Refresher on ATAD3

ATAD3 will introduce a multi-level test to identify and combat entities with low or no substance (so-called ‘shells’). Entities meeting three cumulative ‘gateways’ (looking at passive income, cross-border transactions and ‘outsourcing’), will have to annually report on their own substance in their tax return. Where the gateways are not cumulatively met, ATAD3 should not apply.

If the gateways are met, the next step is to check whether the entity does not cumulatively meet three ‘substance indicators’. Only in that case, it is considered a shell, which will (expectedly) result in adverse tax consequences.

Please note that currently, ATAD3 is still scheduled to entry into force per 1 January 2024.

Outsourcing – the EP’s take on the use of service providers

The first draft proposal’s wording suggested that both internal and external outsourcing of day-to-day operations and decision-making could result in the outsourcing gateway being met. The EP’s proposal suggests that the relevant gateway is only met if there is outsourcing to third parties.

This seems a welcome suggestion as the business model of the investment management industry ordinarily services acquisition or investment vehicles through a management entity ultimately controlled by the fund manager. The management entity is arguably not a third party of the relevant acquisition or investment vehicle.  

Substance indicators – the EP’s take on shared premises

The cumulative substance indicators require the entity, besides having an EU bank account and a local resident director, to have own premises or premises available for the exclusive use by that entity. No specific guidance was provided on how to deal with group entities that use the same premises.

According to the EP, the requirement to have premises available for the exclusive use of an entity should be changed to also include premises shared with entities of the same group. This would also be a welcome suggestion for fund managers that have a multitude of acquisition or investment vehicles in need of office space and an address.

Reflections on the entry into force date and the carve out for AIFs

In our view, the most notable ‘omission’ from the EP’s opinion is that the entry into force date has not been pushed back. In other words, the EP is leaving it up to the EC to decide on whether it believes entry into force as per 2024 is feasible. If so, then it is important to note that the 2-year lookback period to test the gateways commenced on 1 January 2022. In any case, given that no final version of ATAD3 was published by the EC yet, timing will prove to be tight.

No further suggestions were made in respect of the carve-out for AIFs. An extension of this carve-out to also include entities controlled by an AIF – widely hoped for by the investment management industry – was unfortunately not part of the EP’s suggestions.

Next steps

It remains to be seen to what extent the EC will adopt these changes. The EC is working on a second version of ATAD3, which we will hopefully see in Q1 of 2023. In the meantime, we suggest exploring commercially viable approaches to align your fund structure with evolving ATAD3 insights and to monitor future developments.

Should you have any questions, please feel free to reach out to your trusted Loyens & Loeff contact.