Substance & Tax Law
In recent years tax authorities have placed more emphasis on combatting the use of abusive and aggressive tax structures by companies operating across borders, to ensure fair taxation. The EU and OECD have provided tax authorities with various instruments such as the Anti-Tax Avoidance Directive (ATAD) and the Multilateral Instrument. The judgements handed down by the CJEU on the Danish cases have also set an important precedent.
However, since entities with no minimal substance and economic activity are supposedly still used for improper tax purposes, the European Commission recently issued a new proposal (ATAD 3). It is highly recommended that taxpayers already assess the possible impact of the proposal and consider opportunities for strengthening their local footprint and/or restructuring.
On 22 December 2021, the European Commission published a proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes. With this proposal, the European Commission intends to counter situations where taxpayers evade or avoid taxes by misusing entities that have no minimal substance and do not perform any actual economic activity (so-called “shell entities”). To meet this objective, the proposal contains a common set of rules, including minimum substance indicators, for the identification of shell entities and their tax treatment. A reporting obligation and an automatic exchange of information must furthermore ensure that Member States have information readily available on the substance level of companies in scope that meet certain criteria. Feedback on the proposal to the European Commission was open until 6 April 2022. A separate EU Directive dealing with a shell entity in a third country is expected in the course of 2022.