EU DIRECTIVE ATAD 3: the new proposals

On 22 December 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 30 June 2023 and to be applicable as from 1 January 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.

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 incomegenerating 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.


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.
  • 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 provisions.

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