Contributing Firms:
Unshell Directive
The draft ATAD 3 Directive targeting the misuse of shell entities for tax purposes is currently with the European Council for further consideration and is due to come into effect from 1st January 2024. While it remains to be seen if this timeline can be met and what, if any, further amendments will be made to the proposals, what can affected firms do now to prepare, considering that even in the event of a delay in implementation, their current activities and circumstances will likely be considered in the Directives’ gateway test which has a two year look back period?

Anna Holohan, Tax Director, Financial Services Tax, Deloitte Ireland LLP: On 22 December 2021, the European Commission published a draft Directive, Unshell, which is designed to prevent ‘the misuse of shell entities for improper tax purposes’. Broadly, using a number of objective indicators related to income, staff and premises, the aim of the proposal is to help national tax authorities detect entities that exist merely on paper. Where such entities are deemed to exist, certain tax benefits may be denied.
Anna Holohan
Anna Holohan

The original proposal was that the Directive was to be transposed into national law by EU Member States on or before 30 June 2023 with the expectation that the Directive would then be in effect from 1 January 2024. The draft Directive provides for a two year look back rule which will be applied to determine if an undertaking falls within the scope of the Directive. As such it may be prudent for taxpayers to consider their position from 1 January 2022 although it remains to be seen what date the Directive will be effective from.

Actions that could be taken now include the following:
1. Consider the current draft of the Directive and be familiar with the various exemptions, gateway tests etc.
2. Analyse if all three gateway tests (relating to income, cross border activity and outsourcing of day-to-day administration and decision making) are likely to be met and therefore the entity would, under current proposals, be required to make a report to the relevant competent authority.
3. Consider if any of the current proposed carve outs and exemptions are likely to be applicable.
4. If an entity is likely to be required to report, such entity should consider the substance indicators (re bank accounts, premises, nexus to the Member State) and how it would provide the relevant documentary evidence to support its substance.
5. Continue to monitor updates and developments.

This article appeared in the September 2023 edition of the Irish Tax Monitor.