ATAD 3’s primary objective is to mitigate the misuse of shell-companies with limited or no economic activity, in order to limit the tax advantages they may be benefiting from. The Directive is targeted to come into force on the 1 January 2024, potentially 1 January 2025, although this date is still to be confirmed and may be postponed. The current draft Directive is suggesting that it will look back at the previous two tax years, meaning therefore that if ATAD 3 will come into effect on 1 January 2024, it will cover activity from 1 January 2022 onwards.

Whilst the Directive is still in draft form and is therefore still subject to change, there are good indications of what will be covered at a high level. As it stands, the draft Directive is looking at any legal entity that operates within the EU and is benefiting from favourable tax advantages, to ensure that they have a level of real economic activity.

To understand if an entity is deemed to have substance under ATAD 3, the European Commission has set out three gateways. Any company passing all three gateways and not falling under an exemption shall be presumed to not have sufficient minimum substance and therefore qualifies as a shell for the purposes of the Directive. (please note that expected thresholds may still be subject to change). These gateways are as follows:

If an entity passes through all three of these gateways, then they must report on the proposed substance test and will have to provide evidence in their tax returns that show they have: 

• Their own premises or premises for their exclusive use; 
• At least one own and active bank account in a Member State; and 
• At least one qualified, authorised and independent director that is resident for tax purposes close to the undertaking and dedicated to its activity, or that they have full-time employees who are tax resident in the entity’s Member State (or at no great distance from that Member State). 

If an entity is found to have limited substance after passing through the three gateways laid out within ATAD 3, it could result in the entity not being eligible for certain double tax treaties, etc.

Tax consequences for an entity deemed as a shell could based on the currently proposed text of the Directive be one of the following:

• Loss of the benefit of the double tax treaties and EU directives' provisions; 
• Non-availability of certificate of residence; and 
• Potential re-allocation of taxing rights within the structure