On 22 December 2021, the European Commission (the “EU Commission”) published a proposal directive, which aims to prevent the misuse of shell entities for improper tax purposes (the “ATAD 3 Proposal”). The ATAD 3 Proposal aims to tackle cross-border tax avoidance and evasion practices by means of so-called “shell entities”, which in a nutshell can be defined as legal entities or arrangements with no or low substance and lacking commercial rationale. Such entities are indeed viewed by the EU Commission as vehicles likely to be used for aggressive tax planning or tax avoidance purposes. It is indeed considered that by means of shell entities, businesses may channel financial flows towards jurisdictions that have no or very low taxes, or where taxes can easily be circumvented, whilst the shell entity may rely on EU directives or other international agreements to reduce overall taxation of its group.
More concretely, the ATAD 3 Proposal introduces reporting obligations (the “Reporting Obligations”) for potential shell entities that will automatically be exchanged by its jurisdiction to all other Member States of the European Union (the “Member States”) to improve transparency standards around the use of such entities so that their abuse can more easily be detected by relevant tax authorities. Further, the ATAD 3 Proposal denies the access to the benefits of double tax treaties (“DTTs”) and EU directives to entities considered a “shell” within the meaning of the proposal. Finally, the ATAD 3 Proposal imposes penalties in case of non-compliance or false indications in relation to the Reporting Obligations.
Below will be addressed the 10 most relevant questions that the ATAD 3 Proposal may raise.
Should you need more insight, please get in touch with Gérard Neiens or Jean-Philippe Monmousseau from our Luxembourg tax team.
Authored by Gérard Neiens, Jean-Philippe Monmousseau, and Grâce Mfuakiadi.