The EU “Unshell” Directive

Sophie Limbioul
Senior Manager, Private Clients & Family Offices Romandie, PwC Switzerland

It is now almost a year since the EU Council published a draft proposal for a new EU directive (“ATAD III”) on 22 December 2021, laying down rules to prevent the misuse of shell entities for tax purposes. This is another step in the EU strategy to tackle tax evasion and aggressive avoidance. 

Where do we stand today?

For the Directive to be implemented there must be unanimous agreement, and we are not there yet. However, in the meantime we see that third party service providers across the financial services industry are effectively doing the job of the Directive by already asking their customer base to confirm that there is substance to their entities (not just limited to European companies) and actively choosing not to work with customers using entities based in certain jurisdictions. 

The proposed approach involves two steps:

Essentially, the Unshell Directive works by denying access to tax treaties to entities that do not meet certain criteria.

Step 1: Identify entities in EU territories which are at risk based on 3 cumulative “gateway” criteria, focusing on the activity of the entity:

  1. Portion of passive income represents more than 75% of the entity’s annual income or, in case of no income, a pure holding entity (real estate of financial assets)?
  2. Does the entity engage in cross-border activities?
  3. Does the company outsource part or all of its administrative functions?
No to one of those questions Considered as “low risk” based on the current draft, and therefore out of scope of the Directive
Yes to all 3 questions Go to step 2

Step 2: If the entity meets the 3 gateway criteria, I will have to provide information on the level of substance in its jurisdiction by reporting its own status with respect to the following 3 minimum indicators:

  1. Own premises in its jurisdiction
  2. Active bank account in an EU member state
  3. Qualifying director/manager and employees based in the same jurisdiction (minimum amount of 5 employees currently foreseen)
Yes to all of those questions In principle, “low risk” under the current draft ATAD 3 EU Directive, but this does not prevent the EU member state from adopting a stricter approach
No to at least on of those questions Entity is presumed to qualify as a shell entity under the EU directive UNLESS it can prove that (a) it actually has not benefitted from any tax advantage or (b) it proves that the information based on which the assessment is made is not correct or that it actually conducts a genuine economic activity

Consequences for “shell entities”

EU member states will have to refuse to issue a tax residency permit to identified “shell entities” and EU member state(s) in which the shell entity engages in cross-border transactions will have to deny the benefit of double tax treaties.

It should be noted that the draft Directive foresees an automatic exchange of the information collected through tax returns regarding the substance indicators in order to facilitate efficient communication amongst member states.

Points to be clarified

There are various elements of the Directive that remain unclear. For example, the Directive refers to “shell entities”: what will qualify as an entity? Will it apply to foundations? And what about trusts? And how will it apply to “shell entities” held by such structures? If an active bank account is required, what is “active”? If 5 employees are required, how do you define if their activities are “qualifying”?

It is clear that the EU has a strong appetite for tackling all perceived tax evasion and aggressive avoidance so we expect this Directive to be implemented, but there is still some way to go to reach unanimous agreement, and as such, there may be tweaks to the rules as drafted. 

Immediate actions required/strongly recommended

Any individual or family with EU-based companies (or with EU companies within their group) should review their existing holding structures to understand what risks there are and where. This kind of risk assessment will allow the individual/family to identify any actions needed to meet the minimum substance requirements.


Contact us

Lisa Cornwell

Lisa Cornwell

Partner, Private Clients & Family Offices - International, PwC Switzerland

Tel: +41 58 792 25 93

Sophie Limbioul

Sophie Limbioul

Senior Manager, Private & Family Offices Romandie, PwC Switzerland

Tel: +41 58 792 81 83