Update on the Unshell Directive: ECOFIN Confirms Abandonment of ATAD 3 Proposal

Background
On 22 December 2021, the European Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes (commonly known as the “Unshell Directive” or “ATAD 3”). The initiative sought to ensure that companies within the EU with minimal or no economic substance do not benefit from tax advantages, thus promoting a fairer and more transparent internal market.
Original objectives of the Directive
For recollection, the initial goals of the Unshell Directive were the following:
  • Combat tax avoidance and evasion via companies lacking real substance;
  • Ensure that shell companies cannot unjustly access tax benefits within the EU;
  • Promote transparency by enhancing exchange of information and aligning reporting obligations across Member States.
 
Developments between 2022 and 2024
During this period, technical discussions around the above Directive took place and various compromise texts and notes were prepared by successive presidencies.
Key areas of concern included notably:
  • The definition of minimum substance requirements;
  • The interaction with domestic anti-abuse rules;
  • The possibility of rebutting the presumption of being a shell entity;
  • The exchange of information and issuance of tax residency certificates;
  • Administrative burdens on both taxpayers and tax authorities.

In June 2024, a new approach was presented to Member States and further elaborated into concrete drafting suggestions in November. Focus areas included:
  • Scope and hallmarks of shell entities;
  • Reporting obligations and information exchange mechanisms;
  • Interaction with the provisions of the Directive 2011/16/EU on administrative cooperation in the field of taxation (“DAC”), notably DAC 6 on the automatic exchange of information in relation to reportable cross-border arrangements;
  • Avoidance of redundant reporting through separate IT systems.
 
EU Council position as of May-June 2025
During the Working Party on Trade Questions meeting held on 27 May 2025, the following key points were pointed out:
  • Substantial overlaps were identified between the Unshell Directive and DAC 6 hallmarks;
  • Delegations broadly agreed that the Unshell Directive’s objectives could be achieved by revising DAC 6, rather than creating a parallel framework;
  • This approach aligns with the EU’s “tax simplification and decluttering agenda” aiming to reduce administrative and compliance burdens.
As a result, it has been concluded that the Unshell Directive initiative should not be continued in the EU Council. This welcome and positive conclusion reflects a general consensus to avoid duplicative reporting requirements, disproportionate compliance costs for businesses and additional compliance pressure on tax administrations.
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