In or out of scope?

Investment managers generally anticipate that it is challenging for investment acquisition structures to not cross all three ‘gateways’. In other words, they perceive it likely that part of their structures (e.g., investment holding vehicles) are in scope. This effectively means that they must report on their substance, and, if insufficient, that they may face a denial of tax benefits under a tax treaty or EU Directive.

How has the industry responded so far?

As the ATAD3 proposal uses several vague concepts, it is hard to concretely respond to. On top of that, the industry seems to expect that the effective date of ATAD3 will likely be pushed back and that the proposal will not be adopted in its current form. For those reasons, most managers ‘sit and wait’ to a certain extent. New structures do however typically seek some alignment with the current ATAD3 substance indicators.

Forward looking observations on the effective date

Rumour has it that the proposal is not high on the agenda of the next chairs of the counsel of the EU and that it is therefore unlikely that ATAD3 will entry into effect as from 2024. For the moment, 2025 is generally perceived as the date ATAD3 will likely become effective (so hopefully also pushing the 2-year lookback period from 1 January 2022 to 1 January 2023). That said, it seems that it is hard for EU Member States to agree on the tax consequences that should apply if an entity is in scope.

Forward looking observations on the mechanics: rumours

As the outsourcing gateway sets the bar high, it is considered to effectively pull most of the investment structures into the scope of the proposal. However, this gateway is surrounded by unclarity and the high bar seems to go against the sound business model of the investment management industry. The industry typically services acquisition or investment vehicles through a group entity rather than equipping a multitude of vehicles with their own functions - such a set-up seems insufficient to get over the bar. 

It is rumoured that investment vehicles controlled by AIFs may benefit from a ‘carve-out’. This would be a big relief for the industry. It is also being considered to merge the gateways and the substance indicators to (alternative) gateways. As investment managers generally expect to be able to comply with the substance indicators, this possible change could mean that they would be out of scope. Finally, if EU Member States will be unable to agree on the tax consequences of being a shell, then it may well be that ATAD3 will eventually only trigger a reporting obligation and exchange of information (rather than imposing immediate adverse tax consequences).