COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid Accompanying the document Proposal for a COUNCIL DIRECTIVE laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU
Date: 2021-12-22
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU Member State, European tax cooperation, corporation tax, organisation, tax avoidance, tax collection, tax evasion, tax harmonisation, tax law, taxpayer

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 22.12.2021  SWD(2021) 577 final  COMMISSION STAFF WORKING DOCUMENT Subsidiarity Grid Accompanying the document Proposal for a COUNCIL DIRECTIVE laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU {COM(2021) 565 final} - {SEC(2021) 565 final} - {SWD(2021) 578 final} - {SWD(2021) 579 final}  
 
 
Subsidiarity Grid 

1.  Can the Union act? What is the legal basis and competence of the Unions’ intended action? 

1.1 Which article(s) of the Treaty are used to support the legislative proposal or policy initiative? 

The legal basis for this initiative is Article 115 of the Treaty on the Functioning of the European Union 
(TFEU), to ensure the proper functioning of the Internal Market. 

1.2 Is the Union competence represented by this Treaty article exclusive, shared or supporting in 
nature? 

The Union competence represented by this Treaty is shared between the Commission and Member 
States as provided under Article 4 (2) (a) Internal Market. 

Subsidiarity does not apply for policy areas where the Union has exclusive competence as defined in 
Article 3 TFEU1. It is the specific legal basis which determines whether the proposal falls under the 
subsidiarity control mechanism. Article 4 TFEU2 sets out the areas where competence is shared 
between the Union and the Member States. Article 6 TFEU3 sets out the areas for which the Unions 
has competence only to support the actions of the Member States. 

2.  Subsidiarity Principle: Why should the EU act? 

2.1 Does the proposal fulfil the procedural requirements of Protocol No. 24: 

-  Has there been a wide consultation before proposing the act? 

There has been extensive consultations with the following actions: 

  Targeted consultation with stakeholders on the inception impact assessment from 20 May 

until 17 June, 2021. Stakeholder groups included the following: Academic/research 
institutions, Business associations, Companies, EU citizens, Non-EU citizens, Trade Unions 
and NGOs;  

  Extensive targeted consultation with Member State national tax authorities in the form of: 
individual Member State consultations from June to September 2021 building and mapping 
information on existing rules and seeking their views and feedback on possible policy 
designs; and a meeting5 seeking  national tax authorities experts’ views on the need for EU 
action and possible policy design on 22 June, 2021;  

  Meeting with the Commission expert group on Tax Good Governance to gather business and 

NGO’s views on a possible initiative on 9 July, 2021; 

  Public consultation to gather public views on the added value of an EU action and the 

potential scope of such initiative from 4 June to 27 August, 2021.  

Overall respondents acknowledge the ongoing challenge of tax avoidance and evasion, including 
through the misuse of shell entities. However, they are divided when it comes to solutions. While 
some respondents support action to tackle tax avoidance and evasion via shell entities, others take 
the view that an EU legislative initiative in this direction may be premature. Generally, the business 
associations consulted argue that the current framework as well as the upcoming international 
framework would suffice to address the problem of tax avoidance and evasion and shell entities. On 

1 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E003&from=EN  
2 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E004&from=EN  
3 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E006:EN:HTML  
4 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016E/PRO/02&from=EN  
5 Commission Expert Group WPIV in Direct Taxes  

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the other hand, Member States and civil society organisations are generally supportive of EU 
intervention. Several respondents point out the lack of capacity in Member States’ tax administration 
and the insufficient administrative cooperation between Member States in tax matters as main 
hurdles in the EU fight against tax avoidance. Business associations raised concerns on the 
proportionality of the initiative.  

- 

Is  there  a  detailed  statement  with  qualitative  and,  where  possible,  quantitative  indicators 
allowing an appraisal of whether the action can best be achieved at Union level? 

The  explanatory  memorandum  of  the  act  contains  a  statement  that  the  proposal  ensures  the 
principle of subsidiarity. Furthermore, Section 3.2 of the Impact Assessment confirms the need for EU 
action and that the principle of subsidiarity is maintained. 

2.2 Does the explanatory memorandum (and any impact assessment) accompanying the 

Commission’s proposal contain an adequate justification regarding the conformity with the 
principle of subsidiarity? 

              Statement on subsidiarity to be included in the explanatory memorandum:   

This  proposal  complies  with  the  principle  of  subsidiarity.  The  nature  of  the  subject  requires  a 
common initiative across the internal market. 

The rules of this Directive aim to tackle cross-border tax avoidance and evasion practices and provide 
a  common  framework  to  be  implemented  into  Member  States'  national  laws  in  a  coordinated 
manner. Such aims cannot be sufficiently achieved through action undertaken by each Member State 
while  acting  on  its  own.  Such  an  approach  would  in  fact  only  replicate  and  possibly  worsen  the 
existing  fragmentation  in  the  internal  market  and  perpetuate  the  present  inefficiencies  and 
distortions in the interaction of distinct measures. If the objective is to adopt solutions that function 
for  the  internal  market  as  a  whole  and  improve  its  (internal  and  external)  resilience  against 
aggressive tax planning practices that affect or can affect equally all Member States, the appropriate 
way forward involves coordinated initiatives at the level of the EU. 

Furthermore,  an  EU  initiative  would  add  value,  as  compared  to  what  a  multitude  of  national 
implementation  methods  can  attain.  Given  that  the  envisaged  anti-tax  abuse  rules  have  a  cross-
border dimension, it is imperative that any proposals balance divergent interests within the internal 
market and consider the full picture, to identify common objectives and solutions. This can only be 
achieved if legislation is designed centrally. Finally, if the measures  to implement  this initiative  are 
enacted according to the acquis, taxpayers can have the legal certainty that they comply with EU law. 

Such an approach is therefore in accordance with the principle of subsidiarity, as set out in Article 5 
of the Treaty on the European Union. 

The following are the main arguments for the principle of subsidiarity contained in Section 3.2. of               
the impact assessment:    

  Tax evasion and tax avoidance by shell entities and arrangements are not limited to one 

Member State. A key feature of such schemes is that they involve more than one Member 
State’s tax system at the same time. Such schemes involve legal entities or arrangements 
being established in a Member State, where it has no premises and people, to perform an 
economic activity and receive profits generated by a related entity in another Member State 
or even a third country. The cross-border dimension necessitates EU level intervention; 

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  While some Member States have targeted rules and practices, including economic substance 
criteria, to counter shell abuse, most Member States do not and rely instead on general anti-
abuse rules. The differences between these rules, and how they are enforced, reflect more 
national  tax  systems  and  priorities,  than  on  targeting  the  Internal  Market  dimension. 
Therefore, common EU rules  are needed to counter shell entity abuses, otherwise national 
rule differences  will lead to regulatory and tax arbitrage;   

  Currently,  there  is  no  EU  legislation  defining  economic  substance  requirements.  Although 
there  is  EU  case  law  establishing  substance  requirement  general  principles,  its  scope  is 
limited  to  the  specific  case  in  dispute.  In  addition,  although  the  Code  of  Conduct  Group 
(Business taxation) has developed economic substance requirements, these are only applied 
in the context of a specific tax regime.          

  Existing instruments, such as exchange of information under the Directive on  

              administrative cooperation in direct taxation6 (the ‘DAC’), do not have mechanisms that allow 
timely automatic exchange of information on shell entities and arrangements in one Member 
State that may well affect other Member States. 

2.3 Based on the answers to the questions below, can the objectives of the proposed action be 

achieved sufficiently by the Member States acting alone (necessity for EU action)? 

Member States will not on their own be able to achieve this proposal’s objectives. Uniform substance 
criteria are necessary to counter tax abuse in the Single Market. Without which our efforts in tackling 
it will be significantly compromised as shell entities and arrangements can and would likely move to 
Member States  with weaker  substance  criteria. Further,  working on their own,  Member States  will 
not  have  readily  available  information  to  assess  shell  entities  and  arrangements,  resident  or 
established in another Member State. 

(a)  Are there significant/appreciable transnational/cross-border aspects to the problems being 

tackled? Have these been quantified? 

There are appreciable transnational/cross-border aspects of the problem. To avoid tax, some 
multinationals and individuals can exploit different EU tax rules to set up shell entities and minimise 
their taxation. Among other mechanisms, they take advantage of the current European legal 
framework, which facilitates the flow of passive income like dividends, interest and royalty payments 
within the EU to avoid double taxation, while rules on applicable taxes, rates and the fight against 
artificial tax structures remain national tax authorities’ main responsibility. 

No previous quantification has been available on the cross-border impact of shell entities and 
arrangements in relation to tax revenue loss. However, there are significant cross-border flows of 
passive income between group companies in the EU with direct investment income received by 
Member States from other Member States amounting to 420 billion EUR in 20197. For the impact 
assessment, tax avoidance due to the use of Special Purpose Entities (SPE’s), one form of shell 
entities,has been estimated in a range between EUR 23 and about EUR 60 billion per year in the EU.  

To evade tax shell entities use complex structures involving multiple jurisdictions. The ultimate goal 
of such structures is to hide the identity of the beneficial owner of the shell entity or arrangement. 

6 Directive 2011/16/EU for Administrative Cooperation in Direct Taxation 
7 Source Eurostat – direct investment income EU 27 as partner countries. 

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Due to tax evasion’s clandestine nature quantification has not been possible for the EU. However, a 
number of data leaks (Panama Papers, Paradise Papers, and Pandora Papers), indicate that the use of 
entities and arrangements to hide wealth is substantial, including entities resident in the EU. 

(b)  Would national action or the absence of the EU level action conflict with core objectives of 

the Treaty8 or significantly damage the interests of other Member States? 

Leaving it to national action could potentially damage the financial interests of Member States. For 
example, if one Member State had weak rules with regard to identifying shell entities and measures 
to counter such abuse, then this would result in regulatory and tax arbitrage with shell entities more 
likely to become resident or establish themselves in such a Member State to the detriment of other 
Member States. Therefore, to be effective there needs to be common substance rules in the EU and 
exchange of information mechanisms to tackle such abuse in the Single Market.    

(c)  To  what  extent  do  Member  States  have  the  ability  or  possibility  to  enact  appropriate 

measures? 

Member States can and already avail to differing degrees measures at national, EU and international 
level to tackle abuse by shell entities and arrangements. The rules and how enforced differ between 
Member States. Such differences lead to fragmentation of measures designed to tackle cross-border 
tax  abuse  by  shell  entities  and  arrangements  in  the  EU.  Further,  there  is  a  lack  of  information 
currently  available  to  identify  the  existence  of  a  shell  entity  or  arrangement  in  another  Member 
State.  Through  automatic  exchange  of  information,  Member  States  will  be  made  aware  of  shell 
entities  and  arrangements  in  other  Member  States  which  allows  them  to  prevent  tax  abuse  in  a 
cross-border context in a timely basis. Further, there are a number of elements in the proposal which 
are not available at national level. Existing rules at national level  generally do not include objective 
substance criteria that can be used to identify whether a legal entity or arrangement is a shell entity 
or arrangement.   

(d)  How does the problem and its causes (e.g. negative externalities, spill-over effects) vary 

across the national, regional and local levels of the EU? 

There are no reliable statistics available of the number of shell entities and arrangements in the EU. 
The difficulty of estimating numbers is also compounded by the lack of a common definition of what 
a shell entity is. Nevertheless, using proxies like FDI to GDP the impact assessment demonstrates the 
uneven distribution of shell entities and arrangements in the EU. Geographically, the estimate largely 
depends on the two EU countries showing by far the highest inward foreign direct investment in 
SPEs, the Netherlands and Luxembourg. The recent Pandora Papers revelations point to shell entities 
in many third countries but also in some Member States: Cyprus, Ireland and Luxembourg. The 
Panama Papers also mentioned several shell entities in Cyprus and Malta. Evidence from the impact 
assessment indicates that this is a national rather than a regional or local issue.  

(e)  Is the problem widespread across the EU or limited to a few Member States? 

Tax revenue loss affects all Member States, the scale of which will depend on a number of factors, 
including cross-border links and the flows of passive income between group companies. As in (d), 
there are indications that some Member States are more likely to be used for channelling cross-
border payments of passive income through such structures. The tax revenue losses will not be 

8 https://europa.eu/european-union/about-eu/eu-in-brief_en  

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incurred in these Member States which will offer favourable tax rules to these shell entities on the 
passive income received cross-border. This will mean in an EU context that the income will neither be 
taxed where the shell entity is resident nor where the group company making the payment is 
resident meaning lower revenue collection across the EU as a whole. 

(f)  Are Member States overstretched in achieving the objectives of the planned measure? 

Member States will not be overstretched in achieving the objectives of the planned measure. The 
initiative will require minimal financial and human resources from national authorities to implement 
the systems required. Systems are already in place under the DAC to exchange information between 
Member States.    

(g)  How do the views/preferred courses of action of national, regional and local authorities 

differ across the EU? 

From the consultations with Member States, there was broad support for an initiative to target tax 
abuse by shell entities with strong support for exchange of information measures. Member States 
stressed the importance of ensuring that it is compatible with existing measures aimed at tackling 
shell company abuse at national, EU and international level. Ensuring proportionality and minimizing 
the administrative burden were viewed as key considerations. Member States acknowledged the 
challenge of setting of establishing adequate economic substance criteria which targets abusive shell 
entities and arrangements rather than companies used for legitimate business purposes. Therefore, 
the rebuttal option in the proposal was welcomed as providing taxpayers with the possibility of 
demonstrating a legitimate business purpose despite failing the substance criteria. Evidence from the 
impact assessment indicates that this is a national rather than a regional or local issue.  

2.4 Based on the answer to the questions below, can the objectives of the proposed action be 

better achieved at Union level by reason of scale or effects of that action (EU added value)? 

In order to ensure the objectives of the proposal given the significant cross-border nature of tax 
abuse by shell entities and arrangements, an EU action is required to have uniform substance criteria 
to ensure a level playing field for both Member States and businesses in the EU. The EU has systems 
currently in place which facilitate exchange of information between Member States and thus reduce 
the administrative burden. 

(a)  Are there clear benefits from EU level action?  

A core finding of the impact assessment estimates the foregone tax revenue through the use of 
special purpose entities in a range between EUR 23 and about EUR 60 billion per year. Special 
purpose entities are only one specific type of shell entities, as the latter can take different forms 
depending on their intended use. Even if the intervention reduced tax avoidance and tax evasion by a 
very small amount, it is expected that benefits would nonetheless outweigh the costs (mainly 
compliance and administrative costs) associated with this initiative.  

In terms of indirect benefits, there are two main categories. First, EU citizens will be the main 
beneficiary of the positive social impacts which will reinforce the role of the EU and increase the 
willingness of taxpayers to comply with tax obligations. Secondly, EU companies will also benefit 
from the initiative. Common substance requirements, combined with exchange of information 
between tax administrations and a common framework for sanctions, would ensure a uniform 
treatment for all legal entities and arrangements and remove the risk of fragmentation in the 
Internal Market. This would also improve transparency and certainty for businesses to operate in the 
Internal Market thereby ensuring a level playing field for businesses and competitiveness. 

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(b)  Are there economies of scale? Can the objectives be met more efficiently at EU level (larger 

benefits per unit cost)? Will the functioning of the Internal Market be improved? 

There are economies of scale to be obtained from the proposal. In terms of exchange of information 
on  shell  entities,  Member  States  will  use  the  common  exchange  modalities,  infrastructure  and 
schemes that are already available for exchange of information under the DAC.  

Furthermore,  EU  action  would  keep  compliance  costs  to  a  minimum  as  businesses  would  need  to 
adhere to a single set of, rather than different, national rules in the EU. For a group active across the 
EU,  there  would  be  gains  in  terms  of  economies  of  scale,  as  all  its  entities,  no  matter  in  which 
Member State, would need to follow only one and the same set of basic requirements.  

Under  the  proposal  all  entities  and  arrangements  in  the  EU  would  face  the  same  minimum 
requirements  for substance,  which  would  promote  a  level  playing  field  and  fair  competition  which 
would mean that the integrity and functioning of the Internal Market are likely to be improved.  

(c)  What are the benefits in replacing different national policies and rules with a more 

homogenous policy approach? 

The initiative does not replace existing national policies aimed at tackling shell entity and 
arrangement tax abuse. Rather they complement existing national policies aimed at tackling tax 
abuse by shell entities and arrangements. Uniform substance criteria, exchange of information 
mechanism and a common sanctions framework are necessary elements to ensure an effective policy 
approach to tackle cross-border tax abuse. 

Through a rebuttal principle, the fundamental rights of taxpayers will be maintained as taxpayers will 
be able to challenge the outcome of the self-assessment test. Equally structures that are not put in 
place with the main purpose to obtain a tax advantage may avail of a mechanism to request an 
upfront exemption.  

(d)  Do the benefits of EU-level action outweigh the loss of competence of the Member States 
and the local and regional authorities (beyond the costs and benefits of acting at national, 
regional and local levels)? 

The competence of Member States in tax matters is maintained as this proposal is complementary 
and  contributes to the  effectiveness  of existing  national,  EU  and  international  measures  like  OECD 
BEPS to combat tax avoidance and tax evasion by shell entities and arrangements. Businesses will not 
be able to use the fact that they have passed the substance criteria under this proposal to prevent 
Member States from applying their own legislation when it comes to countering tax abuse by shell 
entities and arrangements.  

(e)  Will there be improved legal clarity for those having to implement the legislation? 

The proposal provides new mechanisms for combatting shell entity and arrangement tax abuse 
rather than improving legal clarity for existing legislation. The proposal includes clear reporting and 
substance criteria to help Member States identify in a timely manner entities and arrangements used 
for abusive purposes. 

3.  Proportionality: How the EU should act 

3.1  Does the explanatory memorandum (and any impact assessment) accompanying the 

Commission’s proposal contain an adequate justification regarding the proportionality of the 

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proposal and a statement allowing appraisal of the compliance of the proposal with the 
principle of proportionality? 

The envisaged measures do not go beyond ensuring the minimum necessary level of protection for 
the internal market. The Directive does not therefore prescribe full harmonization but only a 
minimum protection for Member States' tax systems. Thus, the Directive ensures the essential 
degree of coordination within the Union for the purpose of materializing its aims. In this light, the 
proposal does not go beyond what is necessary to achieve its objectives and is therefore compliant 
with the principle of proportionality. 

3.2 Based on the answers to the questions below and information available from any impact 
assessment, the explanatory memorandum or other sources, is the proposed action an 
appropriate way to achieve the intended objectives? 

The  proposal  aims  to  provide  Member  States  with  uniform  objective  substance  criteria  to  identify 
shell entity and arrangement’s abuse as well as establishing information exchange provisions that are 
not currently available to them. The proposal complements existing measures to prevent such abuse 
in the Internal Market through a Directive.  

(a)  Is the initiative limited to those aspects that Member States cannot achieve satisfactorily on 

their own, and where the Union can do better? 

Yes.  This  initiative  is  limited  to  providing  Member  States  with  tools  that  they  cannot  satisfactorily 
achieve  on  their  own.  In  order  to  ensure  a  level  playing  field  between  Member  States  and 
businesses, uniform substance criteria to identify shell entities and arrangements are required in the 
EU.    Furthermore,  Member  States  require  automatic  information  exchange  mechanisms  to  notify 
other Member States of shell entities resident in their jurisdiction or established in their jurisdiction 
in the case of shell arrangements. 

(b)  Is the form of Union action (choice of instrument) justified, as simple as possible, and 

coherent with the satisfactory achievement of, and ensuring compliance with the objectives 
pursued (e.g. choice between regulation, (framework) directive, recommendation, or 
alternative regulatory methods such as co-legislation, etc.)? 

The policy intervention in the form of a directive ensures consistency and clarity in the most effective 
and simple way possible. It is also proportional to achieve its objectives. The regulatory option is the 
most appropriate way for meeting the objectives of EU action. The status quo or baseline scenario is 
the  least  effective,  efficient  or  coherent  option.  Differently  from  the  baseline  scenario  and  other 
options,  the  reporting  of  shell  entities  and  arrangements  together  with  automatic  exchange  of 
information between tax EU tax administrations and a common sanctions framework will mean that 
all  EU  tax  administrations  have  the  same  tools  for  combatting  abusive  shell  entities  in  the  Single 
Market. An EU regulatory action would put all tax authorities on an equal footing.  

With  regard  to  proportionality,  the  carve-outs  in  the  proposal  mean  that  low  risk  entities  and 
arrangements  would  not  be  subject  to  the  reporting  requirements.  Furthermore,  the  substance 
criteria used will mean that only high risk entities and arrangements will be captured and reported as 
shell. 

(c)  Does the Union action leave as much scope for national decision as possible while achieving 
satisfactorily the objectives set? (e.g. is it possible to limit the European action to minimum 
standards or use a less stringent policy instrument or approach?) 

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Yes, the proposal is limited to establishing minimum standards and the rules necessary to achieve the 
set objectives. This will be done via a proposal for a directive the adoption of which requires 
unanimity in the Council.  

(d)  Does the initiative create financial or administrative cost for the Union, national 

governments, regional or local authorities, economic operators or citizens? Are these costs 
commensurate with the objective to be achieved? 

There will be additional administrative costs for businesses both in checking whether they need to 
report and, if they are required to report, at the self-assessment stage. However, in both cases the 
costs are estimated to be minimal as the information required is already at their disposal in their 
accounting and registration records even if not publically disclosed. Availing of the rebuttal provision, 
businesses would have to provide additional information and documentation to the tax authorities. 
However, this information is also already readily available to the company therefore compliance 
costs for businesses are expected to be minimal. The Sanctions Regime will entail regulatory charges 
for companies that do not fulfil their obligations and expenditure in legal proceedings, however, the 
principles of sanctions being effective, dissuasive and proportional will be maintained. Minimum 
sanctions will be proposed to ensure that there is a level playing field in the EU to ensure an effective 
sanctions regime to avoid regulatory arbitrage.   

For national tax authorities systems are already in place under the DAC to exchange information 
between Member States.   The annualised cost over 10 years for Member States and the European 
Commission is expected to be EUR 1.2 million. Further with regard to the Sanctions Regime, Member 
States will need to execute regular audits and inspections possibly followed by legal proceedings. To 
minimise costs such audits/inspections would be incorporated into the normal audit process. 

(e)  While respecting the Union law, have special circumstances applying in individual Member 

States been taken into account? 

Not applicable. 

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