned.

Companies that are unable to demonstrate that they have minimum substance will be subject to a rebuttable presumption of lack of minimum substance in the relevant tax year which will entail the impossibility of obtaining a tax residency certificate in the state of their residence. Alternatively, the state of residence will be able to issue a residency certificate bearing a notice that the company concerned is not entitled to the benefits of the Interest Directive, the Parent-Subsidiary Directive, or the agreements and conventions in force in the company's state of residence.

Consequently, payments made to shell companies will be able to be taxed at the basic withholding tax rate depending on the type of payment made, for example:

• • in the case of a dividend payments, the tax rate will be 19%,

  • in the case of payments of interest or royalties, the tax will be as high as 20%.

How to prepare?

Please note that under the draft Directive, the verification of criteria concerning the minimum asset-personality substrate will include the previous two tax years. Assuming that the provisions implementing the Directive enter into force as planned (i.e. 1 January 2024), the aforementioned verification will cover the years 2022 - 2023.

The final wording of the provisions of the Directive is not as yet known. Moreover, the provisions of the Directive will have to be implemented in Polish Corporate Income Tax Act and Personal Income Tax Act and at this point it is difficult to determine what will be the final wording of the new regulations. However, it is already worth analysing the functioning of groups of entities operating in various tax jurisdictions in view of these proposed changes.

Next steps

Should you be interested in finding out more about the Unshell Directive and its impact on your business, please do not hesitate to contact us.

Authored by Andrzej Dębiec, Dominika Górska, and Zbigniew Marczyk.