ATAD III – in a nutshell
By Maria Ström & Victor Elovsson
The European Commission has on 22 December 2021 published a proposal for additional reporting rules under the so-called Unshell directive, also referred to as ATAD III.
ATAD III is proposed to introduce minimum standards to determine whether holding companies and similar vehicles have sufficient substance. The proposed introduction of a “minimum substance test” and reporting requirements to identify shell companies will have adverse impact on investment structures that do not perform actual economic activity. For companies identified as shell companies for the purpose of ATAD III, the benefits of tax treaties and EU directives may be denied, resulting in an increased withholding tax burden as well as potential penalties for failure to report or incorrect reporting.
The minimum substance requirements
A company will be considered “at-risk”, and subject to reporting requirements if:
- the company has received more than 75% of its revenues in the preceding two tax years from passive income (e.g., royalties, dividends and income from assets);
- the company is mainly engaged in cross-border activity; and
- the company outsources the administration of day-to-day operations and decision-making on significant functions.
If considered “at-risk”, the company must report whether it meets the “minimum substance test”, i.e., if:
- the company has an office space or exclusive use of an office space;
- the company has at least one active bank account in the EU; and
- the company has (i) at least one qualified and authorised director resident in or close to the jurisdiction of the company, and the director is not an employee of an unrelated party and is not a director of any other unrelated company, or (ii) the majority of its employees are resident in or close to the jurisdiction of the company, and those employees are qualified to carry out the income-generating activities.
Exemptions and the right to rebuttal
A company that is considered at-risk may request an exemption from its reporting obligation if it can provide evidence that its existence does not reduce the tax liability of the beneficial owner(s) or of its group. This exemption is granted for one year and may be extended up to five years.
A carve-out is made for companies listed on regulated markets, regulated financial companies (including UCITs and AIFs) and companies with at least five full-time qualified employees, since the risk of them lacking the necessary economic substance is considered low. Note that although investment funds are carved out, the industry as such will be affected since the carveout does not apply to intermediate holding companies held directly or indirectly by an investment fund.
Consequences of not meeting the substance requirements
If a company is identified as a shell company for the purposes of ATAD III, the relevant EU member state would be able to take actions against the company, including denying the company a certificate of tax residence and restricting treaty freedoms. In practice, this means that certain tax benefits may be denied, and the company may be unable to claim tax treaty relief in other jurisdictions. Note that EU member states may nonetheless allow benefits under domestic law or tax treaties to apply in relation to the shareholder of the identified shell company (look-through treatment).
EU member states may introduce penalties of up to 5% of the annual revenues for companies that fail to report, or file incorrect reports, and may request other EU member states to initiate a tax audit if they suspect an EU company to be non-compliant with the provisions of ATAD III.
ATAD III is currently a proposal, but if adopted, EU member states will need to implement the proposed measures into their domestic tax legislation by 30 June 2023 and apply them as of 1 January 2024. A two-year look-back rule shall be applied in order to determine if a company falls within the scope of ATAD III. A company’s position as of 1 January 2022 may thus already be a reference point.
The prudent approach will be to review EU holding companies in light of the proposal and consider appropriate actions on a current basis, such as aligning operations with new substance requirements ahead of time.
Although Norway is currently not expected to implement ATAD III directly, it should nonetheless be expected that Norwegian tax authorities will follow the EU development and review Norwegian substance requirements in light of ATAD III.
Schjødt's tax lawyers in Sweden and Norway are following the development closely.