European Economic and Social Committee’s Opinion on the proposed ATAD 3 Directive

By: Pierre-Régis Dukmedjian, Partner – Head of Tax, and Nadejda Girleanu, Of Counsel, Simmons & Simmons Luxembourg LLP

 On 6 April 2022, the European Economic and Social Committee (EESC) issued an Opinion (the Opinion) on the European Commission’s proposal for a Directive (the Draft Directive) laying down rules to prevent the misuse of shell entities for tax purposes also known as ATAD 3, published on 21 December 2021.

 

Background

The aim of the Draft Directive is to identify certain structures set up for improper tax purposes, such as tax avoidance and/or tax evasion. These structures concern the setting up of entities within the European Union (EU), which are presumed to have an economic activity but do not carry out any genuine economic activity. Instead, they are set up to obtain certain tax advantages for the profit of their beneficial owner(s) or for the group to which they are related.

As a new tool in the EU anti-tax avoidance package, the Draft Directive:

• lays out several steps intended to allow ‘shell’ undertakings to be identified including a substance test, which identifies undertakings lacking sufficient substance;
• factors in the tax repercussion applicable to these ‘shell’ undertakings –mainly the denial of the treaty benefits and/or of the provisions of the EU Directives (e.g., Parent-Subsidiary Directive, Interest Royalty Directive);
• would allow for an additional EU automatic exchange of information and the possibility for EU Member States to ask for tax audits on that matter to other EU Member States.

Opinion of the EESC

Following on from its general and specific comments, the following EESC conclusions and recommendations should be noted:

• The EESC supports the Commission proposal on the misuse of shell companies for tax purposes and its objectives. The EESC notes its concern in relation to the fact that the substance requirements do not address the digital side and only foresee the importance of tangible assets, which could trigger issues in the future
• In addition, it highlights that the Draft Directive is consistent with previous EU legislative initiatives, such as the Anti-Tax Avoidance Directive (ATAD) and the Directive on Administrative Cooperation (DAC) and complements the recent proposal on the global minimum level of taxation for multinational groups in the EU (Pillar 2)
• It welcomes the Commission’s public consultation and supports the additional public consultation by national experts. The EESC, however, highlights that only a small number of stakeholders (50) have actually participated.
• It supports the choice of a directive aimed at ensuring a common legal framework among Member States–the EESC does not envisage having these tax measures handled through individual Member State initiatives in their respective legal systems since the aim is to counter cross-border tax avoidance and tax evasion.
• According to the EESC, the Draft Directive fulfils the proportionality principle as it does not go beyond the minimum necessary level of protection of the single market and involves an apparently reasonable impact on companies.
• It considers that the “gateway criteria” in the form of cumulative indicators are relevant.
• Verification should target not only income but also assets (and should address cases where assets do not generate income).
• The Opinion highlights the need to settle common and clear rules on the specific contents of the declarations required from entities.
• It restates the requirement to have a complete and comprehensive EU list of non-cooperative tax jurisdictions located outside the EU. The EESC also recognizes that more action should be taken when a company or entity outside the EU does business with an EU-listed company or entity.
• The EESC recommends that appropriate guidelines regarding the substance test set out in the Draft Directive are released by the Commission as well as suggesting compatibility should be maintained with existing relevant international and EU standards. Particular reference is made to the concept of “substantial economic activity,” which has been detailed in the context of preferential tax regimes and broadly considered within the forum on harmful tax practices.
• Shell entities can be used not only for tax evasion and tax avoidance but also for committing crimes such as money laundering. As a result, coordination of legislation and of different supervisors in charge of fighting these crimes is of great importance. Such criminal activities tend to involve the hiding of beneficial ownership through interposition of several shell entities managed by “professional enablers”. EESC is of the view that linking these two pieces, un-shell entities and anti-money laundering aspects, should be addressed either in the Draft Directive or by promoting a European framework law.
• The EESC is also of the view that malpractice and the criminal activities of “professional enablers” could be tackled through the collaboration of professional regulatory or supervisory bodies. It also considers that it is extremely important to target professional enablers who contribute to finding opportunities to make unlawful practices which support fiscal and financial crimes.
• The Opinion recommends that European legislation should address the possibility of using shell companies to facilitate undeclared work, as well as to avoid social-security contributions.
• It highlights that companies with sufficient transparency, but which pose no real risk of lacking economic substance for the purpose of tax evasion or tax avoidance should not be captured by the Draft Directive.
• The EESC thinks that there is a need to establish a transfer pricing directive as the use of shell entities could interact with existing rules regarding transfer pricing.

Conclusion

Although the opportunity of the measures provided by ATAD 3 is questionable, the majority of the EESC’s conclusions and recommendations set out above are welcome. We nevertheless note that the clarification of some important definitions has not been addressed (e.g., the definition of outsourcing).

By: Pierre-Régis Dukmedjian, Partner – Head of Tax, and Nadejda Girleanu, Of Counsel, Simmons & Simmons Luxembourg LLP