Executive Summary
On 22 December 2021, the Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (the “Unshell” proposal).
In outlining the rationale for the proposal, the Commission explained that while shell, or letterbox, entities can serve useful commercial and business functions, some international groups and even individuals abuse them for aggressive tax planning or tax evasion purposes. Certain businesses direct financial flows to shell entities in jurisdictions that have no or very low taxes, or where taxes can easily be circumvented.
The proposal is aimed at ensuring that shell companies in the EU that have no or minimal economic activity are unable to benefit from any tax advantages, thereby discouraging their use. According to the proposal, there will be a filtering system for the entities in scope, which have to comply with a number of indicators. These levels of indicators constitute a type of gateway. There are three gateways set out and if a company crosses all three gateways, it will be required to annually report more information to the tax authorities through its tax return.
The three gateways are as follows:
- The first level of indicators looks at the activities of the entities based on the income they receive. The gateway is met if more than 75% of an entity's overall revenue in the previous two tax years does not derive from the entity's business activity or if more than 75% of its assets are real estate property or other private property of particularly high value.
- The second gateway requires a cross-border element. If the company receives the majority of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad, the company crosses to the next gateway.
- The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.
An entity crossing all three gateways will be required to report information in its tax return related, for example, to the premises of the company, its bank accounts, the tax residency of its directors and that of its employees. These are known as substance indicators. All declarations need to be accompanied by supporting evidence. If an entity fails at least one of the substance indicators, it will be presumed to be a shell.
If a company is deemed a shell company, it will not be able to access tax relief and the benefits of the tax treaty network of its Member State and/or to qualify for the treatment under the Parent-Subsidiary and Interest and Royalties Directives. To facilitate the implementation of these consequences, the Member State of residence of the company will either deny the shell company a tax residence certificate or the certificate will specify that the company is a shell. Moreover, payments to third countries will not be treated as flowing through the shell entity and will be subject to withholding tax at the level of the entity that paid to the shell.
Please contact Paul Hale or Danny O'Connell with any questions regarding these proposals.
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Paul Hale
Managing Director, Tax Affairs
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Danny O'Connell
Director, EU and International Regulatory and Tax Policy
Practical Implications
If these changes are adopted as proposed, they will present the following practical implications:
- Although there will be no direct legal implications for an investment fund or fund manager, the imposition of a finding of a company being a shell entity could have knock-on effects for fund structures.
- According to Article 6 of the proposal, regulated financial undertakings including investment firms, Alternative Investment Fund Managers (AIFMs), AIFs, Undertakings for Collective Investment in Transferable Securities (UCITS) management companies and UCITS funds, amongst others are not subject to Article 7 (Indicators of minimum substance for tax purposes).
- In addition, the Council has discussed whether fund-of-funds and subsidiaries of funds should be exempted entities according to the Directive. In Council negotiations, there are some Member States who have stressed that fund-of-funds and subsidiaries of funds should be exempted entities. The Swedish Presidency of the Council has commented here that it could be argued that there is no need for a specific exemption for fund-of-funds, since each fund could be a regulated entity on its own merits, and thereby exempt. The end result is that there is uncertainty regarding the exact impact this proposal would have, until we see a final, agreed text.
Timeline
AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.
| Estimated Compliance Date | June, 2026 |
| Estimated Transposition Date4 | June, 2026 |
| Estimated Effective Date3 | June 2025 |
| Final ECON Position for Trialogues2 | January 17, 2023 |
| Council general approach1 | to be adopted |
| Proposed Directive published by European Commission | December 22, 2021 |
- The Council is yet to adopt its General Approach as the negotiations are ongoing. The current Hungarian Presidency of the Council has not made this file one of their priorities for its Presidency. The Commission is still expected to devote resources in re-starting discussions in Council however under the Polish Presidency beginning in 2025.
- The resolution adopted by the ECON Committee and subsequently approved by the European Parliament in plenary sitting is a non-binding opinion which will be taken on board by the Council as part of the consultation process. The European Parliament has a consultative role when it comes to tax legislation. As a result, it will not take part in trialogue negotiations. It will be for the Council to reach unanimous agreement between the Member States to find agreement on the proposal.
- We have estimated this date based on the possibility that Council could approve a general approach given that the new European Commission is expected to devote reseources into re-starting discussions. The Directive will then enter into force on the twentieth day following its publication in the Official Journal.
- Member States are expected to be given 1 year to transpose the Directive into national law and apply it beginning the following day.