COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT 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

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  EN 

   EUROPEAN COMMISSION  Brussels, 22.12.2021  SWD(2021) 579 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  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) 577 final} - {SWD(2021) 578 final}  
 
 
Executive Summary Sheet  

Impact assessment for an initiative to fight the use of shell entities and arrangements for tax purposes  – 
“Unshell” 

A. Need for action 

What is the problem and why is it a problem at EU level?  

The main problems addressed by the impact assessment are tax avoidance and tax evasion caused by the 
use  of  shell  entities  for  tax  purposes  by  companies  and  individuals.  Shell  entities  can  be  defined  as 
companies  and  other  entities  which  do  not  have  substance  (they  do  not  have  offices,  employees, 
equipment  etc.)  and  do  not  perform  any  genuine  economic  activity,  only  fulfilling  the  essentials  of 
registration and organisation. Shell entities can take different forms depending on the intended use.  

Overall, tax losses due to tax avoidance by companies are in the order of tens of billion of euro per year.1 
It is particularly challenging to estimate tax losses due to the use of shell entities. A first approximation of 
the  phenomenon  hint  at  a  tax  loss  that  could  be  estimated  at  around  EUR  23  billion  per  year.  There  is 
moreover robust anecdotal evidence that shell entities continue to be employed to reduce tax liability in 
legal and sometimes illegal fashion by a variety of economic actors, including large multinationals.  

The  three  main  drivers  of  the  problem  are:  a)  lack  of  EU  rules  defining  common  minimum  substance 
requirements  for  tax  purposes  in  the  EU;  b)  lack  of  information  that  tax  administrations  would  need  to 
effectively apply existing rules against tax avoidance and evasion; c) promotion of shell entities by certain 
intermediaries. 

What should be achieved? 

The general objective of the initiative is to tackle tax avoidance and evasion via shell entities and in doing 
so contribute to proper functioning of the internal market. 

More specifically, the initiative aims to achieve the following three objectives: first, it aims at introducing, 
within the EU, common rules to be able to identify shell entities at risk of being used for tax avoidance or 
evasion. Second, Member States need to know about the existence of shell entities being identified as such 
in  another  Member  State.  Third,  the  initiative  aims  to  disincentive  the  use  of  tax  and  company  service 
providers from creating shell entities in the EU.  

What is the value added of action at the EU level (subsidiarity)?  

The problem of tax avoidance or tax evasion through the use of shell entities is typically  a cross-border 
problem. It has the same drivers and underlying causes no matter in which Member State it appears. 

Within the Union, national approaches risk distorting the internal market and could make some Member 
States vulnerable to regulatory and tax arbitrage, especially if national action translates in some Member 

1 Within the EU, tax avoidance is estimated at between EUR 35 billion and EUR 70 billion of tax revenues lost 
per  year.  Source:  Dover,  R.,  Ferrett,  B.,  Gravino,  D.,  Jones,  E.,  &  Merler,  S.  (2015)  Bringing  transparency, 
coordination  and  convergence  to  corporate  tax  policies  in  the  European  Union,  European  Parliamentary 
Research Service, PE 558.773.  

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States not imposing substance requirements for shell entities or imposing requirements more lenient than 
elsewhere. Importantly, as shell entities are commonly used to erode the tax base of a Member State other 
than the one where the shell entity is located, some Member States might not have sufficient incentive to 
introduce robust, national rules. 

Only a common EU framework can help to achieve the objective of tackling tax avoidance and evasion via 
shell entities while preserving both the integrity  of the internal market and ensuring a level playing field 
among economic operators across the Union. 

B. Solutions 

What are the various options to achieve the objectives? Is there a preferred option or not? If not, why? 

The  baseline  (option  0)  represents  the  status  quo:  lack  of  minimum  substance  requirements  for  shell 
entities and implementation of existing rules at EU, national and global level to tackle tax avoidance and 
tax  evasion.  This  includes  action  by  the  EU  Code  of  Conduct  Group  for  business  taxation  (COCG)  to 
address the issue of substance but only for preferential tax regimes.  

Option  1  is  a  soft-law  option.  It  would  introduce  minimum  substance  requirements  for  shell  entities 
however,  such  requirements  would  not  be  binding  nor  enforceable.  Option  1  could  take  the  form  of  a 
Commission  recommendation  or  of  an  expansion  of  the  mandate  of  the  COCG  to  check  that  substance 
requirements are applied as a general feature of Member States' tax systems.  

Option 2 is the basic regulatory option, on top of which Option 3 and Option 4 are built. Option 2 would 
introduce  common  substance  requirements  across  the  EU,  obliging  (certain)  legal  entities  and  legal 
arrangements – those that would not be carved-out from the start and that would pass certain gateways – to 
demonstrate to the tax administration that they have substantial economic activity in their Member States 
of  tax  residence.  Lack  of  substance  requirements  would  lead  to  tax  consequences  (namely,  stop  to  tax 
advantages for shell entities under relevant EU directives and/or tax treaties).  

On  top  of  Option  2,  Option  3  would  include  the  establishment  of  a  mechanism  for  administrative 
cooperation  and  exchange  of  information  concerning  shell  entities.  Option  4  would  be  composed  of  the 
same  elements  of  Option  3,  with  the  addition  of  a  common  definition  of  sanctions  in  case  of  non-
compliance by shell entities. 

Option 4 is the preferred option. It includes all elements of Option 2, exchange of information between tax 
administrations  as  per  Option  3  and  complements  this  with  a  common  sanction  framework.  Option  4  is 
expected to best meet the objectives of the initiative, with the highest deterrent effect on taxpayers, while 
not imposing a disproportionate cost for businesses nor for tax authorities.  

What are different stakeholders' views? Who supports which option?  

Overall, the respondents to the public consultation acknowledge the ongoing challenge of tax avoidance 
and  evasion,  including  through  the  misuse  of  shell  entities.  However,  suggestions  on  the  way  forward 
differ. While some respondents support action to  tackle tax avoidance and tax evasion via shell entities, 
others take the view that an EU legislative initiative in  this direction may be premature.  Member  States 
overall have expressed constructive openness and in some cases explicit support for an EU legal initiative 
to tackle the use of shell entities used for tax avoidance or tax evasion.  

C. Impacts of the preferred option 

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What are the benefits of the preferred option (if any, otherwise of main ones)?  

Option 4 provides for a common minimal substance definition, which was lacking in the current anti-tax 
abuse framework of the EU.  

Thanks  to  its  exchange  of  information  between  tax  authorities,  it  complements  current  exchange  of 
information already in place at EU level. It would ensure that Member States, whose tax bases are being 
eroded by the use of shell entities, registered in other Member States, are made fully aware of this.  

Through common sanctions, it ensures the highest level of compliance by entities and equal treatment for 
all entities in the EU, independently of their place of registration. Thus, the potential positive effect on the 
sustainability  of  public  finances  is  the  highest  amongst  all  options  and  the  EU  intervention  is  seen  as 
contributing to the better functioning of the internal market by avoiding its fragmentation via the various 
possible choices of sanctions.  

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.  

What are the costs of the preferred option (if any, otherwise of main ones)?  

Compliance costs for entities are expected to be limited as this would be information readily available to 
the entity, for the entities that will have to self-assesse and to report.  

Costs  for  the  tax  administration  are  limited  to  the  implementation  of  a  platform  for  the  exchange  of 
information,  the  evaluation  of  reported  data  and  the  administration  of  sanctions.  The  evaluation  of  the 
reported data, to conclude whether an entity is shell or not, is made by the tax administration, based on the 
self-assessment made by the entity against specific criteria. 

The size of the costs of sanction administration would depend on the form the sanction would take. For a 
financial  penalty,  the  costs  are  expected  to  be  limited  to  the  administrative  costs  generated  by  issuing  a 
fine and monitoring its payment.  

Enforcement costs should not be fundamentally different for the national administration between option 2, 
3 and 4, because, if no common framework of sanctions was planned, the national administration would 
still have to apply certain sanctions to ensure compliance. 

What are the impacts on SMEs and competitiveness?  

The initiative aims at covering those entities that do not have substance and are set up to avoid or evade 
taxation2,  not  businesses  with  employment  and  genuine  economic  activity.  The  criteria  that  trigger 
reporting  obligations  to  the  tax  authority  are  strictly  limited  to  companies  with  a  risk  of  practising  tax 
avoidance  or  tax  evasion,  which  is  expected  to  cover  only  a  very  small  proportion  of  the  SME-defined 
population. The gateway criteria are expected to exclude the vast majority of SMEs (e.g. to fall in scope, a 
SME  should  have  most  of  its  revenues  from  passive  income,  be  owned  mainly  by  foreign  owners  and 

2 The OpenLux investigation revealed that more than 1 000 companies with no employees were registered at the 
same address. 

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would not have the resources required to conduct a genuine economic activity).  

On  competitiveness,  the  initiative  would  only  impact  financial  flows  that  are  not  associated  with 
employment nor with  genuine economic activity. In the longer term, limiting the use of entities  with no 
substance could have positive second-round (indirect) effects, stimulating productive investments.  

Will there be significant impacts on national budgets and administrations?  

The  main  impact  for  national  budgets  would  be  a  tax  gain,  difficult  to  estimate.  Within  the  EU  tax 
avoidance is estimated at between EUR 35 billion and EUR 70 billion of tax revenues lost per year. 

Tax  revenue  forgone  can  be  considered  a  resource  shortfall  that  could  otherwise  be  used  for  public 
investment and the provision of public goods. Such a shortfall is especially unwelcomed at a time when 
resources are needed to boost the recovery after the COVID-19 pandemic. 

Will there be other significant impacts?  

No 

Proportionality?  

Action  would  not  go  beyond  setting  minimum  substance  criteria.  Mechanisms  such  as  carve-outs  and 
exemptions from the reporting requirements under the initiative will mean that low tax abuse risk entities 
and  arrangements  will  not  be  subject  to  the  initiative.  Furthermore,  according  to  Commission  analysis, 
only  a  minimal  amount  of  entities  and  arrangements  in  the  EU  will  need  to  self-assess  under  the 
initiative.     

D. Follow up 

When will the policy be reviewed?  

If  the  preferred  option  was  chosen,  the  policy  would  be  monitored  through  in  two  main  ways.  Fist, 
Member States will report data on the implementation of the policy and enforcement actions.  At least in 
part,  this  data  should  be  made  public,  for  the  purpose  of  transparency  and  to  enable  public  scrutiny  in 
Member States. Second, the Commission will assess implementation and enforcement of the initiative in 
the various Member States and report about it. Such assessment will be conducted mainly on the basis of 
data from Member States.  

Five years after the implementation of the instrument begins, the Commission will evaluate the results of 
the  policy,  with  respect  to  its  objectives  and  the  overall  impacts  on  tax  revenues,  businesses  and  the 
internal market. 

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