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The Proposed New EU Directive on Shell Entities

Unshell Proposal

By Company Registrations Worldwide, 21st Feb 2022

On 22nd December 2021, the European Commission published the ‘Unshell proposal’ to prevent the misuse of shell entities for evasion and avoidance purposes. The Unshell proposal aims to ensure EU shell companies with no or little economic activity do not receive tax benefits such as double tax treaties and EU tax directives. The commission is seeking transparency on the use of Shell entities which can relieve the financial burden on taxpayers while promoting a level playing field for European businesses.

The Directive should come into effect on 1st January 2024, Once adopted by the EU Member States.

Shell Entities to be Excluded from the New Rules Include:

  1. Companies on EU markets- entities that are listed on a regulated market and have transferable security admitted to trading.
  2. Alternative investment funds (AIFs) -entities that are managed by an AIFM credit institution, UCITS funds, insurance, and pension undertakings.
  3. Any holding entity that is situated in the same jurisdiction as their registered beneficial owners and their operational subsidiary
  4. Any undertakings with at least five of their own full-time employees or staff members who are exclusively carrying out any activity to generate relevant income.
  5. Any entity that qualifies as securitisation special purpose entities (SPE).

Indicators to Determine Scope

The Unshell proposal introduces a system for determining compliance with a number of indicators which are broken down into three gateways. If an entity crosses all three gateways outlined below it will be considered within scope of the directive. If determined to be within scope the entity will be required to report additional information via its annual tax return.

  1. Passive Income – If the entity derives more than 75% of its income from passive income sources such as dividends, interest on bonds, etc.
  2. Cross-boarder Transactions – If the company receives more than 60% of its assets or more than 60% of its income is earned or paid out to another jurisdiction.
  3. Management & Administration – If in the previous two years, the shell entity has outsourced the administration of its daily operations or decision making on significant functions.

Reporting Requirements for Shell Entities Within Scope

If all three gateways have been crossed the entity will be considered within scope and therefore, required to report substance indicators along with their annual tax return. The entity will be required to provide proof that they satisfy several substance requirements outlined below. Those who fail to meet the requirements will be unable to access tax relief and the benefits of the tax treaty network of its Member State.

  • Its own premise or premise which it has exclusive use of within the member state.
  • One own and active bank account at a minimum within the European Union.
  • One director with sufficient qualifications and decision-making authority. They must not be an employee or act as a director of an unaffiliated entity who is resident within or close to the member state of the residence of the entity.
  • The majority of employees of the entity are resident in or near the Member State of residence of the entity.

The proposed new EU directive on shell entities is just one initiative the Commission is taking to fight abusive tax practices. Whilst this proposal only addresses the issue within the EU, the Commission will present a new initiative to respond to the challenges posed by non-EU shell entities in 2022.

If you would like more information about how this directive may affect your EU Shell entity please Contact Us or call +353 1 6874518, a member of our team would be happy to assist you.