A proposed Directive was published by the European Commission on 22nd December 2021 in order to prevent “shell entities” that are based in the EU member states from the entitlement to particular tax benefits granted by other EU Directive and member states’ double tax treaties.
Should the proposed Directive be adopted, it will be implemented on 01st January 2024 – a point to be noted is that initiative is known as to “Unshell”.
The proposed new measures will allow for misuse of shell entities to be easily detected by tax authorities due to the introduction of new transparency standards. The proposal also intends to help national tax authorities detect entities that exist with insufficient commercial substance to merit access to tax benefits..
The draft Directive sets out three “gateways”:
- The first gateway looks at the activities of the entity based on the income it receives.
- The second gateway requires a cross-border element.
- The third gateway focuses on whether corporate management and administration services are performed in-house or are outsourced.
If an entity passes through all three gateways, then it will be required to report information in its tax return.
The entity must also be able to show:
- it has at least one director resident in its member state, the director is not provided by a service provider.
- the majority of its full time employees are resident in the member state or live close to it and are qualified to carry out the undertaking’s relevant income generating activities.
There are exceptions from these rules for certain regulated, holding or for example companies with 5 full time employees!
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