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How the unshell directive will impact your day-to-day operations and investment strategy?

In brief

On 22 December 2021, the European Commission released its proposal for a directive setting the rules to prevent the misuse of shell undertakings for tax purposes (ATAD III or unshell or Proposal) amending Directive 2011/16/EU on administrative cooperation in the field of taxation.

ATAD III introduces a substance test and reporting requirements for EU tax-resident undertakings in order to allow member states to assess undertakings that do not have a real and substantial presence and economic activity and are hence considered as misused for the purpose of obtaining tax advantages. When an entity is considered a shell, double tax treaties and EU directives benefits will be denied. The Proposal also foresees penalties for reporting failure.

ATAD III is subject to negotiation among all 27 member states and requires unanimous agreement for adoption. If it is finally adopted by July 2023, the new provisions are expected to take effect from 1 January 2024. However, under the current version of the Proposal, the criteria (so-called gateways) for determining whether an entity is subject to the reporting obligations must be assessed with reference to the two preceding years. Therefore, if the current version of the Proposalisapproved 1 January 2022 may already be a reference point.

It is worth noting that in a press release the EU Commission announced that it will present in the course of 2022 a similar initiative to respond to the challenges linked to non-EU shell entities.

Key takeaways

  • Gateways: The gateways will help to determine in the first stage whether an entity is at risk. This preliminary assessment is based on the following three cumulative criteria. These criteria are assessed by reference to the two years preceding the entry into force of the directive: I) percentage of passive income; ii) size of cross-border activities; and iii) type of functions outsourced. If the entity is found to be at risk, information on substance will have to be reported and exchanged.
  • Substance test: Information on minimum substance, with relevant documentary evidence, including information on the entity’s premises, bank account, management and employees should be provided to the Luxembourg tax authorities to assess whether the Luxembourg entity is a shell.
  • Reporting: The reporting of the substance information is performed through the taxpayer’s Luxembourg tax returns.
  • Exchange of information: The information will be automatically exchanged among all EU member states. The EU member states will have access to information on the newly assessed EU shell at any time and without the need for recourse to request the information.
  • Carve-outs: The following entities are excluded from the scope of the unshell directive: listed undertakings, regulated financial undertakings (e.g., banks, insurances, reinsurances, UCITs, AIFMs and AIFs managed by AIFMs), and undertakings that employ five full-time employees.
  • Rebuttal of the presumption: When an entity is presumed to be a shell entity further to the substance test, the shell entity could still rebut the assumption by either bringing additional evidence of the commercial rationale of its activities or producing evidence of the absence of tax benefits.
  • Tax consequences: When an entity is considered a shell, tax treaties and EU directives benefits may be denied.

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Amar Hamouche is a tax director in the Tax Group of Baker McKenzie's Luxembourg office. He has over 16 years of experience. Prior to joining the Firm's Tax team in 2011, Amar was Senior Tax Manager at Ernst & Young Luxembourg for over seven years and a member of the Financial Services Organization tax group, which focuses on Financial Institutions.


Antonio A. Weffer is a tax principal in Baker McKenzie's Tax Practice Group and the head of the firm's transfer pricing practice in Luxembourg. Antonio is an active member of several international professional tax organizations, and regularly publishes articles on international tax issues and speaks at worldwide seminars and conferences. He was ranked Band 2 in the World Transfer Pricing 2017 guide.


Diogo Duarte de Oliveira is a partner in charge of the Tax Department of Baker McKenzie's Luxembourg office. He has over 16 years of experience. Prior to joining Baker McKenzie in 2019, Diogo was tax partner and head of tax at the top-ranked practice of a Benelux leading law firm. He was also an international corporate tax manager with a Big Four audit firm in Luxembourg (and in Mexico City as a secondee).

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