The proposal introduces a “filtering” system for EU company entities, which will have to pass a series of gateways, relating to income, staff and premises, to ensure there is sufficient “substance”. Those entities that are deemed to be lacking in substance are presumed to be “shell companies” unless they can rebut this presumption.
Identification of companies that do not meet minimum substance indicators (gateways)
The Directive provides for three criteria, commonly referred to as “gateways”. An entity cumulatively meeting all three of them will be “at risk” of being considered a shell entity. Entities which do not meet any of the gateways or only meet some of them will be considered to be low-risk and thus will fall outside the scope of the Directive. The gateways are as follows:
(i) more than 55% of the book value of the entity’s certain assets was located outside the Member State of the entity in the preceding two tax years;
(ii) more than 55% of the entity’s relevant income is earned or paid out via cross-border transactions;
(a) More than 65% of the revenues accruing to the entity in the preceding two tax years is relevant income i.e. passive/investment income;
(b) The entity is engaged in cross-border activity on any of the following grounds:
(c) In the preceding two tax years, the entity outsourced the administration of day-to-day operations and the decision-making on significant functions to a third party.
Indicators of minimum substance for tax purposes
· The entity has own premises in the Member State, premises for its exclusive use or premises shared with entities of the same group.
· The entity has at least one own and active bank account or e-money account in the Union through which the relevant income is received;
· One or more directors of the entity are qualified and authorised to take decisions in relation to the activities that generate relevant income for the entity or in relation to the entity’s assets;
· The majority of the full-time equivalent employees of the entity have their habitual residence in the Member State of the entity, or are at no greater distance from that Member States insofar as such distance is compatible with the proper performance of their duties.
Rebuttal of the presumption
Member States should take measures to enable entities that are presumed not to have minimum substance to rebut this presumption, without undue delay and excessive administrative costs, by providing any additional supporting evidence of the business activities which they perform to generate relevant income.
To this end, entities should provide the following additional evidence: (i) a document allowing to ascertain the business rationale behind the establishment of the entity in the Member State where the activity is performed; (ii) information on the profiles of full-time, part-time and freelance employees while ensuring high levels of data protection and privacy.
The Member State should consider a request for the rebuttal of the presumption within a period of nine months after the introduction of the request and it should be considered to be accepted in the absence of an answer from the Member State after the expiry of that nine-month period.
Where a Member State considers that an entity has satisfactorily rebutted a presumption of lack of substance, it should be able to adopt a decision certifying that the entity has minimum substance for tax purposes. This decision should remain valid for up to 5 years from the date of adoption of the decision.
Tax consequences of not having minimum substance
Where an entity does not have minimum substance for tax purposes in the Member State where it is resident for tax purposes, that Member State should deny any request for a certificate of tax residence to the entity for use outside the jurisdiction of that Member State.
When denying a request for such certificate, the Member State should issue an official statement duly justifying such decision and prescribing that the entity is not entitled to the benefits of agreements and conventions that provide for the elimination of double taxation of income, and, where applicable, capital, or of international agreements with a similar purpose or effect.
Entry into force
If approved by the European Council the Directive should be incorporated into each Member States’ national law by 30 June 2023 and come into effect on 1 January 2024. But, have in mind that the specific criteria are based on the facts and figures of the preceding two tax years (i.e. from 1 January 2022).
How we can help
We strongly encourage the entities that might be affected, to consider their current substance and existing structure, and assess whether there is a potential reporting obligation under the Unshell proposal.
As Grant Thornton, we can assist you with the following:
- Assess the current structure and substance indicators of your entity;
- Provide guidance how to empower your existing substance;
- Suggest possible solutions to overcome any substance issues;
- Advice on possible group restructuring;
- Any other services you may need regarding the proposed directive;