On 17 January 2023, the European Parliament approved the European Commission’s draft directive for preventing the misuse of shell entities for tax purposes (“ATAD 3” or the “Directive”), also known as the “Unshell Directive”, as amended by the Committee on Economic and Monetary Affairs (“ECON”). The amended Directive will be available on the European Parliament’s website here.

The European Commission first published its proposed text for ATAD 3 in December 2021 (the “EC’s Proposal”). On 11 January 2023, ECON published a number of amendments to the EC’s Proposal (see here), which the European Parliament approved on 17 January 2023 (the “ECON Amendments”).

The European Parliament’s position will now go before the Council of the EU, which must vote unanimously before ATAD 3 can be adopted at a European level. As with the EU’s Anti-Tax Avoidance Directives I and II (ATAD 1 and ATAD 2), ATAD 3 will then need to be transposed into the national law of EU Member States. Under the current proposals, ATAD 3 is intended to take effect from 1 January 2024 and Member States will need to transpose the Directive into domestic law by 30 June 2023.

In this briefing, we examine the ECON Amendments to ATAD 3 approved by the European Parliament. The amendments impact:

  1. the scope of ATAD 3 – adjusting the thresholds imposed under the gateway tests and amending the carve-outs;
  2. the reporting requirements – modifying the minimum substance indicators and documentary evidence required from in-scope entities; and
  3. enforcement and consequences of non-compliance – altering the penalties that may apply to entities for any infringement of the substance requirements.


In summary, ATAD 3 is a proposal to tackle and deter the misuse of entities with no or minimal substance for tax purposes (i.e. “shell entities”) by introducing EU-wide minimum substance requirements and improving exchange of information between national tax administrations. The text of ATAD 3 refers to “undertakings”, meaning any entity engaged in an economic activity, regardless of its legal form, that is a tax resident in a Member State. For simplicity this briefing uses the term “entity”.

ATAD 3 sets out a series of tests and gateways for identifying entities as potential “shells”. If an entity satisfies all three gateways, it must report to its domestic tax authority economic substance-related information on its tax returns. If an entity fails to provide sufficient evidence that it is not a shell entity, it may be denied the benefit of double tax treaties and EU directives and could be subject to financial penalties.

In a nutshell, ATAD 3 would target entities established in EU Member States that derive more than 65% of their income from passive sources (notably, interest, royalties and dividends), that are mainly involved in cross-border activities and whose day to day management and decision-making is outsourced.

There are various exclusions, including for (i) certain regulated entities such as UCITS, AIFs and AIFMs, (ii) companies with transferable securities listed on a regulated market and (iii) domestic holding companies. In addition, a company that meets certain criteria may request an exemption from its reporting obligation if it can provide evidence that its existence does not reduce the tax liability of its beneficial owner(s) or of the group as a whole.

Further detail on the gateway tests, exclusions and reporting obligations is set out below.

A recent European Parliament report providing further background on ATAD 3 can be found here.

Scope of ATAD 3

Gateway tests

The ECON Amendments clarify that the three gateway tests (see below) are cumulative and adjust the thresholds imposed under the gateway tests themselves so that more entities will potentially fall within scope of the substance reporting obligations. An entity will satisfy the gateway tests (and will need to report economic substance-related information, unless within an exclusion, on which see below) if, in the preceding two tax years:

  1. more than 65% (prior to the ECON Amendments, 75%) of the entity’s revenue accrues from “relevant income” (typically passive income sources such as interest, royalties and dividends as well as leasing and property income);
  2. the entity is engaged in cross-border activities on the grounds that:
    • more than 55% (prior to the ECON Amendments, 60%) of the book value of the entity’s in-scope fixed and moveable assets were located outside the entity’s Member State; or
    • at least 55% (prior to the ECON Amendments, 60%) of the entity’s relevant income is earned or paid via cross-border transactions; and
  3. the entity outsourced the administration of day-to-day operations and the decision-making on significant functions to a third party. The ECON Amendments clarify that this limb (3) only catches outsourcing to a third party, and so it would not apply, for example, to outsourcing to an associated enterprise.


Regulated financial undertakings and domestic holding companies – certain entities, such as regulated financial undertakings (including AIFs and AIFMs) and domestic holding companies, are not subject to ATAD 3.

However, these exemptions apply on an entity-by-entity (rather than on a group) basis. This means, for example, that holding vehicles or entities held directly (or indirectly) by a regulated entity in a fund structure, and which are not themselves regulated, are potentially within scope of ATAD 3. It was hoped that ATAD 3 would be amended to bring such entities within the regulated financial undertakings exemption. However, the ECON Amendments did not provide for this change.

ATAD 3 could, therefore, impact, for example, EU intermediate vehicles through which an investment fund holds its assets, leading to increased costs associated with the operation of such intermediate vehicles which could ultimately reduce returns to investors.

It remains to be seen whether such an amendment extending the financial undertakings exemption will be made at Council approval stage.

Employees – under the EC’s Proposal, undertakings with at least five full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income would also have been excluded. The relevance of this limb for the asset management industry was debatable given the entity-by-entity determination. In any case, the carve-out has been removed by the ECON Amendments.

Exemption for lack of tax motive

An entity that meets the gateway tests may request an exemption from its reporting obligations under ATAD 3 if the entity’s existence does not reduce the tax liability of its beneficial owner(s) or of the group as a whole.

The ECON Amendments require that Member States allow entities to make such request “without undue delay and excessive administrative costs”. This requirement is supplemented by a new 9-month time limit within which a Member State is required to consider the request for exemption. If the Member State fails to respond to the request after the expiry of the 9-month period, the request will be deemed accepted.


ATAD 3 targets EU-resident entities. Therefore, non-EU (including UK) holding companies will not be subject to the substance reporting rules. While work is already underway at a European level to design mechanisms to target non-EU entities, there is no indication as to when we might see draft measures in this regard. The ECON Amendments do not make any changes with respect to non-EU resident undertakings.

Substance reporting requirements

Minimum indicators

Wherever the three gateway tests are satisfied (and assuming there is no applicable carve-out or exemption), entities must report on three indicators of minimum economic substance in their annual tax returns. If the entity meets all three indicators of substance, it will not be considered a “shell”. If it does not, the consequences outlined below may apply.

The minimum substance indicators relate to:

  1. premises – the entity must have its own premises, premises for its exclusive use or, following the ECON Amendments, premises shared with group entities, in each case in the relevant Member State;
  2. bank account – the entity must itself have at least one active bank account or e-money account in the EU. The ECON Amendments further require that the relevant income be received through such bank account; and
  3. directors/employees – one or more of the entity’s directors must be locally resident and authorised to take decisions in relation to the activities that generate relevant income for the entity and/or a majority of the entity’s full-time equivalent employees must be locally resident and qualified to carry out the activities that generate relevant income for the entity. “Locally resident” here means resident for tax purposes in the Member State of the entity or at no greater distance from that Member State insofar as such distance is compatible with the proper performance of the director’s/employee’s duties. The EC’s Proposal required directors to be both authorised and qualified to take decisions in relation to the entity’s income-generating activities, but the qualification requirement has been deleted as part of the ECON Amendments. Under the EC’s Proposal, there were two additional minimum substance indicators with respect to directors – namely, that the locally resident director or directors (1) must actively and independently use the authorisation to take decisions in relation to income-generating activities, and (2) may not be employees of an unassociated enterprise or perform the function of director of other unassociated enterprises. Both of these indicators have been dropped under the ECON Amendments.

Documentary evidence

In addition to information regarding the minimum substance indicators, in-scope entities that have a reporting requirement must supply certain documentary evidence with their tax returns. This includes, for example, the type of business activities performed to generate the relevant income and details of the outsourced business activities.

Two further documentary requirements have been added by the ECON Amendments, namely:

  1. an overview of the entity’s structure (including associated enterprises) and any significant outsourcing arrangements, including the rationale behind the structure; and
  2. a summary report of the documentary evidence submitted, containing a brief description of the nature of the entity’s activities, the number of employees on a full time equivalent basis and the amount of profit or loss before and after taxes.

The presumptions

Where an entity declares that it meets all the indicators of minimum economic substance outlined above, and provides the required documentary evidence, it will be presumed to have the required minimum substance for the relevant tax year. Failing that, there is a presumption against minimum substance.

Entities may rebut this presumption by providing any additional supporting evidence of the business activities that generated relevant income. The ECON Amendments require that Member States allow entities to rebut this presumption “without undue delay and excessive administrative costs”. Similar to the request for the exemption for lack of tax motive (discussed above), this requirement is supplemented by a new 9-month time limit within which a Member State is required to consider the request for a rebuttal of the presumption. If the Member State fails to respond to the request after the expiry of the 9-month period, the request will be deemed accepted.

Exchange of information

A key tenet of ATAD 3 is the sharing of information regarding shell entities between EU Member States. Information received from entities as part of the ATAD 3 substance reporting requirements will be shared with all other Member States automatically within 30 days from receipt of that information. Such information includes the entity’s declaration with regards to the minimum economic substance indicators, as well as a summary of the documentary evidence received from the entity.

The ECON Amendments to the Recitals of ATAD 3 stress the importance of Member States sharing the relevant information to which they have access and reiterate that ATAD 3 will involve an amendment to Directive 2011/16/EU on administrative cooperation (“DAC”) to facilitate the automatic exchange of information received in the framework of ATAD 3.

Enforcement and consequences of not having minimum substance

Request for tax audits

A Member State that has reason to believe that an entity which is tax resident in another Member State has not met its obligations under ATAD 3 may request the tax authorities in that second Member State to conduct a tax audit of the entity. The ECON Amendments make provision for the request for a joint tax audit of the entity in accordance with the DAC.

Tax consequences

If an entity does not meet the minimum substance tests in its Member State of residence, that entity will not be able to obtain a certificate of residence for use outside that Member State. The ECON Amendments require the Member State to issue an official statement justifying such decision. In addition, the entity will be denied access to treaty benefits, as well as the EU Interest and Royalties Directive and the EU Parent-Subsidiary Directive.


Under the EC’s Proposal, Member States would have been required to apply a minimum administrative pecuniary sanction of at least 5% of an entity’s turnover in the relevant tax year if that entity does not comply with its substance reporting requirements or if it makes a false substance reporting declaration.

The ECON Amendments have split this penalty into two: (i) a penalty of at least 2% of the entity’s revenue in the relevant tax year will apply if that entity does not comply with its substance requirements; and (ii) a penalty of at least 4% of the entity’s revenue in the relevant tax year will apply if that entity makes a false substance reporting declaration. Where an undertaking has zero or low revenue, the penalty will be based on the entity’s total assets.


ATAD 3 is expected to increase compliance and/or operation costs for investment funds and corporate groups with international activities that make use of EU established companies or certain other EU established entities, subject to exceptions.

Companies within the UK’s new qualifying asset holding company (“QAHC”) regime introduced in April 2022, and other non-EU entities, will not be within the scope of ATAD 3. This is another potential advantage for investment funds and other eligible persons in structuring investments through QAHCs.

The EU intends to release additional proposals to tackle non-EU shell entities. However, establishing intermediate entities in the same jurisdiction in which, for example, the investment management team that manages the fund in question is based, should generally mean that minimum substance requirements are easier to satisfy.

It will be interesting to see whether the exemption for lack of tax motive may be utilised by investment funds holding their assets through EU intermediate entities, particularly given that a key objective when structuring an investment fund and its investment holding structures is to seek to ensure that the investors are not subject to a higher amount of tax than if they had invested in the underlying assets directly.

Certain aspects of the ECON Amendments, in addition to providing various clarifications to the ATAD 3 rules, are tax authority friendly, in terms of potentially bringing more entities within scope by widening the gateway tests. This is unsurprising given the anti-abuse objective. Other aspects of the ECON Amendments make for a more balanced approach, however, for example by improving the application of the lack of tax motive exemption, and removing elements of the minimum substance requirements relating to directors, as described above. In addition, changes to the Recitals to ATAD 3 stress the need for proportionality.

As mentioned above, the draft ATAD 3 (as amended) will now go before the Council of the EU for consideration and potentially a final decision on adoption. A unanimous vote by Member States is required before ATAD 3 can be adopted. It is possible that further changes to ATAD 3 will be made before then. Timing for the Council’s vote is not yet known, although the current proposal remains that ATAD 3 would take effect from 1 January 2024.