EU tax Snippet Summer Series #4 EU ATAD 3 Directive – New York office Snippet

As outlined in our earlier Snippet, the ATAD3 proposal was introduced to combat tax abuse by ‘shell companies’ – EU holding and financing companies perceived to lack sufficient substance (𝐒𝐡𝐞𝐥𝐥𝐬). ATAD3 prescribed adverse tax consequences (e.g. the denial of tax benefits under EU directives and tax treaties to Shells and/or exchange of information with source countries about the lack of substance). Since the initial release of ATAD3 in December 2021, EU Member States (𝐄𝐔 𝐌𝐒) have been unable to reach the unanimous consent required for adoption. After more than three years of negotiations without reaching consensus, the EU Council has now formally announced the end of the efforts to adopt ATAD3.

Instead, the EU Council intends to pursue ATAD3’s objectives through amendment of the existing EU Mandatory Disclosure Rules (𝐃𝐀𝐂𝟔). These rules require certain EU intermediaries (or, in certain cases, EU taxpayers) to report cross-border arrangements that meet specific “hallmarks” indicating potential tax avoidance or abuse to the tax authority of the relevant EU MS. Once a DAC6 report is filed, it is automatically exchanged with other EU MS.
DAC6 applies since 2020 and is currently under review. A proposal by the European Commission for its revision is expected in Q1 2026. The announced approach is to reach the goals of ATAD3 (i.e., identifying Shells) by modifying and/or expanding DAC6’s existing hallmarks. This approach, which avoids separate directives for DAC6 and ATAD3, aligns with the European Commission’s current agenda of simplification and regulatory decluttering.

No details are known yet as to how ATAD3’s objectives will be integrated in the revision of DAC6. However, since DAC6 does not prescribe adverse tax consequences (which ATAD3 did), it is anticipated that the consequences of being a Shell will be limited to information exchange.

Since the reporting obligation under DAC6 generally lies with the EU intermediary, integration of ATAD3 into DAC6 may result in an important role for EU intermediaries in assessing whether the EU operations of a US multinational or US asset manager have sufficient substance for DAC6 purposes.

The abandonment of the draft ATAD3 directive brings a welcome end to the prolonged uncertainty surrounding its status. However, the intended integration of ATAD3 into DAC6 shows that combatting Shells remains on the EU agenda. We will continue to closely monitor developments in this regard.

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