ATAD 3 amended by EU Parliament: stricter in certain areas, yet significant concessions for businesses and more clarity

On 17 January 2023, the EU Parliament approved an amended version of the directive laying down rules to prevent the misuse of shell entities for tax purposes, the so-called Anti-Tax Avoidance Directive 3 (“ATAD 3”), which is sometimes more fittingly referred to as the Unshell Directive. This approval follows a little over a year after the EU Commission published the initial proposal for ATAD 3.

By means of ATAD 3, the EU intends to introduce indicators of minimum substance that legal entities in the EU must comply with to be entitled to tax treaty benefits and tax benefits based on (EU Member States’ implementation of) EU directives, such as the participation exemption. ATAD 3 would – if and once adopted – become the sequel to ATAD 1 and ATAD 2 which previously introduced measures targeting tax avoidance, such as controlled foreign company and hybrid mismatch rules.

In this insight, we explain what changes ATAD 3 will introduce, how it may affect your business as well as how you can and – considering the advances of its adoption – perhaps should prepare for ATAD 3 now.

A step closer to entry into force

Soon after the initial draft of ATAD 3 was made public by the EU Commission on 22 December 2021, doubts arose as to whether ATAD 3 would make it through the EU legislative process – requiring the unanimous endorsement of all EU Member States for adoption. This approval by the EU Parliament, of an albeit adapted version of ATAD 3, is an important step towards final adoption of ATAD 3.

As a next step, the EU Council will have the final say on its adoption and subsequent implementation into domestic legislation of EU Member States. Importantly, the EU Council does not have to accept the version of ATAD 3 as adapted by the EU Parliament, meaning that the changes made by the EU Parliament are not final and should be viewed as recommendations.

Planned effective date: 1 January 2024

The aspirations regarding implementation in the amended version of ATAD 3 remain unchanged when compared to the initial version presented by the EU Commission. The aim is still for EU Member States to implement ATAD 3 into national legislation by 30 June 2023 with 1 January 2024 being the effective date. The reference period of two years that is envisaged to apply for determining whether ATAD 3 is applicable to an entity (the “gateway”) has not been changed either, which means that the facts and circumstances as per 1 January 2022 are relevant for this purpose.

On 12 May 2022, the Committee on Economic and Monetary Affairs of the EU Parliament released a draft of ATAD 3 in which the effective date was deferred to 1 January 2025, which would also result in the reference period taking effect from 1 January 2023. Unfortunately for businesses, this change has been omitted in the current ATAD 3 proposal as approved by the EU Parliament.

Nevertheless, considering the short timeframe for final adoption and subsequent implementation, which was already rather tight when the initial draft was published by the EU Commission, it is possible that some easing in terms of timing may be provided by the EU Commission at a later stage.

Entities concerned (the “gateway”)

ATAD 3 is applicable to an entity, regardless of its legal form, if it is resident in an EU Member State and meets the following three cumulative conditions. The EU Parliament has lowered the gateway thresholds which will bring more entities into scope of ATAD 3.

  1. Passive income
    More than 65% (previously 75%) of the income of the entity concerned in the preceding two tax years qualifies as "relevant income" under ATAD 3. The definition of relevant income mainly concerns passive income and includes, among others, interest, other income generated from financial assets (such as crypto assets), royalties, dividends, and income from immovable property. In certain instances, it is not necessary for relevant income to have accrued to the entity concerned for this condition to be met.
  2. Cross-border activity
    More than 55% (previously at least 60%) of the relevant income of the entity concerned is earned or paid out through cross-border transactions. Alternatively, more than 55% (previously 60%) of the book value of certain assets (mainly immovable property) is located outside the EU Member State in which the entity concerned is resident in the preceding two tax years.
  3. Management and administration outsourced
    The entity concerned has outsourced the administration of day-to-day operations and decision-making on significant functions in the preceding two tax years. After publication of the initial version of ATAD 3, there were doubts as to whether this condition would be met in case of intra-group outsourcing.
    The EU Parliament has now clarified that this condition requires outsourcing to a third party. This appears to be a welcome change for businesses that have centralised certain functions within the group, although the changed wording still does not completely clarify that outsourcing within the group would be allowed.

Carve outs

ATAD 3 is not applicable to certain entities which are excluded from the scope by carve-outs. Excluded entities include certain listed companies, certain regulated financial companies, and certain holding companies. The latter in brief concern those holding shares in an operational entity resident in the same Member State as its beneficial owners and those holding companies that are resident in the same Member State as its shareholder(s) or ultimate parent company. The exemption for entities that have at least five own full-time employees or members of staff that are solely involved in carrying out activities that generate the relevant income has been removed in the amended version of ATAD 3.

Exemption for lack of tax motives

Upon request, an exemption is available for entities that can demonstrate that the existence of the entity concerned does not reduce the tax liability of the beneficial owner or the group. This exemption appears to be similar to the Dutch subjective test (the “look-through approach”) that is used to decide, among other things, whether the Netherlands will grant an exemption from Dutch dividend withholding tax.

For this exemption to apply, a comparison should be made between firstly the tax liability in the actual situation in which the entity concerned, i.e. the entity that is at risk of being considered a shell entity, directly holding its assets and, secondly, what the tax liability would be in the fictitious situation in which the assets of the entity concerned are held directly by its shareholder. If the latter situation results in a higher tax liability compared to the first situation, this exemption cannot be applied.

After the end of the tax year for which an exemption was granted, the exemption can be extended and remain valid up to 5 years, after which a new request must be submitted - unless the factual and legal circumstances of the entity concerned, the beneficial owner or the group changes in the meantime.

The EU Parliament adds that a request for exemption (as well as for rebuttal - which will be discussed further on) should be processed by tax authorities within nine months and will be considered approved if the respective tax authority fails to decide within this period. This will facilitate businesses obtaining clarity in a timely manner.

Indicators of minimum substance for tax purposes

An entity that falls within the scope of ATAD 3, i.e. there is relevant income, a cross border activity and outsourcing of management/administration, where none of the carve outs apply nor the exemption, must in its annual tax return report and provide supporting documentation on whether the following cumulative indicators of minimum substance are met:

1. Premises

The entity concerned should have its own premises in the EU Member State of residence, or premises for its exclusive use. The EU Parliament has provided for a third option by allowing shared use of premises by entities of the same group. As such, it would not be required for each group entity to own or have premises for its exclusive use. Considering the increase in working from home, this is a welcome change for businesses.

2. Bank account

The entity concerned should have at least one own and active bank account in the EU. The EU Parliament adds that an e-money account suffices. This may provide a solution for businesses based in EU Member States in which it is challenging to obtain access to a standard bank account. The EU Parliament also adds that the relevant income must be received through the bank account owned by the entity concerned.

3. Directors and employees

At least one of the following two requirements must be met:

I. One or more directors of the entity concerned:

(a) Are tax resident in the EU Member State in which the entity concerned is resident or reside at such distance that it is compatible with the proper performance of their duties, and

(b) Are authorised to make decisions in relation to activities that generate relevant income, or the assets of the entity concerned.

Initially, it was also required for directors to use such authorisation actively and independently on a regular basis and not to be employees or directors (or equivalent) of unaffiliated enterprises. These requirements have been omitted by the EU Parliament.

II. Majority of the full-time equivalent employees of the entity concerned:

(a) Have their habitual residence as set out in the EU Regulation on the law applicable to contractual obligations (Rome I) – prior to EU Parliament’s change this condition relied on tax residency – in the EU Member State in which the entity concerned is resident or reside at such distance that it is compatible with the proper performance of their duties, and

(b) Are qualified to carry out the activities that generate relevant income for the entity concerned.

If the entity concerned does not meet all above indicators of minimum substance or fails to provide adequate documentation supporting this, that entity will be considered a shell entity.

Failure to comply with the reporting obligation carries a penalty. ATAD 3 imposes as a minimum penalty a fine of at least 2% (previously 5%) of the revenue (previously turnover - no material change appears to be intended with this change) of the entity concerned. The EU Parliament added that in case of a false declaration in the tax return, an additional penalty of at least 4% of the entity’s revenue would be due. Initially, no distinction was made between failing to report and reporting incorrectly.

The EU Parliament also added that the penalty would be based on the total assets of the entity concerned in case its revenue is below a threshold, which is to be set by EU Member States, and the entity concerned does not fall below another threshold to be set by the EU Commission. This achieves that the consequences of ATAD 3 would also be impactful for entities deemed to be shell entities of which the revenue is low.


Entities that are considered a shell entity can provide rebuttal evidence demonstrating that there is a commercial rationale for the existence of the entity concerned and that it is not misused for tax purposes. Certain information must be supplied to substantiate this. A successful rebuttal may remain valid up to 5 years from the time the decision is issued assuming the relevant factual and legal circumstances do not change.

Consequences of being considered a shell entity

ATAD 3 provides for automatic exchange of certain information between EU Member States by amending the Directive on Administrative Cooperation in Direct Taxation (DAC). It will also be possible for EU Member States to request another EU Member State to audit specific entities.

The qualification of an entity as a shell entity entails that it will not be issued with a certificate of tax residence by its EU Member State of residence. This should ensure that shell entities are disregarded by EU Member States when determining whether tax treaty benefits between EU Member States and tax benefits based on (EU Member States’ implementation of) EU directives (Parent-Subsidiary Directive and Interest and Royalties Directive) should be granted.

In the initial ATAD 3 proposal, EU Member States could alternatively issue a certificate of tax residence indicating that the entity is not entitled to certain benefits. This alternative is no longer provided for in the EU Parliament’s version.

Note that the EU Member State of residence of the shell entity still gets to decide whether the shell entity is resident for tax purposes in that jurisdiction and which obligations the shell entity must comply with, such as filing tax returns and contributing corporate income tax on its profits.

Next steps

It now remains to be seen what wording of ATAD 3 the EU Council will adopt – provided unanimity is reached at all by the EU Member States.

ATAD 3 will potentially have a major impact on businesses carrying out activities in the EU. Given the EU legislator's aspiration for ATAD 3 to take effect rather soon and that the current reference period has already started on 1 January 2022, businesses possibly in scope of ATAD 3 urgently need to assess the impact of ATAD 3 on their group structure and make changes where appropriate.

Please feel free to contact Willem Bongaerts, Arnoud Knijnenburg or Ashraf Abdirizak to discuss the impact of ATAD 3 on your business.

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