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EU Commission publishes Proposal for a directive laying down rules to prevent the misuse of shell entities for tax purposes

In brief

On 22 December 2021, the European Union Commission published its proposal for a directive to “prevent the misuse of shell companies for tax purposes” (“Proposal“). The purpose of the Proposal is to discourage the use and creation of shell companies within the European Union (EU). This initiative complements the existing anti-tax-avoidance set of rules that are considered ineffective by the EU Commission with respect to shell entities. The Proposal requires undertakings to report information that will enable the respective competent authority to assess whether the undertaking has a real and substantial presence and economic activity in the respective jurisdiction. Benefits granted under EU law (so-called “treaty freedoms”) will be denied in case of absence of real and substantial presence and economic activity. The respective undertaking will also be denied the issuance of a tax residency certificate.


  1. What rules are introduced by the Directive? 
  2. In depth 
  3. Final remark

The Directive should be adopted early 2022 by the Council and implemented by member states by 30 June 2023 at the latest. The provisions should subsequently be effective in all member states from 1 January 2024.

What rules are introduced by the Directive? 

The key components of this Proposal can be summarized as follows:

  • All undertakings in scope: The Directive will apply to all undertakings that are considered to be tax resident in an EU member state. Any entity engaged in economic activity, in any legal form, is in the scope of the Directive. There is no minimum threshold applied.
  • Gateway: The Directive introduces a set of cumulative, indicative conditions that enable the taxpayer and tax authorities to determine whether the undertaking is considered a ‘risk case’ with a reporting obligation. The gateway consists of three conditions, that must all be met. The undertaking is considered a ‘low-risk’ undertaking in case the undertaking does not meet all three conditions. 
  • Risk cases: Reporting requirements will only apply to undertakings that are deemed to be risk cases, i.e., undertakings “that present simultaneously a number of features usually identified in undertakings that lack substance” 
  • Low-risk cases: Undertakings that do not present all of the features “usually identified in undertakings that lack substance” are low-risk, and do not have an obligation to be reported.
  • Substance requirements: Risk cases with reporting obligations are required to include information on ‘substance indicators’ on its tax return. ‘Substance indicators’ are, for example, the availability of premises for the exclusive use of the undertaking, bank accounts, tax residency of its directors, and (if applicable) its employees. The undertaking will be considered to be a shell company in case the at-risk undertaking does not meet all substance indicators (i.e., fails at least one of the substance indicators).
  • Rebuttal: When an undertaking is considered to be a shell company, the taxpayer has the right to rebut the assumption by, for example, showing the business need for the respective structure. 
  • Consequences for ‘shell’ companies: Treaty freedoms will be denied in case the undertaking is deemed to be a shell company and the undertaking is not able to rebut the assumption. This consequence  is limited to the respective undertaking that is considered to be a shell company. The treaty freedoms will still apply to the other  group companies, provided that these are not shell companies. A tax residency certificate will also be denied to the shell company, or, if a tax residency certificate is issued, it will contain a warning that the undertaking is deemed to be a ‘shell company’.
  • Compliance burden and related costs for taxpayers are to be increased, but the increased costs are negligible, according to the explanatory memorandum. 

In depth 

The Proposal introduces harmonized substance requirements across all EU member states, as follows:

  • The Proposal defines shell companies as risk cases that do not meet all substance requirements.
  • With respect to risk cases, article 6 sets out that an undertaking is a risk case if:
    • The undertaking, for a period of two years, has derived at least 75% of its income “from interest or other income generating from financial assets, royalties, dividends, income from financial leasing, immovable property, income from services outsourced to associated enterprises, income from insurance, banking and other financial activities.” 
    • The undertaking receives the majority of its relevant income (as noted above) from another jurisdiction, or passes this income on to another jurisdiction. This is the cross-border element.
    • Management or administration services are outsourced.
    • Listed entities, regulated financial undertakings, undertakings that “hold shares in operational businesses in the same member states while the beneficial owners are also tax resident in the same member state”, “undertakings with holding activities that are tax resident in the same member state as the undertaking’s shareholder or ultimate parent entity” and entities that have at least five fulltime employees are exempted from reporting requirements. 
  • All risk cases with reporting obligations are required to include on the tax return for the relevant tax year information on:
    • (a) Address and type of premises
    • (b) Amount of gross revenue and type thereof
    • (c) Amount of business expenses and type thereof
    • (d) Type of business activities performed to generate the relevant income
    • (e) The number of directors, their qualifications, authorizations and place of residence for tax purposes; or the number of full-time equivalent employees performing the business activities that generate the relevant income their qualifications and their place of residence for tax purposes
    • (f) Outsourced business activities
    • (g) Bank account number, any mandates granted to access the bank account and to use or issue payment instructions, and evidence of the account’s activity
  • With respect to substance requirements, article 7 of the Proposal sets out that, a risk case will have sufficient substance if it meets all of the following criteria:
    • (a) The undertaking has its own premises in the member state, or premises for its exclusive use
    • (b) The undertaking has at least one own and active bank account in the EU
    • (c) At least one of the directors is tax resident in the member state of the undertaking (or within commuting distance), is sufficiently qualified to act as director, is sufficiently independent and is not an employee of the group
    • (d) If applicable: The majority of the fulltime employees live within commuting distance of the member state of the undertaking. It is important to note here that the remote-working conditions as a result of the COVID-19 pandemic, which may become permanent in some industries, is not something that the Commission has sufficiently addressed in this Proposal. Such a condition may complicate tax compliance risk for undertakings operating in the EU.
  • The above-listed criteria are substance indicators, that must all be met. If at least one condition is not met, the undertaking is deemed to exist to avoid taxes. This presumption established by the tax authorities can be rebutted/is rebuttable by the taxpayer. 

If adopted, member states must transpose the Directive into national law by 30 June 2023, and the new rules will take effect from 1 January 2024.

Final remark

It has been estimated that the Proposal will deter the incorporation of shell companies within the EU. However, the benefits of harmonizing substance requirements across the EU may not be sufficient to offset the risk of negatively impacting the EU’s business climate. Additionally, the complexity of this new layer of anti-tax-avoidance rules, closely followed by the adoption of a global minimum tax under OECD Pillar Two and the reallocation of taxing rights under OECD Pillar One, will most likely result in an increase in the compliance burden and costs for multinational groups.

For further information and to discuss what this development might mean for you, please get in touch with one of us.


Mounia Benabdallah is a principal in Baker McKenzie’s International Tax Practice Group. She joined Baker McKenzie in 2006 and has practiced in the Firm’s offices in Amsterdam, Chicago and New York. As an attorney at law she is admitted to the Netherlands Bar. Mounia is repeatedly recognized as leading advisor in ITR’s Women in Tax Leaders guide. Because of her strong US focus, Mounia is based in New York and member of the Global Reorganizations Practice Group. Mounia mainly advises US multinationals on the interplay between US international tax law, European tax law and Netherlands tax law in global restructuring projects, with a strong focus on global (OECD BEPS) and European tax policy developments.


Harald van Dobbenburgh has a university background in tax law and economics of taxation. He practices mainly in the areas of Dutch and international tax law and is actively involved in the knowledge-sharing groups within the Firm’s pan-European network. Harald is also an active member in Baker McKenzie’s EMEA-Japan Initiative and has worked for quite some time in the offices of Baker McKenzie in Tokyo and Hong Kong.

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