ATAD III – Principle and consequences
The European Commission has published its draft for a new directive, known as “ATAD III” (“Anti-Tax Avoidance 3”). Still in draft form, this directive would reinforce the establishment of a fair and sustainable European corporate tax system, complementing the information exchange mechanisms organized by the various “DAC” directives, and the “anti-abuse” measures already in force (ATAD I and ATAD II directives).
Before this directive comes into force, Céliance helps you assess your entity: is it affected? If so, we will analyze the options available to you to avoid certain tax consequences.
Céliance can provide you with diagnostics and solutions to help you comply with ATAD 3.
The 1st appointment is FREE
What is the ATAD 3 directive proposal ?
Tax requirements concerning the substance of companies are intensifying in the European Union. In this context, the latest EU initiative targets the abusive use of “shell companies”.
This project is part of the fight against tax evasion and aims to establish anti-abuse rules against so-called “shell companies”.
Under the proposed directive, a company will be considered “at risk” if 3 cumulative criteria have been met over the last 2 financial years. If these criteria are met, the company will then have to indicate in its annual tax return that it meets the 3 “minimum substance” criteria.
3-stage process
- Determining whether the entity is an “entity at risk”: is the entity an “entity at risk”, and therefore subject to annual reporting obligations? 3 cumulative criteria must be met.
- If the company qualifies as a “risk entity”, it will have to prove that it meets the 3 minimum substance indicators required, in order to avoid being classified as a shell entity or prove that it qualifies for exemption from reporting.
- Reversing the presumption: if the entity has failed to pass these 2 stages, it has the possibility of reversing the presumption of a shell entity by demonstrating and proving that it controls and bears the risks of its business or assets.
Which entities are covered by the directive ATAD 3 ?
The aim of the “ATAD III” project is to identify and define the fate of what are known as “shell companies”, i.e. companies with a substance deemed too weak, whose registered office is located on the territory of a Member State, and which are involved in cross-border activities, or have assets located in a State other than that of their residence.
Certain categories of companies are currently excluded from the scope of the new measures, notably listed companies or regulated entities, or even entities employing a minimum of 5 full-time staff.
On the other hand, holding companies, whether financial or asset-based, real estate or not, are covered. The same applies to companies holding intellectual property rights.
Step 1: Determining whether a company is at risk
What is a “risky company”?
These are companies whose substance appears, a priori, to be weak or even insufficient.
To judge an entity as being at risk, 3 criteria need to be taken into consideration, which can be summarized as follows:
1) Income: over the last 2 years, more than 75% of its income is considered passive (interest, dividends, income from the sale of shares or real estate, rents, royalties, etc.).
In the absence of income, if more than 75% of the company’s total book value is represented by private equity/real estate investments;
2) Involvement of the company in cross-border activities: more than 60% of its revenues or the book value of assets held come from, or have been located, outside the entity’s country of residence for 2 years;
3) Outsourcing of its own management: the company has outsourced the management of its day-to-day operations and decision-making on important functions. It uses third-party professional service providers, or has entered into agreements with associated companies for the provision of administrative services, so as to enable it to establish and maintain a legal and fiscal presence.
Stage 2: a “risk company” must demonstrate a minimum level of substance
If the entity meets these criteria and cannot benefit from certain exemptions provided for in the Directive, it will be considered a “risk company”.
It will then be obliged to specify various items of information in its annual tax returns, in order to prove its substance. The 3 minimum substance indicators are as follows:
- The availability of premises for exclusive use in its state of residence;
- The use of at least one active bank account in the EU;
- Does the entity have one or more local (or cross-border) directors who are qualified, active and authorized to take strategic decisions, who exercise their functions and take their decisions independently, and who are not employed or mandated by companies unrelated to the company concerned?
Does the entity have a majority of qualified full-time employees living in the vicinity of the entity?
- Option 1: the 3 cumulative criteria are met
The venture company will be presumed to have “sufficient” substance, but only for the tax year covered by the declaration.
- Option 2: the 3 cumulative criteria are NOT met
It will be considered as a “shell company” and therefore presumed not to have sufficient substance.
The company will be able to rebut this presumption.
It will have to provide evidence and justify that the activities which generated the company’s profits were indeed controlled by it from its headquarters, and that it also assumed the risks relating to these activities.
- Written justification of the economic reasons for its existence;
- Description and documentary evidence of the functions, authority, experience and qualifications of employees;
- Justification that the company’s strategic decisions are effectively adopted from the state of its residence.
Once the presumption has been rebutted, the entity will be deemed to have a minimum level of substance for the current year and the following 5 years (provided the factual and legal situation remains unchanged).
Tax consequences and sanctions envisaged by ATAD 3
Failure to meet any one of these 3 criteria would mean that the entity at risk did not have sufficient substance and was unable to rebut the presumption or benefit from the exemption.
- Certificate of residence
The tax authorities in charge of this entity will not issue a certificate of tax residence to the company concerned. They may provide such a certificate, but specify that the company will not be able to benefit from the advantages of double-taxation treaties or European directives. Other Member States will deny the company access to the benefits of these tax treaties and directives.
- Taxation of shareholders
In addition, “look-through” taxation may be applied by the shareholder’s country of residence. The entity’s shareholders, located in the European Union, will be taxed directly on the entity’s income as if they had received it themselves.
- Request for tax audit
A Member State which has reason to believe that an entity resident for tax purposes in another Member State has failed to comply with its obligations under the ATAD 3 Directive may request the tax authorities of the second Member State to carry out a tax audit of the entity.
- Fines
Any false declaration or failure to declare will be subject to a fine (approximately 5% of the entity’s turnover).
Effective date
The project is currently scheduled to come into force on January 1, 2024. Nevertheless, companies potentially concerned are advised to inform themselves as of now of the likely conditions of application. Indeed, it could be envisaged that the reference period against which the situation of any entity concerned will be examined will begin, in some respects, 2 years earlier, i.e. in January 2022.
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