COMMISSION STAFF WORKING DOCUMENT 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

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 22.12.2021  SWD(2021) 578 final  COMMISSION STAFF WORKING DOCUMENT  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) 579 final}  
 
 
Table of contents  

1. 

2. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 1 

PROBLEM DEFINITION .................................................................................................................... 4 

2.1 What is/are the problems? ..................................................................................... 4 
2.1.1 Indicators of the use of shell entities to escape tax ........................................... 4 

2.1.2 Why the existing EU legislation and the international tax frameworks are not 
sufficient to address the problem ................................................................................ 7 

2.1.3 The challenge of defining shell entities ............................................................. 8 

2.1.4 Tax avoidance and tax evasion via the use of shell entities ............................ 10 

2.2 What are the problem drivers? ............................................................................ 15 
2.2.1 Lack of EU rules defining common minimum substance requirements for tax 
purposes in the EU.................................................................................................... 16 

2.2.2 Lack of information to effectively apply existing rules .................................. 17 

2.2.3 Promotion of shell entities by certain intermediaries ...................................... 18 

2.3 How will the problem evolve? ............................................................................ 21 

3.  WHY SHOULD THE EU ACT? ........................................................................................................ 22 

3.1 Legal basis ........................................................................................................... 22 
3.2 Subsidiarity: Necessity for EU action ................................................................. 22 
3.3 Subsidiarity and Proportionality: Added value of EU action .............................. 23 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 26 

4.1 General objectives ............................................................................................... 26 
4.2 Specific objectives ............................................................................................... 26 

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 27 

5.1 What is the baseline from which options are assessed? ...................................... 27 
5.2 Description of the policy options ........................................................................ 28 
5.2.1 Option 1: Non regulatory option ..................................................................... 29 

5.2.2 Option 2: EU wide common substance requirements ..................................... 30 

5.2.3  Option  3:  EU  wide  common  substance  requirements  accompanied  by 
provisions for administrative cooperation ................................................................ 34 

5.2.4  Option  4:  EU  wide  common  substance  requirements  accompanied  by 
provisions for administrative cooperation and a common sanctioning framework . 37 

5.3 Options discarded at an early stage ..................................................................... 37 

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 39 

6.1. 
6.2. 

Introduction ..................................................................................................... 39 
Impact on Small and Medium Enterprises (SMEs) ......................................... 39 

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6.3.  Data limitations and assumptions .................................................................... 40 
6.4.  Option 0: the baseline scenario (no change) .................................................... 40 
6.4.1.  Compliance costs for businesses ................................................................ 41 

6.4.2.  Regulatory charges ..................................................................................... 41 

6.4.3.  Enforcement costs for tax administrations ................................................. 41 

6.4.4.  Direct costs and benefits ............................................................................. 41 

6.4.5. 

Indirect costs and benefits .......................................................................... 44 

6.5.  Option  1:  Soft-law  option,  sub-option  a):  review  of  the  scope  of  the 

EU Code of Conduct Group ............................................................................ 44 
6.5.1.  Compliance costs for businesses ................................................................ 45 

6.5.2.  Regulatory charges ..................................................................................... 45 

6.5.3.  Enforcement cost for tax administrations ................................................... 45 

6.5.4.  Direct costs and benefits for Member States treasuries .............................. 45 

6.5.5. 

Indirect costs and benefits .......................................................................... 45 

6.6.  Option 

1:  Soft-law 

option, 

sub-option 

b):  Commission 

recommendation on substance ......................................................................... 46 
6.6.1.  Compliance costs for businesses ................................................................ 46 

6.6.2.  Regulatory charges ..................................................................................... 46 

6.6.3.  Enforcement cost for tax administrations ................................................... 46 

6.6.4.  Direct costs and benefits for Member States treasuries .............................. 47 

6.6.5. 

Indirect costs and benefits .......................................................................... 47 

6.7.  Option  2:  A  Directive  that  requires  reporting  of  shell  entities  but 

without automatic exchange of information or common sanctions. ................ 47 
6.7.1.  Compliance cost for businesses .................................................................. 48 

6.7.2.  Regulatory charges Regulatory charges ..................................................... 51 

6.7.3.  Enforcement cost for tax administrations ................................................... 51 

6.7.4.  Direct costs and benefits for Member States .............................................. 51 

6.7.5. 

Indirect benefits .......................................................................................... 52 

6.8.  Option  3:  A  Directive  that  involves  reporting  of  shell  entities  with 
automatic  exchange  of  information  (AEOI)  but  without  common 
sanctions .......................................................................................................... 53 
6.8.1.  Compliance costs for businesses ................................................................ 53 

6.8.2.  Regulatory charges ..................................................................................... 53 

6.8.3.  Enforcement costs for tax administrations ................................................. 53 

6.8.4.  Direct costs and benefits for Member States .............................................. 54 

6.8.5. 

Indirect benefits .......................................................................................... 55 

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6.9.  Option 4: A Directive with automatic exchange of information (AEOI) 

and common framework of sanctions .............................................................. 56 
6.9.1.  Compliance cost for businesses .................................................................. 56 

6.9.2.  Regulatory charges ..................................................................................... 56 

6.9.3.  Enforcement cost for tax administrations ................................................... 56 

6.9.4.  Direct costs and benefits for Member States .............................................. 57 

6.9.5. 

Indirect benefits .......................................................................................... 57 

7.  HOW DO THE OPTIONS COMPARE? ............................................................................................ 59 

7.1.  Effectiveness in reducing the misuse of shell entities for tax purposes .......... 59 
7.2.  Tax gains for public finances .......................................................................... 60 
7.3.  Compliance costs ............................................................................................. 60 
7.4.  Coherence with other policy initiatives ........................................................... 61 
7.5.  Different stakeholder views on the opportunity for an intervention ............... 61 

8. 

PREFERRED OPTION ...................................................................................................................... 63 

8.1.  Description of the preferred policy option ...................................................... 63 
8.2.  Different stakeholder views on the preferred option ....................................... 64 

9.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 66 

ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 69 

ANNEX 2: STAKEHOLDER CONSULTATION ....................................................................................... 74 

ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 89 

ANNEX  4  (A):  METHODS  FOR  ESTIMATES  -  ESTIMATION  OF  POTENTIAL  TAX 

LOSSES .............................................................................................................................................. 93 

ANNEX  4  (B):  METHODS  FOR  ESTIMATES  -  ESTIMATION  OF  COMPANIES  IN  SCOPE 

OF THE INITIATIVE ......................................................................................................................... 98 

ANNEX 5: NATIONAL MEASURES TO TACKLE SHELL ENTITY ABUSE AND RELATED 

SUBSTANCE REQUIREMENTS .................................................................................................... 104 

ANNEX 6: THIRD COUNTRY MEASURES ........................................................................................... 110 

ANNEX 7: THE OPENLUX INVESTIGATION, SOME KEY FINDINGS ............................................. 112 

ANNEX 8: HOW DO THE OPTIONS COMPARE? AN OVERVIEW TABLE ...................................... 113 

ANNEX 9: ADDITIONAL INFORMATION ON THE NECESSITY OF EU ACTION ......................... 115 

ANNEX  10:  ADDITIONAL  INFORMATION  ON  HANDLING  OF  PERSONAL  DATA 

UNDER THE PREFERRED OPTION ............................................................................................. 118 

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Term or 
acronym 

AEOI 

AML 

Meaning or definition 

Automatic exchange of information  

Anti-money laundering 

AMLD  

Anti-money laundering directive  

ATAD  

ATP  

Anti-Tax  Avoidance  Directive,  Council  Directive  (EU)  2016/1164  of  12 
July 2016 laying down rules against tax avoidance practices that directly 
affect the functioning of the internal market. 

Aggressive  Tax  Planning.  Defined  in  the  Commission  Recommendation 
of  6  December  2012  on  Aggressive  Tax  Planning  as:  “(...)  taking 
advantage of the technicalities of a tax system or of mismatches between 
two  or  more  tax  systems  for  the  purpose  of  reducing  tax  liability.  Its 
consequences  include  double  deductions  (e.g.  the  same  loss  is  deducted 
both  in  the  State  of  source  and  residence)  and  double  non-taxation  (e.g. 
income which is not taxed in the source State is exempted in the State of 
residence).” 

BEPS 

Base Erosion and Profit Shifting  

BO 

CD  

CFT 

Beneficial ownership  

Central Directory for automatic exchange of information  

Counter-terrorism financing  

CIGA   

Core income-generating activities 

CRS  

DAC 

DTT 

EOIR 

FATF 

FHTP 

IFCs 

IBFD 

IMF 

Legal 

Common reporting standard  

Directive  on  administrative  cooperation,  Council  Directive  (EU)  of  15 
February  2011  on  administrative  cooperation  in  the  field  of  taxation,  as 
amended. 

Double tax treaties  

Exchange of information on request 

Financial Action Task Force 

OECD Forum on Harmful Tax Practices 

International Financial Centres  

International Bureau of Fiscal Documentation 

International Monetary Fund  

The term is used to refer to trusts and partnerships and any other similar 

iv 

 
 
 
 
 
arrangement   legal arrangements.  

Legal entity   The term is used to refer to any body corporate that has legal personality.   

NACE 

The  Statistical  Classification  of  Economic  Activities  in  the  European 
Community (NACE) is the industry standard classification system used in 
the European Union.  

MEP 

Member of the European Parliament  

MNEs  

Multinational enterprises  

OECD 

Organisation for Economic Co-operation and Development 

ORBIS 

A database on private companies compiled by Bureau van Dijk 

PPT 

SEOI 

Principal purpose test  

Spontaneous exchange of information 

TCSPs 

Trust or company service providers 

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1.  INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

The  EU  tax  policy  agenda  aims  at  enabling  fair  and  sustainable  growth.  EU  tax  policy 
priorities are guided by the principles of fairness, efficiency and simplicity. To contribute 
to  achieving  fair  and  effective  taxation,  in  May  20211  the  Commission  committed  to 
stepping up the fight against the abusive use of shell entities for tax purposes through a 
new legislative initiative. Targeting this type of abuse has become all the more important 
after massive media revelations regarding abusive shell entities in the beginning of 2021. 

The initiative would focus on entities established in EU Member States that have no or 
minimal  substantial  economic  presence,  for  example  in  terms  of  employment,  and  that 
may be used for tax avoidance or evasion. The overall objective of the initiative whose 
impact is assessed in this document is therefore to counter the misuse of shell entities for 
tax purposes only, and in so doing contribute to fair and effective taxation.  

Shell  entities  serve  a  variety  of  purposes.  The  use  of  a  shell  entity  is  not  per  se  an 
indication  of  tax  avoidance  or  evasion.  Nevertheless,  what  are  generically  called  shell 
entities  are  sometimes  used  for  illegal  purposes  such  as  money  laundering.  Moreover, 
they  can  be  used  for  evading  and  avoiding  taxes.  Examples  of  their  persistent  misuse 
were  revealed  by  the  OpenLux  investigation.  Based  on  publicly  available  information, 
OpenLux journalists found significant amounts of assets located in Luxembourg held by 
non-resident taxpayers in holding companies, some of which neither maintain their own 
premises,  nor  have  employees  nor  carry  out  economic  activity  in  Luxembourg.2  The 
investigation found that this enabled, for instance, some French investors to significantly 
lower  their  tax  bill.3  Such  tax  savings  may  be  indicative  of  evasion  and  avoidance  and 
warrant further investigations.4 More recently, the Pandora Papers,5 a massive data leak 
concerning  offshore  accounts  of  several  high-net-worth  individuals,  have  revealed  that 
shell  entities  continue  to  be  used  in  complex  offshore  structures,  also  with  the  aim  of 
avoiding if not evading taxation.  

1 European Commission, 2021, Communication on Business Taxation for the 21st Century.  
2 OpenLux shows failures of beneficial ownership registers | International Tax Review 
3 Following the publication of the investigation, it was quoted in the French press that, ibid. quote : « S’il 
devait être rapatrié demain en France et soumis à la « flat tax » de 30 % sur les revenus du capital, ce  « 
trésor de guerre » pourrait faire rentrer près de 5 milliards d’euros dans les caisses de l’Etat ».  
4  Note  that,  following  the  OpenLux  press  releases,  the  Luxembourgish  authorities  stated,  among  others, 
that: “Luxembourg is fully compliant with and has implemented all applicable EU and international rules 
and standards with regards to tax transparency, the fight against tax abuse as well as AML – and even gone 
beyond these requirements – Luxembourg rejects the claims made in these articles as well as the entirely 
unjustified portrayal of the country and its economy”. Source: 
 https://gouvernement.lu/en/actualites/toutes_actualites/communiques/2021/02-fevrier/08-declaration-
openlux.html  
5  The  Pandora  Papers  are  the  result  of  an  investigation  by  the  International  Consortium  of  Investigative 
Journalists, more information can be found at: https://www.icij.org/investigations/pandora-papers/  

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The European Parliament has at several occasions stressed the importance of tackling tax 
evasion and avoidance via shell entities. It has called for EU intervention on the matter, 
inviting the Commission to exercise its right of initiative and act to counter the misuse of 
shell entities for tax purposes. In its resolution of 26 March 2019 on financial crimes, tax 
evasion  and  tax  avoidance6,  the  European  Parliament  put  forward  several  actions  to 
address the tax challenges posed by companies registered in a jurisdiction mainly for tax 
avoidance or tax evasion purposes and without any significant economic presence.7 Some 
of the actions requested include establishing a common definition of shell companies and 
economic  activity  requirements  tests.  More  recently,  in  March  2021,  the  European 
Parliament discussed in plenary, the findings of the OpenLux investigation.8  

The initiative assessed here fits within a larger set of Commission initiatives for fair and 
effective taxation. Among others, key recent initiatives include the Anti-Tax Avoidance 
Directives (‘ATAD’)9 and expanding on several occasions the scope of the Directive on 
Administrative  Cooperation  (‘DAC’)10.  Moreover,  related  work  has  been  done  and  is 
ongoing by the Code of Conduct Group on business taxation not only on the EU Member 
States but also with regard to non-EU countries through the EU list of non-cooperative 
tax  jurisdictions11.  Since  2018,  the  EU  has  been  reviewing  the  robustness  of  non-EU 
countries’  tax  systems  against  tax  avoidance  or  tax  evasion,  in  part  conducted  via  the 
misuse of shell entities. Technically, this process proposes the introduction of substance 
requirements to some non-EU countries to counter the use of shell companies to avoid or 
evade tax.   

This initiative also relates to other EU interventions currently under preparation to ensure 
fair  and  effective  business  taxation.  In  its  recent  Communication  on  Business  Taxation 
for  the  21st  century12,  the Commission  argued  in  favour  of  a  fair  sharing  of  tax  burden 
across  businesses.  As  outlined  in  the  Communication,  the  Commission  remains 
committed to building a Union framework for business taxation in the EU: the “Business 
in  Europe  Framework  for  Income  Taxation”  (or  BEFIT).  Alongside  BEFIT,  the 

Among 

https://www.europarl.europa.eu/doceo/document/TA-8-2019-0240_EN.html. 

6 More information on OpenLux is provided in the Annex 
7 
others, 
recommendations for actions, whose scope may be broader than tax policy, included: establishing a single 
definition  of  shell  or  letterbox  companies,  repealing  anonymity  for  owners  of  these  companies  and 
establishing  coordinated,  binding,  enforceable  and  substantial  economic  activity  requirements  as  well  as 
expenditure tests for these companies.  
8 “OpenLux” tax investigation discussed in plenary | 08-03-2021 | News | European Parliament (europa.eu) 
During the debate, MEP Mr Paul Tang, chair of the FISC committee at the European Parliament, explicitly 
called for action to tackle tax avoidance and evasion through the use of shell entities. 
9 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that 
directly affect the functioning of the internal market 
10 Council Directive (EU) of 15 February 2011 on administrative cooperation in the field of taxation 
11 https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/ 
12 COM (2021) 251  

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Commission will propose new initiatives with the aim of: (i) addressing the debt-equity 
bias  in  corporate  taxation;  (ii)  enhancing  tax  transparency  of  large  multinational 
companies;  and  (iii)  proposing  the  initiative  subject  of  this  impact  assessment.  The 
Commission will also  launch a broader reflection on the EU tax mix, the proportion of 
total  tax  revenues  derived  from  various  tax  sources  (corporate  income  tax,  personal 
income tax, VAT, etc.).  

The initiative assessed here also aligns with the objective of fair taxation shared by the 
international  community13  and  fits  with  related  international  actions  to  tackle  cross-
border  tax  avoidance.  In  the  late  2010s,  the  OECD  Base  Erosion  and  Profit  Shifting 
(BEPS) project introduced substance criteria for tax purposes. In particular, BEPS Action 
5  aims  to  ensure  that  participants  in  the  so-called  Inclusive  Framework  on  BEPS  have 
significant economic activities linked to preferential tax regimes and their incentives. The 
same  action  introduced  substantial  activity  requirements  for  no  or  only  nominal  tax 
jurisdictions and provided guidance on the application of the requirements. BEPS Action 
6 on Treaty Shopping aims to prevent the abuse of double tax treaties by interposed shell 
entities.14  In  addition,  the  Commission  and  Member  States  are  also  actively  promoting 
fair  taxation  in  international  fora  to  fight  harmful  tax  practices  at  worldwide  level,  e.g. 
the OECD Forum on Harmful Tax Practices (FHTP).   

Mandated  by  the  G20,  the  OECD  Inclusive  Framework  is  currently  working  on  the 
implementation of a global, consensual solution to reform the international corporate tax 
framework.  The  reform  is  based  on  two  main  work  streams:  Pillar  1  (re-allocation  of 
taxing rights) and Pillar 2 (minimum effective taxation). The two pillars aim to address 
different but related issues linked to the increasing globalisation and digitalisation of the 
economy. Pillar 2 is expected to put an end to the race to the bottom in tax competition 
among  jurisdictions  and  to  tackle  corporate  tax  avoidance.  Pillar  1  aims  to  better  link 
taxing rights to place of economic activity. Note that Pillar 1’s scope will be limited to a 
relatively low number of the large and most profitable multinationals only,15 while Pillar 
2 will apply to  multinational  companies  that meet  the  EUR  750 million  threshold, thus 
leaving  all  companies  below  this  threshold  out  of  the  scope.  As  such,  this  process  will 
not provide a comprehensive solution to tackle the use of shell entities for tax avoidance 
or evasion.  

In  addition,  it  is  important  to  stress  that  shell  entities  are  by  no  means  only  associated 
with large, multinational enterprises. Smaller companies and individuals,  often high-net 
worth individuals, make use of them as well. As revealed by the OpenLux investigation, 

13 https://www.g7uk.org/g7-finance-ministers-and-central-bank-governors-communique/  
14 Namely, through a limitation-on-benefits rules or principle purposes test (PPT). 
15 The scope will cover multinational enterprises with global turnover above EUR 20 billion and a pre-tax 
profit margin above 10%.  

3 

 
 
 
 
 
                                                 
thousands  of  foreign  nationals  make  use  of  Luxembourg-based  holding  companies, 
including about 15 000 French individuals.16  

Addressing  the  abusive  use  of  shell  entities  is  important  as,  despite  broader  efforts  to 
counter  tax  avoidance  and  evasion  loopholes  in  the  EU  and  globally,  the  estimated  tax 
revenue  losses  of  the  affected  jurisdictions  remain  high.  Globally,  corporate  tax 
avoidance  is  estimated17  at  between  USD  90  billion  and  USD  240  billion  per  year. 
Within the EU tax avoidance is estimated at between EUR 35 billion and EUR 70 billion 
of tax revenues lost per year.18  

To conclude,  the current  political  context  points  to  the need  for  additional  and specific 
policy actions to tackle the abusive use of shell entities for tax purposes. More generally, 
the ongoing economic and health crisis also adds to the urgency of putting in place a fair 
and  effective  tax  framework  for  sustainable  public  spending  that  can  help  fund  and 
sustain  the  recovery.  Countering  the  misuse  of  shell  entities  for  tax  avoidance  and 
evasion purposes can contribute to that aim.  

2.  PROBLEM DEFINITION 

2.1 What is/are the problems? 

2.1.1 Indicators of the use of shell entities to escape tax 

Anecdotal  and  investigative  evidence  suggests  that  high  net-worth  individuals  and 
companies sometimes make use of shell entities to minimise their tax bill. For instance, 
the  media  reported  that,  in  2020,  without  any  employee  other  than  directors,  an  Irish 
subsidiary  of  Microsoft  made  a  “tax-free”  profit  of  USD  315  billion19.  According  to 
research by an Australian based tax research institute CICTAR, Uber shifted almost EUR 
6 billion through  about  50 shell companies in  the Netherlands in  2019, after creating  a 
massive  tax  shelter20.  According  to  a  US  fair  tax  think-tank,  between  2011  and  2015, 
Walmart  transferred  ownership  of  more  than  USD  45  billion  in  assets  to  a  network  of 
shell companies in  Luxembourg, where Walmart does not have stores21. In 2017, when 

16  LeMonde,  9  February  2021 :  OpenLux :  l’insatiable  appétit  des  Français  pour  les  sociétés 
luxembourgeoises  
17 Recent meta-analysis on tax avoidance from Professor Lejour showing global (conservative) estimates 
of tax revenue losses ranging from tax avoidance.  
18 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 
19  https://www.theguardian.com/world/2021/jun/03/microsoft-irish-subsidiary-paid-zero-corporate-tax-on-
220bn-profit-last-year  
20 https://cictar.org/ministers-urged-to-act-on-ubers-50-company-dutch-tax-she 
21  Americans 
June 
https://americansfortaxfairness.org/files/TheWalmartWeb-June-2015-FINAL1.pdf  

“The  Walmart  Web” 

for  Tax  Fairness, 

accessed 

2015, 

from: 

4 

 
 
 
 
 
                                                 
investigating illegal tax benefits to Amazon in Luxembourg, the Commission found that 
considerable income (royalties) was generated by a holding company that was an empty 
shell  with  no  employees,  no  offices  and  no  business  activity22,  and  paid  only  minimal 
taxation.  

The initiative intends to address both tax avoidance and tax evasion. Both tax avoidance 
and  tax  evasion  undermine  the  fairness  and  integrity  of  tax  systems.  Businesses  that 
avoid or evade tax gain a competitive advantage over enterprises that pay their fair share. 
Taxpayers  with  similar  incomes  or  assets  may  end  up  paying  different  amounts  of  tax. 
Ultimately,  both  tax  avoidance  and  tax  evasion  in  practice  mean  less  resources  (tax 
revenues) to finance public services including, among others, “(…) infrastructure, social 
security and education systems”.23  

For the sake of clarity, it  is  worth  stressing that  the problem  to  be addressed is  not  the 
existence  of  shell  entities  per  se.  Indeed,  the  latter  can  serve  several  valid  and  fully 
legitimate  commercial  and  business  purposes.  Just  to  provide  some  examples  obtained 
via  the  public  consultation  on  this  initiative,24  shell  entities  can  be  used  to:  ensure 
limitation of liability; protect investors and maintain the value of the portfolio; meet the 
requirements  of  third  party  lenders  to  ring-fence  assets  and  liabilities;  facilitate  joint 
ventures  between  funds  and  other  investors;  streamline  decision  making  by  giving 
authority  to  the  directors  of  holding  entities;  provide  a  convenient  vehicle  for  sale  or 
partial sale. As said, shell entities as such are not the problem. Therefore, it would not be 
appropriate  to  distinguish  between  legitimate  and  problematic  shell  entities:  rather,  the 
issue  is  about  distinguishing  between  the  legitimate  and  problematic  uses  of  shell 
entities. As other technologies or forms of innovation and organisation, shell entities can 
be exploited or rather serve broader economic and social goals.   

Specials purpose entities (SPEs) are also used for legitimate business purposes and have 
characteristics  in  common  with  shell  entities.  For  example  although  they  are  formally 
registered with a national authority and subject to their fiscal and legal obligations, they 
can  lack  substance  activities  like  having  few  non-financial  assets  and  employees.25 
Legitimate  uses  of  SPE's  include  spreading  financial  risk  and  facilitating  complex 
financing and project operations. The aim of the current initiative is not to curtail these 

illegal 

to  Court  for  failure 

tax  benefits  from  Apple 

22  Statement  by  Commissioner  Vestager  on  illegal  tax  benefits  to  Amazon  in  Luxembourg  and  referring 
Ireland 
  4  October  2017, 
to  recover 
https://ec.europa.eu/commission/presscorner/detail/fr/STATEMENT_17_3714  
23 Examples of public services funded via general taxation, mentioned by Commission President von der 
Leyen in her 2021 State of the Union address, 15 September 2021.  
24  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements  for  tax  purposes",  input  by  the  European  Fund  and  Asset  Management  Association 
(EFAMA) 
25  For  more 
explained/index.php/Glossary:Special-purpose_entity_(SPE) 

information  about  SPEs  please  consult:  https://ec.europa.eu/eurostat/statistics-

5 

 
 
 
 
 
                                                 
operations but instead to prevent such vehicles from being used for tax avoidance or tax 
evasion.  

Shell  entities  have  also  been  set  up  to  avoid  double  taxation,  for  example  when  the 
resident  jurisdiction  of  a  company  does  not  have  a  double  taxation  treaty  with  another 
jurisdiction with which it is doing business. However, Member States have decided both 
at  national  level  and  international  level  through  the  OECD  BEPS  project  that  their 
resident companies are required to have substance in order to benefit from  their double 
taxation  treaties.  The  problem,  as  the  evidence  above  suggests,  is  the  misuse  of  such 
entities for tax abuse purposes only.  

Figure  1  A  high-level  illustration  of  the  problem  to  be  addressed:  the  use  of  shell  entities  for  tax  avoidance  or  tax 
evasion.  

On the geographical scope of the problem  

The use of shell entities for tax avoidance or evasion is not an “EU problem” only. Shell 
entities are spread across the globe, especially in zero or very low tax jurisdictions. Data 
from  tax leaks26  by the  International  Consortium of  Investigative Journalism  (ICIJ) can 
suggest an answer to the geographical scope and magnitude of the problem.  

For instance, the recent  Pandora Papers revelations point to shell entities in  many third 
countries: British Virgin Islands, Seychelles, Hong Kong, and the United Arab Emirates 
to  cite  only  some.  On  the  other  hand,  in  the  Pandora  Papers  there  is  also  mention  of 
entities in some EU Member States, namely Cyprus, Ireland and Luxembourg. Most of 
the entities involved in the Panama Papers were from the British Virgin Islands, followed 
by  Panama  and  The  Bahamas.  The  Panama  Papers  also  mentioned  several  entities  in 
Cyprus and Malta.  

26 https://offshoreleaks.icij.org/  

6 

 
 
 
 
 
 
 
 
                                                 
On  the  question  of  the  geographical  scope  of  the  problem,  it  may  also  be  relevant  to 
consider the work of some civil society organisations, in particular the NGO Tax Justice 
Network. The latter has developed a combined indicator ranking jurisdictions according 
to how much they facilitate tax avoidance by multinational corporations. The indicator is 
called  the  Corporate  Tax  Haven  Index  (CTHI).27  According  to  the  latest  edition  of  the 
CTHI,  the  countries  ranking  at  the  top  10  of  the  index  are  mainly  third  countries, 
however also the Netherlands and Luxembourg score high.28  

2.1.2 Why the existing EU legislation and the international tax frameworks 

are not sufficient to address the problem 

The  BEPS  project  has  been  a  major  step  forward  in  addressing  the  problem  of  shell 
companies being used for tax purposes. However, the implementation of BEPS measures 
in practice proves challenging for tax authorities, as it emerged also from the public and 
targeted consultation conducted for preparing this initiative. For instance, one respondent 
to the public consultation pointed out that current rules are challenging to implement.29 
As part of the targeted consultation for this initiative, some Member States pointed out 
the difficulty of using existing measures.   

The main challenge lies in the fact that BEPS relies primarily on general anti abuse rules 
to tackle shell entities, namely via the General Anti Abuse Rule (GAAR). The latter was 
introduced within the EU through the Anti-Tax Avoidance Directive (ATAD), the main 
existing  anti-tax  avoidance  tool  at  the  EU  level.  “General”  in  practice  means  that  tax 
administrations address the use of shell entities in tax schemes on a case-by-case basis. 
As  put  by  one  Member  State  in  the targeted  consultation:  “The  current  rules  in  ATAD 
with  respect  to  General  Anti  Avoidance  Rule  and  Controlled  Foreign  Company  Rule 
apply  the  notion  of  non-genuine  economic  activity,  valid  commercial  reasons  and  the 
substantive economic activity test, however, the interpretation is facts and circumstances 
dependent.”  Challenges with tackling shell entities are reported by other Member States. 
For instance, a Member State stressed how difficult it is for Member States to come up 
with  “defensive  measures”  addressing  the  problem.  Member  States  at  present  have 
limited  scope  to  implement  effective  measures  to  fight  harmful  tax  practices. 
Operationally,  tax  administrations  need  significant  time  and  resources  to  implement 
existing  measures  to  counter  the  use  of  shell  entities  for  tax  purposes. Moreover,  tax 
administrations often lack the information necessary to detect such use. 

27 https://cthi.taxjustice.net/en/cthi/data-downloads  
28 https://cthi.taxjustice.net/en/cthi/cthi-2021-results  
29  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by the Spanish Tax Agency.  

7 

 
 
 
 
 
 
 
 
                                                 
As the problems of tax avoidance and tax evasion persist, it is important that shell entities 
are  addressed  in  a  targeted,  specific  manner,  providing  tax  administrations  with  the 
information they need to prevent (preferably, rather than to react ex post) tax avoidance 
and  tax  evasion.  It  is  also  important,  to  ensure  a  level  playing  field  and  to  avoid 
distortions between Member States, that specific provisions to tackle tax avoidance and 
tax evasion  via shell entities are introduced  at  the EU level,  via common provisions so 
that, to put it simply, a shell entity is  identified and recognised as such, on the basis of 
the  same  objective  criteria.  To  avoid  distortions,  moreover,  the  same  tax  consequences 
should be applied no matter where the problem emerges within the EU.  

2.1.3 The challenge of defining shell entities 

There is currently no standard and comprehensive definition of shell entities30, which in 
itself may partly explain our limited ability to measure and understand the extent of tax 
avoidance or tax evasion by shell entities. Nevertheless, there are a number of definitions 
available both at EU and at international level that can help us identify shell entities. The 
International Bureau of Fiscal Documentation (IBFD) refers to a letterbox company that 
‘lacks  any  further  business  substance’31.  The  Guidance  paper  on  transparency  of 
beneficial ownership  prepared by the Financial  Action Task Force (FATF) lists several 
definitions  of  letterbox  companies  (shell,  front  or  shelf  companies)  and  defines  shell 
companies  as  those  companies  that  have  ’no  independent  operations,  significant  assets, 
ongoing business activities, or employees’.32 The OECD describes a letter box company 
in the following manner: ‘A paper company, shell company or money box company, i.e. 
a  company  which  has  complied  only  with  the  bare  essentials  for  organization  and 
registration  in  a  particular  country.  The  actual  commercial  activities  are  carried  out  in 
another country’33.   

2.1.3.1 Common features of risky shell entities  

Despite the lack of a universal definition, available international definitions such as those 
above,  definitions  at  national  level34  and  a  literature  review  on  shell  entities,  indicates 
that there are a number of characteristics common to shell entity definitions:  

IBFD, 

International  Tax  Glossary,  available  at:  https://www.ibfd.org/IBFD-Products/IBFD-

30 ICF Consulting Services Ltd (2021), Commission Study on Letterbox Companies 
31 
International-Tax-Glossary-7th-Edition 
32  FATF,  Concealment 
gafi.org/media/fatf/documents/reports/FATF-Egmont-Concealment-beneficial-ownership.pdf   
33 https://www.oecd.org/fr/ctp/glossaryoftaxterms.htm#L 
34 The  US Securities and Exchange Commission (SEC) defines a  shell entity as  company, other than an 
asset-backed issuer, with no or nominal operations and either: no or nominal assets, assets consisting solely 
of cash or equivalents or assets consistent of cash or equivalent and nominal assets, source: US Securities 
Act, part 203, rule 405.  

https://www.fatf-

ownership, 

beneficial 

available 

2018, 

at: 

of 

8 

 
 
 
 
 
                                                 
i) 

ii) 

iii) 

iv) 

v) 

Lack  of  substance  or  economic  activity  –  there  are  no  or  minimal  non-
financial assets, employees, production or operations; 
No physical presence beyond a ‘brass plate’, sometimes with multiple entities 
using the same postal address; 
Anonymity  –  the  identity  of  the  real  owner  behind  a  shell  entity  (‘the 
beneficial ownership’) is often concealed; 
Cross-border  element  –  use  of  complex  group  structures  typically  using 
multiple jurisdictions which can conceal beneficial ownership; 
Use  of  intermediaries  -  for  example,  trust  and  company  service  providers 
(TCSPs)  are  required  to  set  up  shell  entities  given  their  complexity  and  the 
knowledge needed to set them up. 

These  elements,  often  combined,  point  to  a  risk  of  shell  entities  being  used  for  tax 
evasion  or  avoidance.  While  most  of  these  risk  characteristics  are  common  to  both  tax 
evasion and tax avoidance, existing literature points to essential differences depending on 
whether entities are used for tax avoidance or tax evasion. For example, tax evaders may 
more often make use of anonymous shell entities35 not to pay tax.36  

Given the difficulties in  establishing a  general  definition of shell entities, this initiative 
aims to define a common set of objective criteria which, if met, would imply that there is 
sufficient substance in an entity not to be at risk to be misused for tax purpose.  

2.1.3.2 Shells of different form   

Shell entities come in many different legal forms. Both legal entities like private limited 
liability companies and foundations can be used as shell entities for tax avoidance or tax 
evasion,  as  can  legal  arrangements  like  express  trusts  or  partnerships  and  similar 
arrangements37.  The  problem  to  be  addressed  is  tax  avoidance  and  tax  evasion  though 
shell entities, irrespective of which tax (corporate income tax, personal income tax,  and 
other taxes) is avoided or evaded.  

Different  legal  forms  may  lead  to  different  tax  consequences.  From  a  tax  perspective, 
legal  entities,  such  as  companies,  established  in  a  jurisdiction  will  be  considered  as 
resident  for  taxation  purposes,  subject  to  corporate  income  tax,  and  will  normally  be 
entitled  to  tax  treaty  benefits.  This  is  different  from  a  situation  where  there  is  a  legal 
arrangement,  a  partnership,  which,  under  the  applicable  national  law,  might  not  be 
considered  as  a  tax  resident.  Instead,  it  might  be  transparent  for  tax  purposes  implying 

35  Anonymous  shell  companies  are  not  allowed  in  the  EU.  Under  company  and  anti-money  laundering 
rules, basic and beneficial ownership information should be disclosed.  
36 Panama  Papers and the  Abuse of Shell Entities,  Carl Pacini , Nicole Forbes Stowell, Corporate  Fraud 
Exposed, 
from: 
October 
https://www.emerald.com/insight/content/doi/10.1108/978-1-78973-417-120201023/full/html 
37 COM (2020) 560 Report from the  Commission to the European Parliament and the Council  assessing 
whether  Member  States  have  duly  identified  and  made  subject  to  the  obligations  of  Directive  (EU) 
2015/849 all trusts and similar legal arrangements governed under their laws 

Publication 

retrieved 

online 

2020 

date: 

9 

9 

 
 
 
 
 
                                                 
that the relevant beneficiaries should be taxable for the income of the partnership at their 
residence jurisdiction.  

2.1.3.3 How many shells?  

The  number  of  shell  entities  within  the  EU  is  unknown.  This  is  in  particular  because 
within the EU, there is no common definition of what shell entities are and consequently 
nor statistics about them.38  

Some  studies  estimate  the  number  of  shell  entities  using  proxies.  For  instance,  a  2018 
study  by  the  European  Parliament  uses  the  number  of  foreign-owned  companies  as  a 
proxy.39 In this impact assessment, the estimation of shell entities is conducted in three 
steps: first, the sectors of activity often associated with the existence of shell entities are 
identified.40 Second, the number of companies active in those sectors is estimated. Third, 
using firm-level data, a rather conservative estimation for the number of shell companies 
in the EU could be some 29 000 entities. An upper-bound estimate, based on Irish data, 
arrives at a number of max 75 000 shell companies in the EU.41 This is also the closest 
estimation possible to the overall number of entities (including companies) that would be 
targeted  by  the  regulatory  options  considered  in  this  impact  assessment.  The  estimate 
suggests  that  shell  companies  are  relatively  few.  Put  in  perspective,  the  upper  bound 
estimate of 75 000 companies amounts to only circa 0.5 per cent of the overall number of 
corporate  income  taxpayers42  and  about  0.3  per  cent  of  the  overall  number  of  active 
enterprises within the EU.43   

2.1.4 Tax avoidance and tax evasion via the use of shell entities 

Shell entities can be used for both tax avoidance and tax evasion purposes. This is why 
the intervention intends to tackle both tax avoidance and tax evasion through the use of 
shell entities. An example of tax avoidance via shell entities would be the use by a large 

38 Even where definitions exist, as in the US, no official statistics are available on shell entities.  The US 
Securities and Exchange Commission defines shell company as a registrant with no or nominal operations 
and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting 
of any amount of cash and cash equivalents and nominal other assets. Source: SEC website. 
39  In  2016,  circa  200  000  companies  within  EU-27  were  foreign-owned.  Source:  European  Parliament, 
2018, “An overview of shell companies in the European Union”, p. 15.  
40  On  the  basis  of  the  Statistical  Classification  of  Economic  Activities  in  the  European  Community 
(NACE).  
41 Please refer to Annex 4(B) “Methods for estimates - Estimation of companies in scope of the initiative” 
for  more  details.  Only  shell  companies  and  trusts  are  considered  here,  not  other  forms  of  potential  shell 
entities, for example  partnerships.   
42 OECD Tax Administrations 2021 report, table A.20.  
43  In  2018,  the  EU’s  business  economy  was  made  up  of  almost  25.3  million  active  enterprises,  source: 
Eurostat, business demography statistics.  
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Business_demography_statistics  

10 

 
 
 
 
 
                                                 
multinational of a holding company to transfer money within its corporate group through 
payments which are not in line with economic reality. As a result, the company ends up 
paying  substantially less tax than other companies.  Several  examples could  be made of 
tax evasion  via shell  entities.  For instance, it  could  be the case of a  wealthy individual 
evading  wealth  tax  by  concealing  the  ownership  of  a  yacht  by  interposing  a  shell 
entity. A  concrete  example:  an  Italian  businessman  using  a  Maltese  shell  company  to 
evade direct taxes on his employees.44  

Distinguishing between legal and illegal aspects as well as what is fair and unfair is not 
always  straightforward.  Generally, tax evasion  is always illegal,  while tax avoidance is 
generally  legal  but  in  some  cases  it  may  not  be  so.  The  European  Commission  has 
however  on  several  occasions  explicitly  pointed  out  that  both  tax  evasion  and  tax 
avoidance  are  unfair.  Recently,  for  instance,  Commission  President  von  der  Leyen 
stated:45 “(…) social fairness is (…) also a question of fair taxation. In our social market 
economy, it is good for companies to make profits. And they make profits thanks to the 
quality of our infrastructure, social security and education systems. So the very least we 
can expect is that they pay their fair share. This is why we will continue to crack down on 
tax  avoidance  and  evasion.”  This  statement  seems  to  suggest  that  the  European 
Commission considers both tax avoidance and tax evasion unfair.  

The challenge of defining tax avoidance  

The  conceptual  (as  well  as  legal  and  administrative)  boundary  between  illegal  tax 
evasion and legal tax avoidance, or tax planning, is robust and well known. However, the 
divide  within  the  concept  of  avoidance  between  what  amounts  to  'aggressive'  or 
'unacceptable'  avoidance  and  what  can  still  be  considered  acceptable  'planning'  is  a 
source of on-going disputes between governments and taxpayers. Ongoing and past law 
cases  provide  clear  evidence  of  the  challenges  of  distinguishing  different  forms  of  tax 
avoidance. For instance, in the case concerning the selective tax advantage in favour of a 
Luxembourg subsidiary of the Amazon group, the European Commission’s view differs 
from  that  of  the  other  parties.  In  May  2021,  the  General  Court  of  the  European  Union 
concluded that no selective advantage was given.46 However, the European Commission 
is considering possible next steps and the case does not seem settled yet.47  

44 This case is reported in this press release of 24 March 2021 by the Italian tax administration (Guardia di 
https://www.gdf.gov.it/stampa/ultime-notizie/anno-2021/marzo/maxi-frode-fiscale-
Finanza): 
internazionale-4-arresti-e-sequestri-per-10-milioni-di-euro  
45 Commission President von der Leyen 2021 State of the Union address, 15 September 2021. 
46  General  Court  of  the  European  Union  PRESS  RELEASE  No  79/21  Luxembourg,  12  May  2021 
https://curia.europa.eu/jcms/upload/docs/application/pdf/2021-05/cp210079en.pdf  
47  Statement  by  Executive  Vice-President  Margrethe  Vestager  following  today's  Court  judgments  on  the 
Amazon and Engie tax State aid cases in Luxembourg, 12 May 2021:  
https://ec.europa.eu/commission/presscorner/detail/en/statement_21_2468  

11 

 
 
 
 
 
 
 
                                                 
Part of the difficulty is inherent in the challenge of defining tax avoidance to begin with. 
The  term  is  generally  used  to  describe  the  arrangement  of  a  taxpayer's  affairs  that  is 
intended to reduce his tax liability in such a way that, although the arrangement could be 
strictly  legal,  it  is  usually  in  contradiction  with  the  intent  of  the  law  it  purports  to 
follow.48  

Furthermore,  the  definition  of  tax  avoidance  is  dynamic.  The  understanding  of  what 
amounts to unacceptable tax avoidance evolves over time. A major development in that 
respect  has  been  the  OECD  Base  Erosion  and  Profit  Shifting  (BEPS)  project,  probably 
the most fundamental international tax reform of the 2010s. The project has been referred 
to  as  “International  collaboration  to  end  tax  avoidance”.49  The  fact  that  more  than  130 
countries have subscribed to the delivery and implementation of this project shows that 
there  exists  a  widespread  consensus  that  tax  avoidance  is  increasingly  becoming 
unacceptable.  The  internal  division,  within  tax  avoidance,  between  what  constitutes 
acceptable vs. unacceptable tax avoidance is shifting, limiting more and more the scope 
for acceptable ‘tax planning’.50 

2.1.4.1 Tax avoidance by shell entities 

Although  there  is  no  precise  definition  of  tax  avoidance,  tax  practitioners  and  policy 
makers use it to describe the arrangement of a taxpayer's affairs that is intended to reduce 
their tax liability. In their input to the public consultation on this initiative, IBFD defined 
tax avoidance as “(…) actions or omissions of a taxpayer that are aimed at  obtaining a 
tax  advantage  by  exploiting  the  friction  between  the  form  (which  is  chosen  from  those 
that  do  not  trigger  the  liability  to  tax)  and  the  substance,  which  is  akin  to  events  that 
would  otherwise  trigger  the  liability  to  tax”.51  In  other  words,  although  tax  avoidance 
could  be strictly  speaking  legal,  it is  usually in  contradiction  with  the intent  of the law 
that it is meant to follow.  

Tax  avoidance  includes  treaty  shopping.  The  latter  consists  of  arrangements  through 
which a person who is not a resident of one of the two States that concluded a tax treaty 

48 Definition derived from the OECD Glossary of Tax Terms.  
49 Refer to the OECD BEPS website: https://www.oecd.org/tax/beps/  
50  A  recent  motion  for  a  European  Parliament  resolution,  for  instance,  makes  clear  the  increasingly 
unacceptable nature of tax avoidance: “The European Parliament reiterates the importance of multilateral 
action  and  international  coordination  in  the  fight  against  tax  evasion,  tax  avoidance  and  aggressive  tax 
planning”.  The  “fight”  is  against  both  tax  evasion  and  tax  avoidance,  without  any  distinction  between 
acceptable or unacceptable forms of the latter. Source: European Parliament resolution of 20 October 2021 
on the Pandora Papers, paragraph 17.  
51  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by IBFD, p. 10 

12 

 
 
 
 
 
 
 
 
                                                 
may  attempt  to  obtain  benefits  that  the  treaty  grants  to  residents  of  these  States.  Other 
forms  of  tax  avoidance  involves  exploiting  differences  in  national  laws  of  different 
jurisdictions.  

As  put  by  IBFD  in  their  input  to  the  public  consultation  for  this  initiative,  “(…)  tax 
avoidance is typically arduous to estimate and quantify”.52 Focussing on the problem at 
stake,  there  are  no  robust,  reliable  estimates  of  tax  avoidance  caused  by  shell  entities. 
Yet, raw estimates may provide an indication of the size of the problem. For instance, in 
the  case  of  the  US,  it  has  been  estimated  that  tax  avoidance  facilitated  by  Delaware 
companies, cost other US States USD 9.5 billion per year.53 Other estimates of corporate 
tax avoidance54 size the problem  in  the order of tens of billions of dollars in tax losses 
annually for large economies such as the US or the EU.  

Businesses that operate cross-border can exploit the different tax rules that apply across 
the  EU  to  set  up  structures  with  the  ultimate  aim  of  minimising  taxation.  They  take 
advantage  of  the  current  European  legal  framework,  which  facilitates  the  flow  of 
dividend,  interest  and  royalty  payments  within  the  EU  with  a  view  to  avoiding  double 
taxation,  while  rules  on  applicable  taxes,  rates  and  the  fight  against  artificial  tax 
structures remain mainly the responsibility of national authorities.  

In particular,  the Directive on the common system  of taxation applicable in  the case of 
parent  companies  and  subsidiaries  of  different  Member  States,  known  as  the  Parent 
Subsidiary  Directive  (PSD),  abolished  withholding  taxes  on  payments  of  dividends 
between associated companies of different Member States, thereby preventing economic 
double taxation. Similarly, the Directive on a common system of taxation for interest and 
royalty  payments  between  associated  companies  of  different  Member  States,  known  as 
the Interest and Royalty Directive (IRD), has eliminated withholding tax obstacles in the 
area  of  cross-border  interest  and  royalty  payments  within  a  group  of  companies.  
Removal  of  tax  obstacles  as  above  can  however  be  manipulated  to  give  rise  to  tax 
avoidance in the cross-border context. 

A  similar  case  concerns  the  abuse  of  double  tax  treaties,  commonly  known  as  “treaty 
shopping”. For example, when a group wishes to make a payment between two countries 
that  have  no  tax  treaty  between  them,  this  payment  should  be  subject  to  the  domestic 
taxation  of  both  countries.    However,  there  may  be  a  third  country,  irrelevant  to  the 
transaction,  which  has  an  “attractive”  tax  treaty  network,  i.e.  it  has  double  tax  treaties 
with  both  countries  concerned.  By  routing  the  payment  through  such  third  country, 

52 Ibid.  
53 Income received from intangible assets located in other US States are not taxed in Delaware: Abuse of 
Delaware  Incorporation  Rules    https://jhulr.org/2018/10/15/the-siphon-state-the-9-5-billion-reason-why-
corporations-love-delaware/  
54  SOMO,  Centre  for  Research  on  Multinational  Corporations,  Keep  watching:  The  tax  avoidance 
structures of Viacom CBS, June 2021. 

13 

 
 
 
 
 
                                                 
potentially  using  a  shell  entity  there,  the  payment  could  benefit  from  relevant  treaty 
benefits, including for example no or lower withholding tax rates.  

Another  mechanism  to  avoid  taxation  via  the  use  of  shell  entities  involves  establishing 
entities  in  Member  States  with  a  favourable  regime  of  outbound  (out  of  the  EU) 
withholding  taxation  of  dividend,  interest  and  royalties.  As  put  by  IBFD  in  their 
submission  for  the  public  consultation  for  this  initiative:55  “(…)  third-country  based 
MNEs  take  advantage  of  the  interplay  between  the  Parent-Subsidiary  and  Interest-
Royalty directives (PSD and IRD) and the domestic laws of several EU Member States. 
The ultimate result is a withholding tax-free repatriation of profits from any EU Member 
State  to  a  third  country  simply  by  relying  on  the  withholding  tax  exemption  of  the 
directives  (from  the  Member  State  of  origin  to  the  Member  State  of  the  interposed 
intermediary)  and  the  subsequent  lack  of  withholding  tax  in  the  domestic  laws  of  a 
handful  of  Member  States  (from  the  Member  State  of  the  interposed  company  to  the 
desired third-country, regardless of the existence of a tax treaty with that jurisdiction).”  

Furthermore  national  tax  systems  can  also  grant  exemptions  to  income  received  by 
resident  entities  from  abroad,  for  example  dividend  income,  irrespective  of  whether 
withholding  taxes  are  levied  on  the  payment  of  the  dividend  or  whether  the  state  of 
residence of the payee group company has a tax treaty with the state of residence of the 
shell entity.  

While  there  have  been  a  number  of  initiatives  at  international  level  to  tackle  tax 
avoidance, including by shell entities, for example, the OECD BEPS project and at EU 
level, through ATAD, none of these is targeted specifically to shell entities. In addition 
none provides objective criteria with which to assess lack of substance at the time when 
the tax benefit is requested.56 

2.1.4.2 Tax evasion by shell entities 

Tax  evasion  may  be  characterised  as  intentional  illegal  behaviour  or  as  behaviour 
involving a direct violation of tax law in order to escape the payment of taxes57. The use 
of shell entities for illegal activities such as tax evasion purposes has been the subject of 
much  research  in  recent  years.  As  pointed  out  by  one  respondent  to  the  public 
consultation for this initiative: “There is indeed evidence that shell companies might be 

55  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by IBFD, quote from p. 37.  
56 Further information on the necessity of EU action to tackle the problem is provided in section 3 as well 
as in Annex 9.  
57 IBFD glossary 

14 

 
 
 
 
 
                                                 
used  in  the  context  of  criminal  activity  to  conceal  funds,  and  move  assets  without 
authorities being able to identify those asset movements.”58  

In such scenarios, shell entities are often established in jurisdictions (i) with tax systems 
that  have  zero  or  next  to  zero  tax  at  the  level  of  the  entity;  (ii)  that  exempt  from  tax 
income received from abroad; and/or (iii) have no withholding taxes on distributions of 
income made from the entity.  

Due to the criminal nature of tax evasion, estimates on direct tax evasion caused by shell 
entities are not widely available. However, a number of leaked data in recent  years has 
pointed  to  the  scale  of  the  problem.  For  example,  following  revelations  of  the  Panama 
Papers  in  201659,  tax  authorities  have  recovered  more  than  USD 1.3  billion.  The  leak 
concerned  more  than  214  000  shell  companies  created  by  specific  law  firms,  among 
others, for tax evasion purposes.  

Tax  evasion  is  often  associated  with  money  laundering.  The  EU  has  now  in  place  a 
strong  framework  against  money  laundering  and  terrorism  financing.  It  includes  the 
establishment of EU beneficial ownership registers to enhance transparency of beneficial 
ownership information  in the EU. The 5th  AML Directive  extended the requirement of 
beneficial  ownership  registration  to  trusts  and  similar  legal  arrangements  and  granted 
access by the public to a certain amount of information relating to beneficial ownership 
of legal entities. More recently,60 the Commission adopted a new AML/CFT legislative 
package  to  strengthen  the  EU’s  AML/CFT  rules  as  part  of  the  Commission’s 
commitment  to  protect  EU  citizens  and  the  EU’s  financial  system  from  money 
laundering  and  terrorist  financing.  It  includes  four  legislative  proposals  consisting  of  a 
regulation  establishing  a  new  EU  AML/CFT  Authority,  a  Regulation  on  AML/CFT 
containing  directly-applicable  rules,  a  sixth  AML/CFT  Directive  replacing  the  existing 
Directive 2015/849/EU, and a revision of the 2015 Regulation on Transfers of Funds.  

Despite having a strong AML framework in place, essentially preventing the existence of 
anonymous shell entities in the EU and reducing the risk of tax evasion, the issue of non-
compliance with tax laws cannot be solved by AML rules alone.  

2.2 What are the problem drivers? 

58  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by Confédération Fiscale Européenne / Tax Advisers Europe (CFE), 
referring to a World Bank study: "Stolen Asset Recovery (StAR) Initiative: Challenges, Opportunities and 
Action Plan."  
59 Panama Papers and the abuse of shell entities – Carl Pacini and Nicole Forbes Stowell 
60 On 20 July 2021, the European Commission presented an ambitious package of legislative proposals to 
strengthen  the  EU’s  anti-money  laundering  and  countering  the  financing  of  terrorism  (AML/CFT)  rules. 
More 
information  at:  https://ec.europa.eu/info/publications/210720-anti-money-laundering-countering-
financing-terrorism_en  

15 

 
 
 
 
 
                                                 
As indicated in Figure 2, there are three key drivers behind the problem,  i.e. the use of 
shell entities by individuals or organisations to avoid or evade tax. The first driver is the 
lack  of  a  common  definition  of  substantial  economic  presence  for  tax  purposes.  The 
second driver is that tax administrations within the EU do not have sufficient information 
to prevent, detect or stop tax avoidance or tax evasion through the use of shell entities. 
Advertising and promoting the use of shell entities for tax avoidance or even tax evasion 
is the third driver considered. Each of these three drivers is described below.   

Figure 2 Problem Tree 

2.2.1  Lack  of  EU  rules  defining  common  minimum  substance  requirements 

for tax purposes in the EU.  

Substance  criteria  do  exist  at  EU  level  in  various  contexts.  Regarding  taxation,  the  EU 
Code of Conduct for business taxation has used substance requirements when assessing 
preferential tax regimes in the EU. However, these requirements are non-legally binding 
and are limited in the context of specific regimes.  In the context of the EU list of non-
cooperative  jurisdictions  for  tax  purposes,  substance  requirements  in  line  with  the 
international standards established in the context of the BEPS project, need to be met in 
relation  to  preferential  tax  regimes  adopted  by  third  countries.  Substance  requirements 
also  apply  beyond  specific  regimes,  in  the  context  of  national  tax  systems  of  third 
countries which have no or only very low corporate tax.  

It follows that currently there are no legal requirements at EU level asking for common 
minimum substance requirements for tax purposes.  

16 

 
 
 
 
 
 
Figure 3 Absence of EU rules on substance requirements for corporate tax purposes is one of the drivers of the 
problem 

Moreover,  with  some  exceptions,  most  Member States  do  not  have  domestic  substance 
criteria to prevent abuse.61 While the tax treaties may include provisions like substance 
criteria  and  beneficial  ownership  rules  to  prevent  abuse,  these  differ  across  Member 
States and may well differ in the double taxation treaties concluded by a single Member 
State with other countries.  

As regards anti-tax avoidance rules, while common EU rules have been introduced, e.g. 
by  virtue  of  ATAD,  enforcement  at  domestic  level  may  vary.  For  example,  national 
courts may differ in the application of the EU and national anti-abuse rules to prevent a 
shell entity being used for tax avoidance or tax evasion. Sanctions may also differ among 
Member States. Differences can then be exploited by economic agents, resulting in shell 
entities  used  for  tax  avoidance  or  tax  evasion  purposes  being  set  up  in  Member  States 
with  a  more  favourable  tax  framework.  This  context  may  also  translate  in  weaker, 
fragmented and uncoordinated measures to combat tax avoidance or tax evasion by shell 
entities in the Single Market. 

2.2.2 Lack of information to effectively apply existing rules  

Member States also lack readily available information to levy taxes correctly in a cross-
border context.  

Even  when  Member  States  have  in  place  anti-abuse  rules62,  tax  authorities  do  not 
necessarily have the necessary information to make effective use of such rules for cross-
border  transactions.  This  can  be  explained  via  a  hypothetical  example.  A  subsidiary 

61 More information on national measures is provided in Annex 5.  
62  Namely:  anti-tax  avoidance  provisions  included  in  the  Parent-Subsidiary  Directive,  the  Anti-Tax 
Avoidance  Directive  (ATAD)  directives  provisions  concerning  exit  taxation  rules,  controlled  foreign 
company rules, provisions against  hybrid  mismatches and the General  Anti-Avoidance Rule (GAAR); as 
well as Principal Purpose Test (PPT) provisions linked with the application of bilateral tax treaties.  

17 

 
 
 
 
 
 
 
                                                 
company  established  in  Member  State  A  pays  a  dividend  to  its  parent  company  in 
Member  State  B.  This  dividend  is  paid  “tax  free”,  on  the  basis  of  the  EU  Parent-
Subsidiary directive that exempts intra-company dividends from tax within the European 
Union. For the sake of this example, let us consider that the parent company in Member 
State  B  is  a  shell  company.  The  general-anti  abuse  rule  introduced  by  the  EU  anti-tax 
avoidance directive clearly says that: “(…) Member State shall ignore an arrangement or 
a series of arrangements which, having been put into place for the main purpose or one of 
the main purposes of obtaining a tax advantage that defeats the object or purpose of the 
applicable tax law, are not genuine having regard to all relevant facts and circumstances.” 
Even assuming the shell company getting the dividend was “not genuine”, Member State 
A has limited information to check that is indeed the case. As put by IBFD in their input 
for  the  public  consultation  for  this  initiative,  the  main  problem  is  that  where  the 
information  is  available  (residence  country  i.e.  Member  State  B  in  the  example)  and 
where the information is needed  (source country  i.e., Member State A in  the example), 
are two different countries.63  

As  a  result  of  complex  cross-border  arrangements/contexts,  tax  authorities  lack  readily 
available  information  to  assess  substance  or  whether  an  arrangement  is  genuine  or  not. 
They  cannot  prevent  tax  avoidance  and  tax  evasion  in  a  timely  manner  but  can  only 
attempt to recover part of the tax losses ex-post, following an audit for example, and with 
difficulties  -  as  obtaining  the  information  necessary  to  implement  existing  anti-abuse 
provisions is costly.  

Lack  of  information  makes  the  implementation  of  existing  anti-abuse  rules  particularly 
challenging or indeed insufficient to address the problem described here. As put by IBFD 
in their contribution to the public consultation for this initiative: “(…) both the incentive 
for treaty and jurisdiction shopping and the consequences, should an abusive structure be 
discovered, suggest that traditional anti-avoidance measures do not suffice.”64  

It is also relevant to stress that under existing rules, even where information is obtained, 
it  is  corrective,  rather  than  preventive,  measures  that  apply:  once  tax  avoidance  or  tax 
evasion  is  discovered,  mainly  through  a  tax  audit,  tax  administrations  can  intervene  to 
redress it.  

2.2.3 Promotion of shell entities by certain intermediaries  

Some  intermediaries  seem  to  play  a  catalyst  role  in  the  establishment  and  use  of  shell 
entities.  They  provide  corporate  administration  and  management  services  which  are 
necessary to establish and operate shell entities in the EU. Shell entities can avail of the 

63  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by IBFD, p. 48  
64  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by IBFD, p. 38 

18 

 
 
 
 
 
                                                 
administrative support from such intermediaries, such as postal address, which allows the 
entity to have a minimum physical presence in the Member State to be deemed existing 
there.  The  use  of  intermediaries  to  set  up  such  shell  entity  schemes  have  been  cited  in 
various leaks like the Panama Papers, and at international level through the FATF and the 
OECD65. At EU level, Directive 2018/822/EU (’DAC6’) requires that intermediaries like 
trust  and  company  service  providers,  to  report  cross-border  tax  arrangements  to  their 
national tax authorities. 

65 OECD publication: Ending the Shell Game – ‘Cracking down on the Professionals who enable Tax and 
White Collar Crimes’  

19 

 
 
 
 
 
 
                                                 
Different stakeholders’ views on the problem  

The public consultation survey included several questions to gain a better understanding 
of  the  problem.66  Respondents’  views  are  mixed  when  it  comes  to  possible  remaining 
causes  of  tax  avoidance.  The  most  relevant  cause  cited  by  all  respondents  was 
‘insufficient  capacity  of  tax  administration  to  process  the  available  information  on  tax 
avoidance  structures’,  followed  by  ‘insufficient  cooperation  between  EU  Member 
States’.  The  least  relevant  cause  appears  to  be  insufficient  information  of  tax 
administration on potential tax avoidance structures.  

Respondents were asked whether they agree or not with a series of problem statements. 
The statement with which most respondents agreed is that current EU rules in the field of 
taxation  already  provide  tools  to  tackle  aggressive  tax  planning  schemes  including 
through the use of shell entities.  Understandably, the most “opposed” statement on the 
other hand is that current EU rules cannot fully and effectively address the use of shell 
entities for tax avoidance purposes.  

It is relevant to consider, however, whether and how stakeholders belonging to different 
categories perceive the problem differently.67 Views vary significantly between business 
associations  and  companies  (business  stakeholders)  on  the  one  hand  and  civil  society 
(NGOs and trade union) stakeholders on the other hand. While almost 50% of business 
stakeholders  disagree  with  the  view  that  shell  entities  are  used  in  the  EU  mostly  for 
abusive tax purposes, 66% of NGOs and trade unions agree. Almost all (95%) business 
stakeholders are of the view that current EU rules in the field of taxation already provide 
tools  to  tackle  aggressive  tax  planning  schemes  including  through  the  use  of  shell 
entities. A similar view  is  held  by one third of  civil  society stakeholders, while half of 
this  category  of  respondents  disagree.  90%  of  business  stakeholders  do  not  agree  that 
current  EU  rules  cannot  fully  and  effectively  address  the  use  of  shell  entities  for  tax 
avoidance purposes, while all civil society respondents agree.  

66  Further  information  on  the  public  consultation  is  presented  in  Annex  II.  The  results  of  the  public 
consultation  are  available  online  at:  https://circabc.europa.eu/ui/group/6868da3c-d21c-4ce4-98d9-
d5448986e44e  
67  Results  based  on  the  analysis  per  category  of  stakeholders  of  replies  given  to  public  consultation 
question  3.5:  “Please  indicate  the  extent  to  which  you  agree  or  disagree  with  the  following  statements: 
Shell entities are used in the EU mostly for abusive tax purposes; Current EU rules in the field of taxation 
already provide tools to tackle aggressive tax planning schemes including through the use of shell entities; 
Current EU rules cannot fully and effectively address the use of shell entities for tax avoidance purposes.” 

20 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
2.3 How will the problem evolve? 

In the absence of a public intervention, it is expected that tax avoidance and tax evasion 
through shell entities will persist. If both the European Union and its Member States do 
not act to tackle the problem, it is most likely that it will not be solved. The use of shell 
entities  for  tax  abusive  purposes  will  continue  to  lead  to  a  loss  of  tax  revenues  for  the 
national treasuries, negatively impacting on the provision of public services and creating 
an unlevelled playing field for companies and differences in the treatment of individuals.  

A few Member States, for example the Netherlands and Italy,68 have acted to ensure that 
legal entities and legal arrangements without substance are precluded from tax benefits69. 
However,  as  a  key  characteristic  of  the  problem  is  its  cross-border  nature,  unilateral, 
uncoordinated measures  are unlikely to  be effective solution  to  the problem  considered 
here.  Without  EU  action  tax  avoidance  may  be  expected  to  continue  to  impact  EU 
Member States. Individual and uncoordinated action may also lead to the costs of doing 
business  cross-border  going  up.  If  Member  States  were  to  act  individually  establishing 
their  own  criteria,  for  a  hypothetical,  real  “pan-European”  group  operating  across  all 
Member States, the costs of compliance with 27 diverse substance requirements would be 
higher than having to face one single rulebook. In the latter case, the group would be able 
to standardise some of its compliance activities and benefit from economies of scale. A 
patchwork  of  national  interventions  to  tackle  the  problem  may  inadvertently  increase, 
rather than reduce, distortions in the Single Market. This scenario would be a “lose-lose” 
evolution, where both public authorities and businesses would be worse off.  

If economic agents are seen to react to incentives including regulatory settings, then one 
should not expect a change in their behaviour (i.e. increased tax compliance) if the ‘rules 
of the game’ and the existing tax-related incentives remain the same.  

In  sum,  without  public  EU  intervention,  tax  avoidance  and  tax  evasion  linked  to  shell 
entities  could  be  expected  to  continue,  as  economic  agents  typically  want  to  maximise 
their income. In a scenario of uncoordinated national measures to neutralise the misuse of 
shell entities for tax purposes, it is likely the problem will persist and worsen. 

68 For Italy, reference is made here to provisions concerning società di comodo based on law 23 December 
1994, n.  724, article 30.  
69 Please see Annex to have a complete overview of the measures enacted by Member States in this area. 

21 

 
 
 
 
 
 
 
                                                 
3.  WHY SHOULD THE EU ACT? 

3.1 Legal basis 

Article 115 of the Treaty on the Functioning of the European Union (TFEU) serves as the 
legal  basis  for  the  regulatory  option  of  this  initiative.  Article  115  aims  at  ensuring  the 
proper functioning of the internal market.  

3.2 Subsidiarity: Necessity for EU action 

The  use  of  legal  entities  and  arrangements  without  substance  for  tax  avoidance  or  tax 
evasion purposes is usually not limited to the territory of only one Member State. Instead, 
it  is  a  key  feature  of  such  schemes  that  they  involve  the  tax  systems  of  more  than  one 
Member  State  at  a  time.  Some  schemes  involve  a  legal  entity  or  arrangement  being 
established in one Member State, where it has no premises and resources to perform an 
economic activity, to receive profits generated by a related entity in other Member States 
or even a third country. Several Member States could therefore be impacted by a scheme 
that  would  include  the  use  of  shell  entities.  In  other  words,  the  problem  has  a  cross-
border dimension.  In addition,  the problem  has the same drivers and underlying  causes 
no matter in which Member State it appears. 

The  review  of  Member  States  anti-tax  avoidance  rules70  indicates  that  some  Member 
States  have  developed  targeted  rules  or  practices,  including  criteria  on  substance,  to 
counter abuse by shell entities in the area of taxation. However, most Member States do 
not apply targeted rules, but may rely on general anti-abuse rules, which Member States 
tend  to  apply  on  a  case-by-case  basis.  Even  amongst  the  few  Member  States  that  have 
developed targeted rules at national level, the rules differ significantly, and reflect more 
national  tax  systems  and  priorities,  rather  than  target  the  Internal  Market  dimension.  It 
follows that the majority of existing rules does not address the case where the existence 
of  a  shell  entity  affects  a  Member  State  other  than  the  one  where  the  shell  entity  or 
arrangement is located. Such differences could lead to tax and regulatory arbitrage.  

The above findings have been confirmed in the context of the public consultation on the 
basis  of  the  materials  provided  by  the  contributors.  In  particular,  IBFD  provided  data 
ascertaining  that  “a  comparative  desktop  review  of  the  domestic  rules  of  EU  Member 
States shows that domestic rules targeting specifically  shell arrangements are relatively 
uncommon”.71 

70 Information on Member States’ practices is provided in Annex.  
71  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by IBFD.  

22 

 
 
 
 
 
  
                                                 
Recent EU actions could be considered relevant to curbing the problem of shell entities 
and arrangements. These include the DAC and the ATAD, already cited above. However, 
there are some limitations in their use to tackle tax abuse by shell entities. 

At EU level there are currently no legislative measures defining substance of an entity or 
arrangement  for  tax  purposes.  The  Court  of  Justice  of  the  European  Union  has 
established  general  principles  regarding  substance  requirements  for  tax  purposes  in  the 
context  of  the  prevention  of  tax  avoidance.  In  addition,  the  Code  of  Conduct  Group 
(Business  Taxation)  has  developed  substance  requirements,  of  a  soft  law  nature,  in  the 
context of specific preferential tax regimes. However both case-law and current Code of 
Conduct practices cannot be used as self-standing provisions of general application. They 
are rather of limited scope, either by the circumstances of the specific case in dispute (for 
jurisprudence), or in the context of specific regimes (for the Code of Conduct review).  

Importantly, existing instruments do not ensure timely identification of the cases of lack 
of  substance  and  prompt  communication  of  the  information  to  all  Member  States  that 
may be affected.72 The persistence of the problem, described in the previous  section, is 
reflected in the Open Lux investigation (see Annex 7).  

In  light  of  the  above,  specific  EU  level  action  appears  a  necessary  course  of  action 
against shell entities. This is especially because a patchwork of individual actions, if at 
all, at national level could render some Member States vulnerable to regulatory and tax 
arbitrage  especially  if  national  action  translates  in  some  not  imposing  substance 
requirements or imposing more beneficial requirements. Importantly, as shell entities are 
commonly used to  erode the tax base of a Member State, different  from that where the 
shell  entity  is  located,  Member  States  might  not  have  sufficient  incentive  to  introduce 
robust rules at national level. 

3.3 Subsidiarity and Proportionality: Added value of EU action 

The  current  initiative  does  not  seek  to  replace  existing  measures  aimed  at  tackling  tax 
avoidance and tax evasion through shell entities. Rather the initiative aims to reinforce, 
and complement existing measures  by providing  objective substance criteria to  identify 
shell entities that may be used for tax avoidance and evasion with the aim to prevent such 
abuse in a timely manner. 

The  necessity  to  act  in  response  to  the  problem  and  its  drivers  and  the  multi-country 
nature of the problem suggests that it would be preferable to establish a common set of 
rules  across  EU  Member  States  that  would  ensure  consistency  on  the  definition  of 
substance requirements for tax purposes as well as on the countermeasures to be applied. 
It  will  allow  Member  States  to  assist  each  other  in  identifying  harmful  schemes 
regardless of a) where they are located in the EU and b) which Member State’s tax base 

72  In  Annex,  additional  information  is  provided  on  why  existing  provisions  are  insufficient  to  tackle  the 
problem. Please refer to Annex 9 - Additional Information on the Necessity of EU Action.  

23 

 
 
 
 
 
                                                 
these  schemes  put  under  threat.  EU  level  intervention  would  also  minimise  the  risk  of 
unfair tax competition amongst legal entities and legal arrangements in different Member 
States,  potentially  generated  by  unilateral  definition  and  implementation  of  substance 
requirements.  A  common  approach  would  ensure  consistency  of  treatment  of  shell 
entities  in  the  EU,  irrespective  of  their  location  or  residence  or  establishment  and  thus 
avoid tax arbitrage. Without such a common approach to the denial of tax benefits, the 
issue of profit shifting would not be addressed.  

Due to the transnational nature of the problem, EU regulation would provide a common 
instrument  for  the  exchange  of  information  and  ensure  that  the  information  timely 
reaches  all  concerned  Member  States.  Given  its  extensive  practical  experience  in 
operating the DAC, the EU is in a better position than any Member State individually to 
ensure the effectiveness and completeness of the system for exchanging information. In 
the  evaluation  of  the  DAC73,  tax  authorities  have  indicated  that  the  common  exchange 
modalities,  infrastructure  and  schemas  have  led  to  stronger  and  more  effective 
cooperation. In this regard, better cooperation also been the outcome of using EU funds 
(disbursed under the Fiscalis programme), which generated economies of scale and lower 
transaction costs for tax administrations.  

The  preferred  option  has  to  respect  the  principle  of  proportionality,  i.e.  achieving  the 
objectives yet minimising negative consequences for business.  

The  importance  of  ensuring  in  particular  the  proportionality  of  the  initiative  has  been 
extensively stressed by business stakeholders.74 When replying to the public consultation, 
for instance, the Malta Business Bureau expressed its disagreement with the need for EU 
coordination  on  defining  what  a  shell  entity  for  tax  purposes  is  and  how  it  should  be 
treated in terms of taxation. This business association stressed that: “Coordination at EU 
level  must  strictly  be  based  on  the  principles  of  subsidiarity  and  proportionality”.  The 
intervention “must comply with a principle of proportionality regarding the objective of 
fraud  repression”,  according  to  the  French  Association  of  Large  Companies  (AFEP). 
Similar, explicit concerns on the proportionality of the initiative were also raised by the 
Cyprus  International  Businesses  Association  (CIBA),  the  American  Chamber  of 
Commerce in  Belgium, the  Institute of Certified  Public Accountants of Cyprus  and the 
Movement of the Enterprises of France (MEDEF).  

To  ensure  proportionality  and  answer  to  concerns  raised  by  business  stakeholders,  the 
intervention is  meant to  keep  compliance costs to a minimum. Business  would need to 
adhere  to  a  single  set  of,  rather  than  different,  national  rules  in  the  EU.  This  would 
enhance predictability, provide legal certainty and ensure a common EU defence against 
tax avoidance via the misuse of shell entities for tax purposes. For a group active across 

73 SWD (2019) 327 Final 
74  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", input by various business associations.  

24 

 
 
 
 
 
                                                 
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.  All  affected  entities  would  face  the  same  minimum  requirements  for 
substance, which would promote a level playing field and fair competition. In this way, 
the integrity and functioning of the internal market are likely to be improved.  

25 

 
 
 
 
 
 
 
4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

4.1 General objectives 

The  general  objective  of  the  initiative  is  to  tackle  tax  avoidance  and  evasion  via  shell 
entities and in doing so contribute to the proper functioning of the internal market and to 
fair and effective taxation. The initiative would reduce the tax revenue loss caused by tax 
avoidance and tax evasion through the use of shell entities. When a shell entity has been 
identified  in  a  Member  State,  all  other  Member  States  will  be  informed  about  its 
existence  and  can  therefore  take  necessary  action  by  denying  tax  benefits  to  the  shell 
entity  including  cross-border  transactions.  A  tax  framework  for  businesses  based  on 
investment  and 
fairness,  efficiency  and  effectiveness  can  support  productive 
entrepreneurship, while ensuring inclusive and sustainable social protection systems.  

The initiative will allow Member States to  describe and even quantify the extent of the 
problem of shell entity abuse in a more accurate and comprehensive way with the use of 
data  to  be  submitted  by  Member  States  under  the  proposal.  Ultimately  the  initiative 
should also further disincentive the creation of shell entities in the EU. 

This general objective is rooted in the EU Treaties, fits within the political guidelines of 
Presidents’  von  der  Leyen,  the  mission  letter  of  Commissioner  Gentiloni  and  is  in  line 
with several calls for actions made by the European Parliament.  

4.2 Specific objectives 

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  high  risk  of  tax  abuse.  Such  rules  would  define  objective  substance 
requirements  and  would  ensure  that  shell  entities  used  for  tax  abuse  can  be  identified 
promptly.  However, substance requirements  alone  are not  enough  to  prevent  tax abuse. 
To be  effective, the initiative  will  set  clear, pre-determined,  common tax consequences 
throughout the EU in order to prevent tax losses and also to prevent tax and  regulatory 
arbitrage in the EU. 

Second,  Member  States  need  to  know  about  the  existence  of  shell  entities  being 
identified  as  such  in  another  Member  State.  This  would  allow  other  Member  States  to 
take  effective  and  prompt  actions  to  address  cross-border  tax  abuse  by,  for  example, 
denying tax treaty benefits on withholding taxes paid to the shell entity by a company in 
their  own  jurisdiction.  Timely  availability  of  information  on  the  existence  of  identified 
shell entities, both  at  national  level  and in  other  Member States,  will   provide Member 
States with an effective mechanism to prevent shell entity tax abuse in the EU.  

Third, the initiative aims to disincentive the use of TCSP's from creating shell entities in 
the  EU.  If  the  substance  requirements  include  criteria  which  aim  at  counteracting  the 
services  provided  by  TCSP's  then  demand  for  their  services,  for  example  setting  up    a 
postal address for a shell entity, would decrease which would have a significant negative 
impact on their business model.  

26 

 
 
 
 
 
If  successful,  the  initiative  could  also  translate  into  higher  tax  revenues  for  Member 
States, compared to a baseline scenario.  

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

5.1 What is the baseline from which options are assessed? 

In a baseline scenario, tax avoidance or evasion through the use of shell entities within 
the EU would be tackled primarily ex-post, and not prevented, via existing instruments, 
namely:  

  At EU level: with the technical assistance of the Commission, Member States would 
continue to examine preferential tax regimes in a peer review manner in the context 
of  the  Code  of  Conduct  Group,  to  assess  if  they  are  prone  to  be  abused  by  shell 
entities  not  actually  conducting  the  activities  targeted  by  the  regime.  Legal  entities 
and  arrangements  that  benefit  from  preferential  tax  regimes  within  the  EU  should 
have substance, according to the Code of Conduct on business taxation.75 However, 
beyond the scope of preferential tax regimes, the issue of substance is unexplored in 
the EU context and would remain so in a baseline scenario. 

  At  national  level:  implementation  by  Member  States  of  a  general  anti-abuse  rule 
(GAAR).76  The  GAAR  is  a  last  resort  measure  for  tax  administrations  to  stop 
artificial  arrangements  or  structures  to  obtain  tax  benefits.  For  making  use  of  it, 
Member  States  need  substantial  time  and  resources,  having  to  look  at  the  objective 
facts and circumstances of each and every case.  
Implementation  of  other  anti-tax  avoidance  measures,  mainly:  limits  to  interest 
deductions, controlled foreign company rule, and exit taxation provisions. Such rules 
do not contain specific requirements for substantial economic activity of legal entities 
and arrangements as such.  

 

  Member  States  would  also  continue  to  implement  domestic  measures  for  effective 
taxation which, in some cases, include measures targeting the use of shell entities for 
tax purposes.77 These are not coordinated. 

  Courts would continue to interpret obligations for taxpayers, including legal entities 
and  arrangements,  against  the  framework  of  existing  EU  law  and  case-law.78  It  is 

75  Conclusions  of  the  ECOFIN  Council  Meeting  on  1  December  1997  concerning  taxation  policy  - 
Resolution  of  the  Council  and  the  Representatives  of  the  Governments  of  the  Member  States,  meeting 
within the Council of 1 December 1997 on a code of conduct for business taxation, at:   
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31998Y0106%2801%29  
76  Council  Directive  2016/1164  of  12  July  2016  laying  down  rules  against  tax  avoidance  practices  that 
directly  affect  the  functioning  of  the  internal  market,  OJ  L  193/1  (2016)  introduced  the  GAAR  into  EU 
law. 
77 See in annex for more details on Member States’ measures.  
78  This  includes  binding  EUCJ  jurisprudence  as  regards  what  constitutes  a  wholly  artificial  arrangement 
designed to circumvent Member States’ legislation. 

27 

 
 
 
 
 
                                                 
likely  that  such  interpretation  would  continue  being  linked  to  the  specific 
circumstances of each case.  

  At global level: more than 130 jurisdictions of the OECD/G20 Inclusive Framework 
on Base Erosion and Profit Shifting (BEPS) have signed  an agreement on the main 
features of a reform of the global corporate tax framework, comprising of two pillars: 
a  partial  reallocation  of  taxing  rights  to  market  jurisdictions  (Pillar  1)  and  the 
establishment of a minimum effective corporate tax rate (Pillar 2). Pillar 2 is relevant 
to  the  assessment  of  the  initiative.  Signatories  agreed  to  establish  a  minimum 
effective  tax  rate  of  “at  least  15%”  on  the  profits  of  multinational  companies  on  a 
jurisdictional basis, meaning that, in principle, passive income paid to a shell entity 
established in a Member State should be subject to a 15% tax rate. However, Pillar 2 
only applies to multinational companies that meet the EUR 750 million threshold as 
determined  under  BEPS  Action  13  (country  by  country  reporting),  thus  leaving  all 
companies below this threshold out of the scope. 

5.2 Description of the policy options 

In addition to the baseline, the following options are presented and assessed:  

Soft law option (or Option 1):  

Expanding the mandate and scope of the Code of Conduct Group on business taxation to 
explicitly tackle the use, by taxpayers operating cross-border, of legal entities and legal 
arrangements with  no or minimum  substance and no real  economic  activities to  reduce 
their  tax  liability.  This  soft-law  option  could  also  take  the  form  of  a  dedicated,  new 
Commission recommendation to address the problem.  

Regulatory options (Option 2, 3 and 4):  

  Option  2:  Introducing  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,  if  not  rebutted,  would  lead  to  pre-
determined  tax  consequences,  with  the  determination  of  sanctions  for  non-
compliance left to the tax administrations.   

  Option  3:  Common  substance  requirements  as  above,  backed  up  by  exchange  of 
information.  As  for  the  previous  option,  this  option  would  introduce  common 
substance requirements across the EU along with a definition of tax consequences in 
lack  thereof,  leaving  the  determination  of  sanctions  for  non-compliance  to  national 
tax  administrations.  In  addition,  this  option  would  include  the  establishment  of  a 
mechanism  for  administrative  cooperation  and  exchange  of  information  concerning 
shell entities, expanding the existing DAC framework.  

  Option  4:  Common  substance  requirements  along  with  tax  consequences  in  lack 
thereof backed up by exchange of information and a definition of sanctions in case of 
non-compliances.  This  option  maintains  the  features  of  Option  3  above,  yet,  it  also 

28 

 
 
 
 
 
 
includes  sanctions  to  be  imposed  by  Member  States’  tax  administrations  to  entities 
that do not comply with the new obligations.  

It is worth emphasising that the regulatory options are cumulative. Option 4 builds upon 
option 3, which itself builds upon option 2, as shown in Figure 2 below. Option  1 is  a 
soft-law option. Option 0 is the baseline scenario. 

5.2.1 Option 1: Non regulatory option  

With  Option  1,  tackling  the  use  of  entities  and  arrangements  without  substantial 
economic activity for tax avoidance and evasion purposes would continue on a soft-law 
basis at EU level. This Option 1 could be implemented following two sub-options: in the 
context of the EU Code of Conduct Group or as a standalone recommendation.  

Figure 4 Overview of the policy options considered 

5.2.1.1.Sub-option a): review of the scope of the EU Code of Conduct Group 

Scrutiny  of  substantial  economic  activity  is  at  the  core  of  the  work  of  the  EU  Code  of 
Conduct Group for business taxation, assisted by the Commission. Yet, the scope of such 
work  at  EU  level  is  limited  in  the  context  of  identified  preferential  tax  regimes.  In 
essence the Group verifies if such regimes include adequate safeguards to prevent their 
abuse  by  entities  without  substantial  economic  presence.  Option  1  would  remove  the 
existing  limits  and  explicitly  expand  the  remit  of  the  Code  of  Conduct  Group  review 
beyond the context of preferential tax regimes. As a result, the Group would be entrusted 
to  verify if the  general  tax framework in  each  Member States includes  rules to  prevent 
abuse by entities without substance. The option would not affect the external dimension 
of the Code of Conduct Group. The latter  would continue to  screen third countries and 
assess  their  compliance  with,  among  others,  substance  requirements  for  offshore 
structures  and  arrangements.  The  Group  would  do  so  either  in  the  context  of  specific 

29 

 
 
 
 
 
 
 
regimes or more generally, in the case of zero or almost zero tax jurisdictions. Member 
States  would  be  primarily  responsible  for  the  implementation  of  this  option.  The 
Commission may well play an active role. Yet, ultimately it is only Member States which 
have  the  power  to  decide,  at  unanimity,  whether  and  how  to  change  the  mandate  and 
scope of the Code of Conduct Group. 

5.2.1.2 Sub-option b): Commission recommendation on substance  

In  a  different  soft-law  option,  the  Commission  recommends  a  common  approach  to 
define what may be considered a shell entity or arrangement for tax purposes and how it 
should be treated by Member States. It could also encourage Member States to exchange 
information  on  findings  regarding  shell  entities.  In  the  past,  the  Commission  has  made 
its  May  2021 
use  of  recommendations 
recommendations  on 
the 
recommendation would be an initiative by the Commission, adopted by the Commission 
and addressed to Member States.  

tax  area,  most  recently  with 

the  domestic 

Institutionally, 

treatment  of 

losses. 

the 

in 

Key differences 
Form / instrument  

Decision-making  

Sub-option 1 a) 
Revised mandate of the 
Code of Conduct Group  
Consensus by all Member 
States  

Sub-option 1 b) 
Commission 
recommendation  
Commission’s own 
initiative  

Table 1 How the two soft-law sub-options differ 

5.2.2 Option 2: EU wide common substance requirements  

This  policy  option  is  the  first  and  most  basic  scenario  of  a  trio  of  regulatory  options 
aiming  at  enhancing,  in  the  area  of  taxation,  the  anti-avoidance  and  evasion  tools 
available  to  Member  States.  Options  3  and  4  build  on  this  basic  scenario,  including  in 
addition further obligations for tax administrations, in terms of exchange of information, 
and a common approach on sanctions.  

This  option  would  establish  a  set  of  minimum  substance  requirements  common  across 
the European Union. It would introduce  a common understanding of what constitutes a 
shell entity for the purposes of this tax initiative. It would allow tackling their use for tax 
purposes  by  defining  the  implications  (tax  consequences)  of  such  findings.  The 
introduction of substance requirements takes stock of existing experience, within the EU 
and  internationally,  on  assessment  of  substance.  As  mentioned  above,  under  Option  1, 
Member States have been using substance requirements to assess harmful tax regimes in 
the  EU  as  well  as  in  international  fora.  The  substance  requirements  put  forward  in  the 
context of this Option 2 (and subsequently Options 3 and 4) are in line with the standards 
used  so  far.  Hence  the  actors  involved,  namely  Member  States,  taxpayers,  tax 
administrations, international partners, should be familiar with this notion. They should 
find relatively  straightforward  to  implement  it in relation  to new concepts.  In the same 
vein and taking into account that there is no commonly accepted definition of what is a 
shell  entity,  definition  of  substance  requirements  could  offer  a  more  familiar  and 
acceptable approach to distinguish between shell and non-shell entities. In this context it 
is  acknowledged  that  substance  requirements  have  been  established  primarily  in  the 

30 

 
 
 
 
 
context  of  traditional  business  models  and  may  be  less  apt  when  it  comes  to  digital 
business  models.  Nevertheless,  it  must  also  be  acknowledged  that  digitalisation  of  the 
economy  is  an  ongoing  process,  which  has  altered  the  way  business  is  done  but  not 
overhauled it yet: a certain physical presence seems to still be essential today and cannot 
be disregarded, at least not at the present stage. 

Furthermore, this option, which constitutes a proposal for a directive, is consistent with 
actions  recently  taken  in  the  EU  in  order  to  tackle  tax  avoidance.  Namely  this  action 
builds on and follows up to the 2016 ATAD directive, as well as to the DAC as amended. 
It is nevertheless proposed as a standalone measure in order to  allow, on the one hand, 
for  a  scope  broader  than  the  one  of  ATAD  and,  on  the  other,  for  the  introduction  of 
specific tax-related consequences that go beyond the mere reporting and/or exchange of 
information  under  the  DAC.  As  a  result,  this  option  is  envisaged  to  complement  the 
existing  EU  directives,  seeking  to  tackle  tax  avoidance  and  evasion  through  a  specific 
practice identified to be used for tax avoidance or evasion purposes.  

5.2.2.1 Carve-outs and exemptions  

As  the  aim  of  this  initiative  is  to  tackle  tax  avoidance  and  evasion,  situations  or 
arrangements where no tax avoidance and evasion is expected to take place should not be 
burdened with the consequences of this initiative. As with previous initiatives in the area 
of  tax  avoidance  and  tax  evasion,  certain  categories  were  carved  out  in  order  not  to 
unnecessarily  involve  these businesses as these  are not  the ones  targeted.  For example, 
listed  companies  are  subject  to  important  transparency  obligations  already.  Therefore, 
they are assumed to pose a relatively low risk of being exploited as shell entities for tax 
purposes.  Equally,  a  low  risk  seems  to  arise  with  those  holdings  located  in  the  same 
jurisdiction as their shareholder.  

Similar  carve-outs  are  used  by  a)  the  Code  of  Conduct  Group  when  it  verifies  regimes 
including  substance  requirements  in  Member  States  and  in  third  countries  and  b)  the 
OECD Forum for Harmful Tax Practices which has a similar task at international level. 
These  have  been  verified  against  and  enhanced  with  the  input  from  the  public 
consultation, where contributors were asked to indicate specific structures that should be 
carved-out because they do not raise tax risks but are put in place for good commercial 
reasons, such as joint ventures.  

However,  carve-outs  are  general  rules  and  might  not  preclude  a  genuine  business  from 
falling in  scope  of the initiative. Such business should  be given the chance to  evidence 
that  lack  of  tax  motives  in  its  structure  and  obtain  an  exemption.  An  exemption 
mechanism should therefore complement the carve-outs. The exemption shall apply both 
for the required reporting and the tax consequences of the initiative. Entities that pass the 
gateways  and/or  do  not  have  the  minimum  substance  can  choose  to  apply  for  an 
exemption.  As the  gateways provide further focus on the type of activities/income it is 

31 

 
 
 
 
 
expected  that  the  entity  will  be  pre-dominantly  involved  in  intra-group  transactions,  an 
exemption should then only be granted if the interposing of the entity does not provide 
for a lower overall tax burden for the group of companies it is part of.     

Carve-outs envisaged in Option 279 

(i)  Companies of which the principal class of shares is regularly traded on one or 

more recognised stock exchanges. 
(ii) Regulated financial undertakings. 
(iii)Businesses whose main activity is holding shares in operational businesses in 
the same Member State while their beneficial owners are also resident for tax 
purposes in the same Member State. 

(iv) Undertakings  with  at  least  5  own  full  time  employees  exclusively  involved 
with  the  activities  generating  the  relevant  income  and  having  the  necessary 
qualifications.  

5.2.2.2 A gateway to focus on the highest risk   

Entities  not  carved  out  and  not  exempt  otherwise  would  have  to  fulfil  certain 
requirements  or  “gateways”.  These  requirements  have  been  chosen  on  the  basis  of 
evidence80 according to which shell entities typically do not produce goods nor provide 
services. Therefore it can be expected they mainly earn passive income,81 are used as part 
of  tax  structures  involving  several  jurisdictions,  do  not  employ  staff  or  do  not  have 
offices, etc. To reflect these characteristics, the gateways of Option 2 include:  

1.  The  first  gateway  looks  at  the  type  of  income  to  single  out  entities  with 
geographically  mobile  activities.  The  latter  means  essentially  that  the  entities  that 
earn more than 75% of their income in the form of passive income (such as interests, 
royalties, dividends, rents or similar) would pass this gateway.   

2.  The second gateway seeks to identify a cross-border element as tax risks from shell 
entities  are  expected  to  arise  in  situations  involving  more  than  one  taxing 
jurisdictions.  

3.  The third gateway focuses on the (lack of) resources necessary to carry on a business 
activity,  i.e.  staff,  premises,  equipment  and  singles  out  entities  in  need  to  rely  on 
outsourcing of core activities  (corporate administration and management or). 

79 Actual carve-outs will depend eventually on whether this option is retained and on its final design.  
80 Please refer to the description of shell entities provided in Section 2, and in particular section 2.1.2.1. 
81 Passive income is a tax term that can be defined as: “Income in respect of which, broadly speaking, the 
recipient  does  not  participate  in  the  business  activity  giving  rise  to  the  income,  e.g.  dividends,  interest, 
rental 
terms, 
https://www.oecd.org/ctp/glossaryoftaxterms.htm  

royalties, 

Glossary 

income, 

Source: 

OECD 

etc.”. 

tax 

of 

32 

 
 
 
 
 
 
 
                                                 
Entities  and  arrangements  meeting  all  the  three  gateways  should  report  to  the  tax 
administrations on whether they meet a set of substance indicators and provide evidence. 
The key policy rationale for including  gateways are part of the regulatory  option is  the 
attempt at a balancing act between on the one hand the policy objective of tackling tax 
avoidance and tax evasion through shell entities on the one hand; and, on the other hand, 
the attempt at avoiding a disproportionate burden on the private sector.  

5.2.2.3 Minimum substance 

After an entity has crossed all the gateways, such entity would be asked to: a) run a self-
assessment about whether it meets basic minimum substance criteria; b) to report to the 
tax  administration  where  it  is  resident  for  tax  purposes  the  results  of  such  self-
assessment.  

It  is  challenging  to  define  what  substance  amounts  to.  Option  2  proposed  here  would 
include the following substance indicators: 

1.  The  entity  has  own  premises  in  the  Member  State  where  it  is  resident  for  tax 

purposes. 

2.  The entity has at least one own bank account in the EU. 
3.  One  or  more  directors  of  the  entity  are  resident  for  tax  purposes  in  the  same 
Member State of the undertaking, or close enough to ensure they are able to fulfil 
their duties,  and are qualified and  authorised to take decisions  in  relation to  the 
activities that generate relevant income for the undertaking. 

In selecting the specific substance indicators, existing international and EU standards on 
assessing substantial economic presence for tax purposes have been taken into account. 
The  latter  have  been  developed  and  are  applied  by  the  OECD  Forum  on  Harmful  Tax 
Practices and the EU Code of Conduct Group. These standards focus on the existence of 
staff,  premises  and  equipment  that  are  essential  to  perform  an  activity.  Given  the 
geographically  mobile  nature  of  the  activities  in  scope,  equipment  could  be  a  non-
appropriate requirement. At the same time, it is recognised that lack of own bank account 
is a key feature of shell entities used for evasion and avoidance of taxes, as also indicated 
by the results of the public consultation for this initiative.82   

5.2.2.4 Tax consequences  

Where  an  entity  reports  that  it  does  not  have  the  substance  indicators  set  above,  tax 
consequences would be triggered, to be specified under this option. Consequences would 
be triggered only if the entity fails to meet all minimum substance criteria. The indication 

82 A majority of respondents agreed that the lack of own bank account may be the most indicative feature 
of shell entities, source: DG TAXUD (2021)  – Public Consultation "Tax avoidance  - Fighting the  use of 
shell entities and arrangements for tax purposes". 

33 

 
 
 
 
 
                                                 
of  specific  tax  consequences  is  a  new  feature  that  complements  existing  EU  anti-tax 
avoidance rules regarding a lack of substance situation.  

In  addition  to  the  interplay  of  carve-outs,  gateway  and  substance  indicators  that  would 
allow authorities to identify only those entities that are shells misused for tax purposes, 
taxpayers identified as shells should still be able to provide counter-evidence through a 
rebuttable  presumption  before  consequences  apply.  This  would  allow 
tax 
administration to make an individual assessment based on the facts and circumstances of 
each case. Should a tax administration ascertain that the taxpayer has substantial presence 
despite indications to the contrary, it would be able to certify so and relieve the taxpayer 
from the consequences.   

the 

Figure 5  Key  different  steps  envisaged in the basic  regulation option  (option 2),  allowing to focus  the  effects  of  the 
intervention only on a limited number of companies or other legal entities 

A  mechanism  to  monitor  implementation  of  the  measures  in  Member  States  (via 
reporting  by  Member  States  to  the  Commission)  should  also  be  envisaged.  This  is 
particularly  important  because  the  identification  of  shell  entities  and  the  application  of 
consequences lies with the Member State of tax residence of such entities. As, in many 
cases, the Member States whose tax bases are eroded through the use of shell entities are 
different  from  those  where  the  shell  entities  are  tax  resident.  A  monitoring  mechanism 
should thus provide incentives for all Member States to apply the measures appropriately.  

5.2.3 Option  3: EU wide common  substance requirements  accompanied  by 

provisions for administrative cooperation  

5.2.3.1 Overview  

This  option  would  build  on  the  previous  one.  However,  on  top  of  option  2,  it  would 
envisage an EU wide mechanism for administrative cooperation and automatic exchange 
of information between tax authorities.  

34 

 
 
 
 
 
 
Since  2011  and  the  adoption  of  the  Directive  on  Administrative  Cooperation  (DAC)83, 
the  EU  has  made  large  progress  in  the  field.  While  there  remains  scope  for 
improvement,84 administrative cooperation and in particular exchange of information has 
empowered tax authorities with a key resource  – information – needed to ensure cross-
border  tax  compliance  in  a  highly  dynamic  and  integrated  economy  as  the  EU  internal 
market.  

The  administrative  cooperation  element  of  this  option  would  build  upon,  and 
complement, existing DAC mechanisms and tools. Currently, Member States can use the 
DAC to check the status of entities which are tax residents in other Member States but 
such mechanisms are not automatic. A Member State needs to ask another Member State 
for information. This is referred to as exchange of information on request. The requested 
Member  State  has  up  to  six  months  for  answering.  In  practice,  responses  are  far  from 
immediate and in some cases provided later than six months.85  

This  option  would  push  administrative  cooperation  one  step  further  by  obliging  tax 
authorities to automatically86 inform each other about whether entities in scope which are 
tax resident in their jurisdictions fulfil the substance requirements or not. The basic flow 
of  information  would  work  in  two  steps:  first,  the  entity  will  send  its  self-assessment 
(about  whether it fulfils  substance requirements  or not) to  the tax  administration  of the 
Member State where it has its tax residence. Second, the tax administration will upload 
the  self-assessment,  including  its  conclusion  (whether  an  entity  fulfils  or  not  substance 
requirements) in a shared directory for all other tax administrations to be able to read.87 

By introducing automatic exchange of information mechanisms, this option would enable 
all Member States concerned, e.g. because they are the place of tax residence of an entity 
belonging  to  the  same  group  of  the  one  having  sent  its  self-assessment,  to  have 
information  available  on  a  timely  basis  in  order  to  apply  correctly  the  envisaged  tax 
consequences.  In  addition,  this  could  encourage  Member  States’  tax  administrations  to 
implement properly and timely the obligations envisaged by the new initiative. 

83  Council  Directive  2011/16/EU  of  15  February  2011  on  administrative  cooperation  in  the  field  of 
taxation and repealing Directive 77/799/EEC, OJ L 64, 11.3.2011, p. 1–12 
84 European Court of Auditors special report on Exchanging tax information in the EU: solid foundations, 
cracks in the implementation 
https://www.eca.europa.eu/Lists/ECADocuments/SR21_03/SR_Exchange_tax_inform_EN.pdf  
85 Commission staff working document, Evaluation of the Council directive 2011/16/EU on administrative 
cooperation in the field of taxation and repealing directive 77/799/EEC, SWD(2019) 327 final, p. 23.  
86  Automatically  is  to  be  understood  as:  systematic  communication  of  predefined  information  to  another 
Member  State,  without  prior  request,  at  pre-established  regular  intervals.  Reference:  Council  Directive 
2011/16/EU of 15 February 2011, article 3(9).  
87 This system replicates the functioning of the DAC3 on automatic exchange of tax rulings and advance 
pricing agreements. Annex 10 provides additional information on the envisaged flow of information.  

35 

 
 
 
 
 
                                                 
5.2.3.2 Ensuring effective cooperation 

legal 

to  check 

the  correct 

Effective cooperation, including information exchange, between tax authorities would be 
ensured first of all by checking that data exchanged is accurate, complete and sent within 
the  deadlines.  Moreover,  it  is  essential  for  effective  cooperation  that  Member  States 
make  use  of  the  information  they  receive.  However,  effective  cooperation  does  not 
depend only on Member States. The Commission has a role to play. The Commission is 
responsible 
transposition  of  provisions  concerning 
administrative cooperation, among others. Furthermore, it is the Commission that needs 
to monitor how the system of information exchange is implemented and how effective it 
is in practice. As part of the monitoring of tax cooperation between Member States, and 
separately from this initiative, the Commission is planning to conduct on the spot visits 
in  the  Member  States  to  monitor  effectiveness.88  The  initiative  will  include  specific 
monitoring provisions, as outlined in Chapter 9.  Effective cooperation will also  depend 
on the quality and quantity of resources allocated. A regulatory intervention is expected 
to  provide  a  strong  incentive  (and  stronger  than  in  the  case  of  a  soft-law  option)  for 
Member States to ensure that adequate resources are dedicated to effective cooperation. 
Monitoring by the Commission will allow to assess to what extent resource allocation is 
fit for meeting the objectives of the intervention and whether its implementation leads to 
effective cooperation, including effective and useful information being exchanged.  

5.2.3.3 Information exchange and personal data  

Information  exchanged  will  consist  in  the  information  reported  by  entities  to  tax 
administrations  through  their  self-assessment  of  minimum  substance.  It  will  comprise 
primarily  information  about  the  entity.89  However,  Member  States  will  also  receive 
personal data, i.e. only what is necessary to identify the beneficial owner(s) of the entity. 
Interference with the fundamental rights to privacy and to the protection of personal data 
must be necessary and proportionate90. 

Personal data are protected under the General Data Protection Regulation (GDPR).91 The 
processing of personal  data must comply with  the applicable data protection legislation 
(including  with  principles  such  as  legality,  data  minimisation  and  purpose  limitation, 
security etc.). The Directive on Administrative Cooperation includes specific provisions 

88 Replies of the European Commission to the European Court of Auditors special report: “Exchanging tax 
information in the EU: solid foundation, cracks in the implementation”.  
89 As described in section 5.2.2., presenting Option 2.  
90 See  also the EDPS Guidelines on assessing the  proportionality of  measures that limit the fundamental 
rights 
to privacy and to the protection of personal data, available at: 
https://edps.europa.eu/sites/default/files/publication/19-12-19_edps_proportionality_guidelines2_en.pdf 
91 Regulation (EU) 2016/679 General Data Protection Regulation.  

36 

 
 
 
 
 
                                                 
and  safeguards  on  data  protection.  However,  any  legal  intervention  based  on  further 
amendments to this Directive will have to comply with GDPR. 

Each time personal data is processed, there is a risk of a data breach, e.g., a data leak or 
an unauthorised disclosure. The most efficient way to reduce such risks is to reduce the 
amount  of  personal  data  processed  (data  minimisation  principle).  This  is  also  the 
approach  followed  by  this  intervention.  The  vast  amount  of  data  exchanged  within  the 
meaning  of  this  Directive  will  concern  legal  entities  and  not  individuals.  Personal  data 
will represent only a small fraction of the exchange of information flow.92  

Member  States  will  also  have  to  comply  with  GDPR  with  regards  to  the  processing  of 
data  in  their  national  systems.    As  data  controllers  they  will  have  to  implement 
appropriate technical and organisational measures to ensure and to be able to demonstrate 
that processing is performed in accordance with the GDPR. The exchange of the data will 
occur  through  a  secured  electronic  system  that  encrypts  and  decrypts  the  data  and,  in 
every tax administration, only authorised officials should access the information. 

5.2.4 Option  4: EU wide common substance requirements  accompanied  by 
provisions for administrative cooperation and a common sanctioning 
framework  

This option would build on Option 3 with the addition of one more element: a common 
sanctioning framework, targeting non-compliance by the entities in scope. Given that the 
initiative establishes reporting obligations for entities and relies on the actual reporting of 
these entities for its effective implementation, it is important to ensure that such entities 
do  report.  This  option  would  be  enhanced  in  this  direction,  compared  to  the  other  two 
regulatory options. It would define specific, monetary sanctions that Member States’ tax 
administrations  would  apply  to  entities  that  do  not  properly  comply  with  their 
obligations. Having a basic, common EU sanctioning framework would provide a better 
guarantee that sanctions are dissuasive and proportionate, while maximising certainty for 
taxpayers. Any sanctions should be proportionate and non-discriminatory under EU law. 

5.3 Options discarded at an early stage 

As  part  of  the  process  for  identifying  options,  some  alternatives  have  been  considered 
and discarded upfront, for different reasons.  

The  introduction  of  a  ban  to  shell  entities  was  discarded  almost  at  the  start  for  the 
following key reasons: first, as said also earlier in this impact assessment, shell entities 
and  the  lack  of  a  universal  definition  of  what  is  a  shell  entity  are  not  problems  per  se. 
Problems  emerge  from  a  tax  perspective  when  they  are  used  for  tax  avoidance  and 
evasion  purposes.  It  is  evident  that  there  are  legitimate  reasons  why  entities,  including 

92  Annex  10  provides  additional  information  on  which  personal  data  would  be  exchanged  and  how  they 
would be handled.  

37 

 
 
 
 
 
                                                 
legal  arrangements  may  exist without  conducting any substantial  economic activity.  As 
pointed out by one stakeholder: “ (…) there are good commercial reasons for the use of 
special purpose vehicles, in particular in secured lending, securitisation, insurance-linked 
securities and similar transactions.”93 An EU-wide prohibition of shell entities would be 
a  disproportionate  and  potentially  costly  measure,  which  could  also  be  contrary  to  the 
fundamental  freedoms,  and  in  particular  the  freedom  of  establishment,  in  the  single 
market. Secondly, the political and legal feasibility of such a ban appears thin.  

The option of regulating intermediaries, such as in particular trust and company service 
providers,  who  enable  the  set  up  and  maintenance  of  shell  entities  is  another  measure 
considered, as alternative or complementary. Such measure could function to discourage, 
in an indirect manner, the creation and maintenance of shell entities. However, action in 
this direction was  discarded for three main  reasons. First,  as  an EU-wide measure, this 
would regulate only  intermediaries /  service providers with  a link to  the  EU but  would 
not prevent the use of third country persons. Second, groups of enterprises would still be 
able  to  use  associated  enterprises  in  the  role  of  intermediaries  /  service  providers  and 
would  not  need  to  have  recourse  to  external,  regulated  persons.  Third,  such  measure 
could  risk  being  disproportionate  in  relation  to  its  objective:  it  would  be  too  broad  a 
solution for a specific problem.  

Furthermore, this assessment has also discarded options focussing on corporate tax rates 
or VAT, as put forward, for instance, by respondents to the publication for feedback on 
the inception impact assessment.  

Namely, one respondent94 suggested to harmonise and to lower the corporate tax rate (the 
contribution is not specific here, the assumption is that reference is made to the corporate 
tax  rate)  in  order  to  reduce,  arguably,  incentives  for  tax  avoidance  and  risks  of  non-
compliance  by  taxpayers.  Leaving  aside  considerations  of  legal  feasibility,  this  option 
seems  in  any  case  disproportionate  to  the  specific  problem  at  hand,  that  is  to  say  the 
misuse of shell entities for tax purposes.  Another respondent called for introducing one 
single corporate tax rate and to use turnover as tax base.95 

In  the  same  vein,  the  option  to  harmonize  withholding  taxation  (WHT)  on  outbound 
payments from Member States has been discarded. The lack of harmonized WHT was in 
particular cited in the context of the public consultation by the IBFD as one of the drivers 
for the use of shell entities in the internal market for tax abuse. Yet, a measure towards 
harmonization of WHT would imply a significant intervention in the freedom of Member 
States to define their tax rules, which would be disproportionate solution to the problem 
at hand.  

93 Feedback to the inception impact assessment by Arthur Cox LLP, 17 June 2021.  
94 Feedback from Federazione Italiana Ristorazione.  
95 Anonymous feedback. The same feedback also called for changes to capital requirements of companies, 
stating that any EU company must be owned at more than 50% by European nationals and companies.  

38 

 
 
 
 
 
                                                 
Another discarded option from the feedback on the inception impact assessment, would 
entail  stricter  regulation  and  oversight  of  e-commerce.  While  sales  via  e-commerce 
contribute to certain companies’ profits, such option is not directly relevant to tackle the 
problem at hand, namely the misuse of shell entities for tax avoidance or tax evasion.96  

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

6.1. 

Introduction 

The section is organised as follows. First, there is a brief introduction on the typologies 
of impacts considered in the analysis. Second, the impact on SMEs is considered. Third, 
the impact  of each option, including the baseline, is  assessed in  terms  of: a) regulatory 
charges;  b)  administrative  burdens  for  businesses;  c)  enforcement  costs  for  tax 
administrations; and d) direct and indirect benefits. Certain types of costs as well as the 
impact on the environment are not assessed, for the following reasons:  

  Substantive  compliance  costs  are  not  assessed  because  no  equipment,  labour, 
materials or external services will be necessary to comply with the intervention. 
Businesses will incur only administrative burdens or non-substantive compliance 
costs,  due  to  the  nature  of  the  information  requested.  Requested  information 
should  be  readily  available  for  them,  thus  limiting  the  costs  of  compliance  to 
processing of information. 

  No impact on the environment can be readily identified. The proposal does not 
have an environmental policy dimension and is aimed at behavioural changes that 
would affect financial flows.  

6.2. 

Impact on Small and Medium Enterprises (SMEs) 

The  impact  on  SMEs  producing  and  selling  goods  and  services  is  expected  to  be 
negligible  if  any.  As  the  definition  of  SME  is  based  on  thresholds  of  number  of 
employees, turnover and total balance sheet, it would be possible that some shell entities 
would  fall  under  this  definition  (e.g.  a  shell  entity  with  no  employee,  EUR  50  million 
turnover  and  EUR  40  million  onto  the  balance  sheet  could  theoretically  qualify  as  a 
SME).  However,  this  definition  should  not  be  interpreted  rigidly:  the  initiative  aims  at 
covering  those  entities  that  do  not  have  substance  and  are  set  up  to  avoid  or  evade 
taxation97.. The criteria that trigger reporting obligations to the tax authority are strictly 
limited to companies with a high 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 (see section 5 above) 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 

96 Anonymous feedback by a German citizen, 14 June 2021.  
97 Evidenced in the last OpenLux investigation showed more than 1000 companies registered at the same 
address with no employee. 

39 

 
 
 
 
 
 
                                                 
owned  mainly  by  foreign  owners  and    have  outsourced  essential  aspects  of  its 
operations).  

Another  possibility  is  that  SMEs  use  shell  entities  to  carry  activities  in  the  EU.  The 
population  of  SMEs  using  shell  entities  is  expected  to  be  negligible.  In  addition,  and 
importantly,  it  is  not  possible  to  assess  the  specific  impact  on  SMEs  given  the  lack  of 
data.  As  shown  in  this  impact  assessment,  the  lack  of  data  makes  it  a  complicated  and 
inaccurate  exercise  to  quantify  the  use  of  shell  entities  by  businesses  in  general,  and 
impossible to differentiate between SMEs or larger companies, something this initiative 
would improve.  

When it comes to SMEs, also the findings of the public consultation are of limited help 
in terms of impact assessment. Respondents are divided on how to include SMEs in the 
scope of a possible regulatory initiative to tackle tax avoidance or tax  evasion via shell 
entities. Eleven respondents indicated that there is no need for specific rules for SMEs, 
while  ten  indicated  that  a  threshold  could  be  used  to  exclude  SMEs  from  the  scope. 
Hence,  the  negligible  impact  expected  on  SMEs,  both  in  terms  of  SMEs  qualifying  as 
shell  entities  and  SMEs  using  shell  entities,  and  lack  of  data  to  allow  us  to  assess  the 
specific effect on SMEs, justify the lack of an in-depth assessment of the specific impact 
on SMEs.  

6.3.  Data limitations and assumptions  

The analysis in this section builds on limited evidence. The initiative addresses a certain 
type of entities for which there is a severe lack of data. For shell companies, no data is 
available  as  such.  Indeed  and  relatedly,  there  is  no  universal  definition  of  shell  entities 
and no commonly agreed way of giving them a legal qualification. It is thus difficult to 
distinguish between entities with substance and actual operations and a “shell”. All this 
generates  a  high  level  of  opacity  surrounding  these  entities.  Nonetheless,  a  relatively 
wide range of data sources is used to try and quantify the impact of the problem. These 
including:  a)  international  organisations  (Eurostat,  OECD  and  IMF);  b)  commercial 
databases  (ORBIS);  c)  journalistic  sources  (OpenLux)  and  d)  academic  literature, 
including contacts with scholars in the field.  

For a detailed analysis it would be key to  estimate the number of  entities in  scope, i.e. 
those  that  will  pass  the  gateway  criteria  and  will  have  to  report  and,  in  a  second  step, 
those  that  could  be  identified  as  “shell”  as  a  result  of  applying  the  substance  test. 
However,  there  is  no  data  source  available  that  allows  a  reasonable  estimation  of  the 
effect of the gateway criteria and substance test on the number of entities in scope.  For 
this reason, impacts presented in this section will rely often on assumptions, partial data 
or circumstantial evidence and should be treated with caution.  

6.4.  Option 0: the baseline scenario (no change) 

Tax avoidance and tax evasion through shell entities continue to occur in this scenario. 
As said, shell entities can take the form of companies, trusts or foundations settled in an 
EU  country  with  revenues  coming  in  from  (or  revenues  going  out  to)  a  third  country. 
Such structures’ main purpose may well be business-related. As already indicated, there 
are  many  legitimate  reasons  why  shell  entities  are  set  up.  However,  the  end  result  of 

40 

 
 
 
 
 
having  financial  flows  going  through  a  shell  entity  may  be  to  decrease  its  owner’s  tax 
liability, for instance by hiding assets and income from the jurisdiction where owners are 
tax  resident  and  where  tax  rates  are  comparably  high.  Recent  literature98  shows  that 
MNEs may also use shell entities, mostly finance and holding entities, to decrease their 
effective tax rate, over and above other (and main) legitimate commercial reasons.  

As pointed out earlier, DAC and ATAD have tackled some main tax abuse, but there is 
still a lack of commonly shared substance criteria to ensure that tax advantages are not 
granted  abusively.  The  ongoing  reform  of  the  global  corporate  tax  framework,  and 
especially the introduction of a minimum effective tax rate for corporates (Pillar 2) only 
applies  to  multinational  companies  that  meet  the  EUR  750  million  threshold  as 
determined  under  BEPS  Action  13  (country  by  country  reporting)  and  currently  it  is 
difficult to predict when it will start being applied.  

6.4.1.  Compliance costs for businesses 

As this option does not require any new obligation, there is no additional cost expected 
for business. 

6.4.2.  Regulatory charges 

According  to  research  on  Member  States’  practices  performed  as  part  of  this  impact 
assessment99, only the Netherlands100 have objective  substance  criteria that can be used 
ex-ante  to  assess  whether  a  tax  benefit  should  be  granted.  There  is  no  indication  that 
sanctions  are  currently  applied  and  recovered  by  national  authorities  due  to  failure  to 
report  by  shell  entities  at  national  level.  Hence,  no  regulatory  charges  are  currently 
applied to entities. 

6.4.3.  Enforcement costs for tax administrations 

As this option does not require any new obligation, there is no enforcement cost expected 
for administrations. 

6.4.4.  Direct costs and benefits  

In a no change scenario, Member States’ treasuries will continue to experience a shortfall 
in  their  finances  because  of  tax  avoidance  or  evasion  via  shell  entities.  Due  to 
considerable data limitations it is not possible to deliver a robust estimate of the loss 
of corporate tax revenues due to tax avoidance through the use of shell companies. 

98 CICTAR, January 2020, Failing to Care: Global Tax Dodging by a German Healthcare Multinational. 
99 For more information, please refer to Annex 5.  
100  In  the  case  of  the  Netherlands,  substance  criteria  are  used  to  assess  whether  an  Advance  Pricing 
Agreement should be granted. For an overview of Member States’ measures concerning shell entities and 
substance, see Annexes.  

41 

 
 
 
 
 
                                                 
Empirical evidence about the extent of the resulting tax advantages of shell companies is 
sparse,  but  some  indications  may  be  drawn  from  the  extrapolation  of  USA  data.  Most 
recently, Demeré et al (2020)101 have estimated for the USA that Special Purpose Entities 
(SPE) could generate additional tax savings equivalent to 6% of the US federal corporate 
income tax collection. SPEs are usually seen as ‘Phantom FDI’ in the absence of any real 
business  activity.102  If  one  applied  that  rate  to  the  EU27’s  2019  corporate  income  tax 
revenues, this would imply tax savings for SPEs of some EUR 23 billion per year. It is 
important to underline that this does not mean all SPEs are considered shell entities, but 
some SPEs are used in tax structures for tax avoidance purposes and share characteristics 
with shell entities, and can thus be used as a proxy given the lack of more accurate data. 
Moreover, and as explained above, caution should be exercised when extrapolating from 
the US to the EU, but it gives an order of magnitude of the phenomenon. 

The analysis presented in Annex 4(A) suggests that an upper bound of the current EU-
wide tax loss sustained through the use of SPEs could amount to around EUR 60 billion 
per  year.  The  majority  of  this  amount  (some  EUR  40  billion)  stems  from  investors 
outside  the  EU.  These  figures  stem  almost  exclusively  from  those  two  EU  countries 
showing by far the highest inward FDI in SPEs103 and income flows (and thus: imputed 
forgone  tax  revenue):  the  Netherlands  and  Luxembourg.  A  study  by  the  IMF  lists 
those  two  countries  on  top  of  a  list  that  ranks  OECD  economies  with  respect  to  their 
inward FDI position, based on IMF and OECD data.104 Luxembourg and the Netherlands 
combine the largest chunk of the world’s ‘Phantom FDI’.105 Luxembourg’s inward FDI 
position  is  an  estimated  56-fold  of  its  GDP.  More  than  90%  of  this  amount  is  due  to 
SPEs.106 For the Netherlands, another study107 finds that Dutch SPEs are often used for 
indirect  income  transfers  between  two  countries  (e.g.  flows  of  royalty  or  interest 

final 

their 

before 

reaching 

countries 

destinations”.  Available 

101 Demeré, Donohoe, Lisowsky 2020  - The Economic Effects of Special Purpose Entities  on Corporate 
Tax Avoidance, Contemporary Accounting Research Vol. 37 No. 3 (Fall 2020) pp. 1562–1597. 
102  For  example,  Damgaard,  Jannick,  Elkjaer,  Thomas  and  Nils  Johannesen,  “The  Rise  of  Phantom 
Investments”, Finance & Development, September 2019. The key statistical concept ‘SPE’ is explained by 
the OECD as an entity within “complex structures” which is  often  used “to channel investments through 
several 
at: 
https://stats.oecd.org/OECDStat_Metadata/ShowMetadata.ashx?Dataset=FDI_POS_CTRY&Lang=en&Co
ords=%5bTYPE_ENTITY%5d.%5bRSP%5d  
103 Damgaard, Jannick and Thomas Elkjaier – The Global FDI Network: Searching for Ultimate Investors, 
IMF Workig Paper WP/17/258, November 2017, Annex 1. 
104 Ibid, p. 14 and Annex 1. 
105  Damgaard,  Jannick,  Thomas  Elkjaier  and  Niels  Johannesen,  “What  is  Real  and  What  is  Not  in  the 
Global FDI Network?” IMF Working Paper WP/19/274, December 2019. The authors estimate the world’s 
Phantom  FDI  to  account  for  $15  trillion  (40%  of  total  FDI).  Of  this  amount,  Luxembourg  and  the 
Netherlands accounts for $3.8 trillion and $3.3 trillion, resp. (p. 26). 
106 Damgaard et al (2017), Annex 1. 
107  Lejour,  A.,  Mohlmann,  J.,  van't  Riet,  M.,  &  Benschop,  T.  (2019).  Dutch  Shell  Companies  and 
International  Tax  Planning.  (CentER  Discussion  Paper;  Vol.  2019-024).  Tilburg:  CentER,  Center  for 
Economic Research. 

online 

42 

 
 
 
 
 
                                                 
payments from one country to another via Dutch SPEs). If ‘tax havens’ are involved in 
these  bilateral  transfers,  the  likelihood  of  those  payments  being  channelled  through 
Dutch SPEs is significantly higher.  

These findings have to be carefully interpreted in the light of significant data gaps, but 
one  can  indeed  deduce  from  the  regression  analysis  in  Annex  4(A)  that  the  SPEs  and 
‘regular’  entities  (non-SPEs)  follow  a  different  pattern  in  the  context  of  capital  flows 
from  one  country  to  another,  and  that  tax  treatment  of  FDI  plays  a  role  in  explaining 
these differences. In particular, all else being equal, SPEs seem to be more often used for 
shifting  EU  capital  to  countries  where  the  statutory  corporate  income  tax  rate  is  lower 
than in the country where the investor is located.  

Moreover,  after  controlling  for  nominal  corporate  income  tax  rates,  it  appears  that 
Luxembourg  remains  the  dominant  EU  destination  of  investments  of  EU  SPEs.  The 
absence  of  withholding  taxes  on  interest  and  royalty  payments,  and  exemptions  from  a 
withholding tax on dividends in Luxembourg may explain this finding. 

Such  absence  of  withholding  taxes  on  many  outbound  payments  also  applies  in  the 
Netherlands  and  in  Ireland.108  The  regression  analysis  in  Annex  4(A)  confirms  that 
those two countries stand out when considering income flows in both directions (i.e., FDI 
income  flowing  into  and  income  flowing  out  of  EU  countries  from/to  those  two 
countries). However, this finding holds only if SPEs are involved in the transfer, not in 
the case of ‘regular’ non-SPEs.109 One possible explanation is that FDI income flows to 
third  countries  are  often  channelled  through  the  Netherlands  and  Ireland,  especially  if 
SPEs are involved in these payments. 

More  generally,  the  IMF-study  finds  that  the  share  of  non-SPE  FDI  tends  to  go  down 
when  the  total  FDI-to-GDP  ratio  goes  up.  In  other  words,  there  is  “clear  tendency  that 
economies with a high total inward FDI-to-GDP ratio are more likely to host SPEs than 
economies  with  low  ratios.”110  SPEs  can  therefore  be  seen  as  a  driving  force  behind 
current  uncommonly  large  flows  FDI  at  least  in  some  countries.  Indeed,  “phantom 
investment into corporate shells with no substance and no real links to the local economy 
may account for almost 40 percent of global FDI”.111 In a given country, any policy that 

108 Data of the analysis stems from 2019. By that time, the Netherlands had applied a withholding tax on 
outbound payments of dividends, not on payments of interests and royalties. The scope of the withholding 
taxes  was  expanded  only  from  1st  January  2021  to  cover  outbound  payments  of  interests  and  royalties. 
Ireland applies a withholding tax on outbound payments, but many exemptions apply. 
109 This finding remains stable if one controls for bilateral differences in the level of  CIT. Note that the 
Irish official CIT rate (12.5%) is one of the lowest in the EU. 
110 Damgaard, Jannick and Thomas Elkjaier – The Global FDI Network: Searching for Ultimate Investors, 
IMF Workig Paper WP/17/258, November 2017, p. 14. 
111  Damgaard,  Jannick,  Thomas  Elkjaier  and  Niels  Johannesen,  “What  is  Real  and  What  is  Not  in  the 
Global FDI Network?” IMF Working Paper WP/19/274, December 2019, abstract. 

43 

 
 
 
 
 
                                                 
limits the use of SPEs is therefore likely to reduce total FDI, at least in the short term.112 
Note  that,  as  per  the  scope  of  this  initiative,  this  would  be  FDI  flows  that  have  no 
associated employment or economic activity. 

In  the  longer  term,  there  could  be  (non-quantifiable)  positive  second-round  effects  of 
limiting  the  use  of  SPEs  with  no  economic  activity  since  firms  will  seek  investment 
opportunities  with  substance.  Note  that  more  generally,  tackling  the  lack  of  skilled 
labour, infrastructure or regulatory market barriers113 would also increase the likelihood 
of increase ‘real’ FDI and decrease the misuse of shell companies for tax purposes only, 
with a positive economic impact in destination countries. 

Because no regulatory change is planned, no tax gain for national treasuries is expected. 
There are only foregone benefits in terms of tax revenues. 

6.4.5.  Indirect costs and benefits 

A no change scenario would maintain the current tax revenues forgone due to continued 
aggressive tax avoidance and evasion  through the misuse of shell  entities. 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. 

Continued tax avoidance and evasion through shell entities and the absence of action by 
the  EU  may  be  negatively  perceived  by  EU  citizens,  or  even  seen  as  a  form  of 
complaisance. The pandemic may strengthen this perception, as tax revenues are needed 
to finance the recovery and financial efforts from citizens will likely be required in the 
near  future.  In  an  environment  of  rising  scepticism  toward  the  EU,  inaction  does  not 
seem to be an appropriate option.  

No effect is expected on competitiveness for the EU as a whole. 

Regarding  competition,  the  playing  field  would  remain  unlevelled  as  multinational 
corporations  using  shell  entities  for  tax  avoidance  and  evasion  purposes  would  still  be 
able to generate cost saving through this channel, and thus preserve an unfair competitive 
advantage comparatively to smaller firms and those with better practices. 

6.5.  Option 1: Soft-law option, sub-option a): review of the scope of the EU 

Code of Conduct Group  

112  However,  the  share  of  pure  shell  companies  without  substancesubstancesubstance  in  all  SPE  is  not 
known.  It  is  therefore  not  possible  to  estimate  the  extent  of  the  decline  of  inward  FDI  that  follows  a 
removal of shell companies. 
113 Damgaard et al (2017), p. 14. 

44 

 
 
 
 
 
                                                 
The  feasibility  and  effectiveness  of  this  sub-option  are  limited.  In  terms  of  feasibility, 
delivering  this  sub-option  requires  Member  States’  political  commitment  to  act.  The 
mandate of the Code of Conduct Group can only by modified by consensus. Currently, 
the  mandate  of  the  Group  remains  essentially  the  same  since  1997.  When  it  comes  to 
effectiveness, even a consensually agreed reform of the Code of Conduct Group mandate 
to cover assessment of substance would not be binding for Member States.  

6.5.1.  Compliance costs for businesses 

Businesses  would  face  some  compliance  costs.  The  absence  of  binding  provisions  will 
limit  legal  certainty  and  predictability.  As  any  soft-law  option,  there  is  a  risk  that  the 
compliance costs for cross-border activities may increase due to possible divergences in 
the actual implementation of the measure.  

6.5.2.  Regulatory charges 

As no sanctions are planned, no regulatory charges are implemented. However, given the 
discretion  that  soft  law  instruments  allow  for  Member  States,  regulatory  charges  could 
apply in some Member States if they so wish.  

6.5.3.  Enforcement cost for tax administrations 

Some enforcement cost may be entailed if some Member States decide to act and put in 
place a definition of shell entity and attach tax consequences to such entities. However, 
the cost of auditing and making sure that tax consequences are effectively applied will be 
borne  by  participating  Member  States  only.  Without  exchange  of  information  between 
tax administrations, it may be more costly, in terms of time and resources, for Member 
States willing to act to identify the relevant shell entities, when compared to a common 
regulatory scenario. 

6.5.4.  Direct costs and benefits for Member States treasuries 

The effect on Member States’ treasuries would depend on the form and effectiveness of 
the national measures chosen, and on businesses’ potential escape strategies. Without an 
EU-wide implementation, the misuse of shell entities for tax purposes may merely move 
from  the  Member  State(s)  that  will  effectively  implement  substance  requirements  to 
another that does not implement them, rather than be effectively addressed across the EU. 
Thus, at aggregate EU level, tax gains remain hypothetical. 

6.5.5.  Indirect costs and benefits 

By  leaving  a  degree  of  discretion  to  Member  States  on  how  they  will  implement 
measures,  this  option  allows  for  discrepancies  and  creates  complexity  for  entities  with 
cross-border  operations.  Potential  loopholes  can  remain  and  still  be  used  for  tax 
avoidance  purposes.  Hence,  the  tax  loss  roughly  estimated  for  the  no  change  scenario 
could  still  hold  for  this  scenario.  The  risk  of  limited  effective  coordination  of  Member 
States’  measures  may  translate  in  fragmenting  the  Single  Market  and  additional 
complexity for businesses. 

45 

 
 
 
 
 
The  impact  on  competition  among  firms  would  depend  on  how  coordinated  Member 
States’ measures will be. The more coordination, the more levelled the playing field will 
be.  In  the  Member  States  that  effectively  implement  the  revised  mandate  it  may  also 
incentivise voluntary tax compliance. However, as explained above, circumvention of the 
new  rules  may  occur,  due  to  divergent  implementation  across  Member  States.  This 
situation may fuel disappointment in the public opinion and may be as detrimental as the 
no change scenario, or even more so, showing the incapacity of the EU to act effectively 
and make best use of its resources. 

6.6.  Option 1: Soft-law option, sub-option b): Commission recommendation 

on substance 

As in the case of sub-option a), effectiveness would be limited overall. In relative terms, 
a  Commission  recommendation  should  be  less  effective  than  for  a  consensually  agreed 
reform  of  the  Code  of  Conduct  Group’s  mandate.  This  is  because  in  the  latter  case, 
Member States  would demonstrate some degree of ownership and commitment. On the 
other  hand,  the  implementation  of  a  Commission  recommendation  would  depend  even 
more on Member States’ willingness to act. Compared with sub-option b), however, the 
feasibility of a Commission recommendation is very high. Its adoption would depend on 
the Commission’s own initiative and would not depend on Member States’ consensus.  

6.6.1.  Compliance costs for businesses 

Compliance costs for business will depend on how many Member States will follow the 
recommendation  at  national  level  to  make  sure  shell  entities  are  not  used  for  tax 
avoidance purposes. Different implementations of the recommendation could impact the 
Single  Market,  increasing  complexity  and  costs  of  compliance  for  businesses  with 
activities  in  different  Member  States.  It  is  possible  that  overall  compliance  costs  for 
business would be lower for this sub-option than for the previous one, as there would be 
a risk of having one or more Member State not implementing the recommendation (hence 
without new compliance burden and costs for businesses).  

6.6.2.  Regulatory charges 

As no sanctions are planned, no regulatory charges are implemented. However, given the 
discretion  that  soft  law  instruments  allow  for  Member  States,  regulatory  charges  could 
apply in some Member States if they so wish.  

6.6.3.  Enforcement cost for tax administrations 

Member States that implement the recommendation would face enforcement costs. As in 
the  case  of  the  previous  sub-option,  without  exchange  of  information  between  tax 
administrations, it may be more costly, in terms of time and resources, for Member States 
willing  to  act  to  identify  the  relevant  shell  entities,  when  compared  to  a  common 
regulatory scenario.  Overall, it is likely enforcement cost  for tax administrations would 
be lower for this sub-option than for the previous one, as there would be a risk of having 
one  or  more  Member  State  not  implementing  the  recommendation  (hence  without 
enforcement and related costs). 

46 

 
 
 
 
 
6.6.4.  Direct costs and benefits for Member States treasuries 

The effect on Member States’ treasuries is unclear as this would strongly depend on how 
many  and  which  decide  to  implement  the  recommendation.  If  most  Member  States  – 
especially  those  most  used  for  misuse  of  shell  entities  and  those  that  suffer  most  from 
erosion  of  their  tax  base  –  decide  to  act  effectively,  this  could  encourage  an  overall 
reduction of the misuse of shell entities in the EU and tax gains for the EU as a whole. 
However,  if  only  some  Member  States  decide  to  implement  the  recommendation,  this 
would likely trigger a behavioural response with  a relocation rather than a reduction of 
shell  entities:  firms  may  react  to  action  taken  in  one  Member  State  by  establishing 
entities  in  other  Member  States  not  implementing  the  recommendation.  Member  States 
hosting  shell  entities  may  not  have  an  incentive  to  act  as  a  reduction  of  tax  avoidance 
opportunities may incentivise shell companies to relocate in another Member State, and 
thus  erode  their  tax  base.  The  effect  of  this  sub-option  on  Member  States’  revenues  is 
expected  to  be  very  limited  overall,  and  likely  even  more  so  that  for  the  previous  sub-
option.  

6.6.5.  Indirect costs and benefits 

As  the  previous  sub-option,  the  implementation  of  a  Commission  recommendation 
implies a risk of divergent implementation, increasing complexity for entities with cross-
border operations. Potential loopholes would remain, especially if one or more Member 
State  did  not  act  to  implement  the  recommendation.  Tax  losses,  as  estimated  for  the 
baseline scenario, would likely remain the same if this sub-option was chosen.  

The impact on competition among firms would depend on the number of Member States 
that  decide  to  act  and  how.  The  more  Member  States  decide  to  act  and  the  better  the 
measures, the more levelled the playing field will be. In the Member States that follow 
the  recommendation  it  may  also  incentivise  voluntary  tax  compliance.  As  the  initiative 
would originate from the Commission, the latter could be seen as promoting a fairer and 
more  cohesive  society.  However,  the  effectiveness  of  this  scenario  would  be  limited, 
even  more  so  that  in  the  case  of  the  previous  sub-option.  Ineffectiveness  would 
disappoint the public opinion, as the EU would be seen as not capable to act effectively 
to tackle the problem.  

6.7.  Option  2:  A  Directive  that  requires  reporting  of  shell  entities  but 
without automatic exchange of information or common sanctions.  

A directive would ensure homogeneity of criteria to define a shell entity and the resulting 
tax  consequences,  when  used  for  tax  avoidance  or  evasion.  This  option  should 
nonetheless be well calibrated in terms of the scope of entities concerned by the reporting 
request  to  the  tax  authority.  We  note  that  the  risk  of  tax  avoidance  or  tax  evasion  is 
higher  for  entities  involved  in  geographically  mobile  activities.  It  is  equally  important 
that entities which give rise to similar risks due to their activities are treated in the same 
manner,  regardless  of  their  form  and  size.  To  ensure  that  the  burden  created  by  this 
additional  reporting  request  is  proportional  to  the  risk  of  tax  avoidance  or  tax  evasion, 
two  steps  are  taken.  First,  as  explained  in  section  5,  some  sectors  or  types  of  entities 
already  highly  regulated  and  therefore  representing  a  lower  risk  are  exempted.  Second, 

47 

 
 
 
 
 
reporting  criteria,  strict  and  cumulative,  are  defined  to  limit  the  reporting  obligation  to 
only the entities most at risk of practicing tax avoidance or tax evasion.  

Taking into account the exemptions and the reduced scope, due to strict gateway criteria, 
to fall under reporting obligation, the directive will focus on the entities most at risk. 

Such entities will have to self-assess and report to the tax administration of the Member 
State  where  they  are  resident  for  tax  purposes  whether  they  fulfil  minimum  substance 
requirements as detailed in section 5.  

If one of these indicators of minimal substance is not met, the entity will be deemed shell 
and face tax consequences, unless the entity manages to obtain an exemption or to rebut 
the presumption.  

6.7.1.  Compliance cost for businesses 

Compliance costs will increase in a limited manner. There will be a significant share 
of entities that will not have to do anything as the reporting is not applicable or they are 
covered by one of the carve-outs or exemptions. For the rest, with regard to the gateway 
criteria, to check whether a reporting is required, this should involve no or very limited 
costs as information is readily available to the company (share of relevant income, type 
of cross-border activities, and information  related to  the outsourcing of management or 
reliance  on  associated  enterprises  for  certain  activities  in  the  preceding  two  tax  years). 
Additional compliance cost will be low because: 

  Those  reporting  entities  will  represent  a  small  share  of  the  total  number  of 
companies in the EU: an estimated max of 0.3%, corresponding to some 75 000 
firms. This rough estimation is based on a study carried out by the Central Bank 
of  Ireland  which  estimates  the  number  of  shell  companies  in  Ireland.  It  thus 
assumes the share of entities in scope being the same in the EU as it is in Ireland. 
It can therefore be considered an upper-bound estimation for the EU. 

  Those max 0.3% of all companies would be required to provide a limited amount 

of non-complex information.  

  Much of these costs incurred by information requirements should be one-off costs 
or would decline steeply over time due to learning effects and IT-solutions, which 
will likely be developed quickly.  

  Only  a  fraction  of  these  max  0.3%  of  companies  would  fail  to  meet  basic 
minimum substance criteria. Only these firms will be considered for denial of tax 
advantages. 

  Even lower than that fraction will be the share of companies for whom additional 
cost  will  incur  in  the  form  of  requests  for  a  tax  ruling  to  establish  proof  of 
substance. It is impossible to deliver an accurate cost estimation for these part of 
the compliance cost. However, those costs will represent a very small percentage 
of an already small share of companies. In addition, these costs constitute mainly 
one-off costs.  

48 

 
 
 
 
 
 
The  restrictive  approach  described  will  thus  minimize  the  number  of  companies  with 
legitimate business models that could be obliged to report additional data. The following 
paragraphs will develop the different elements described above. 

  Assessing  the  gateway  criteria:  Gateway  criteria  are  defined  in  a  restrictive 
manner,  therefore  easily  assessable.  Information  to  be  gathered  comprises  a 
firm’s  very  core  characteristics  rather  than  the  evaluation  of  legally  difficult 
issues as is often the case with, e.g., new legislation affecting tax or (staff-related) 
social security matters where the assessment of legal uncertainties may be part of 
the  task.  For  example,  the  German  National  Legislation  Control  Council 
(Nationaler Normenkontrollrat - NKR) has laid down for the economy a checklist 
of typical tasks related to the compliance with new legislation114. Typical labour-
intensive steps on that list are, e. g., training, complex calculations, filling forms, 
holding internal and external meetings, or the adjustment of internal processes or 
surveillance-related  tasks.  In  the  specific  context  of  information  requirements 
related  to  the  gateway  criteria,  these  steps  are  relevant  only  to  a  very  limited 
extent or not relevant at all. 

  Tax  audits:  To  ensure  correct  reporting  by  the  company,  tax  audits  will  be 
conducted by tax authorities. Given the limited resources of tax administrations, 
audits  will  not  be  conducted  for  all  companies  and  will  likely  be  based  on  the 
level  of  risk  of  misreporting  or  randomly.  While  this  cannot  ensure  full 
compliance,  the  possibility  of  being  audited  will  provide  an  incentive  for 
companies to report properly.  

  Assessing the substance criteria: Those in scope will have to report further data 
(i.e. indicators of minimum substance) to the tax administration of their Member 
State  of  residence.  Again,  the  information  requested  should  be  readily  available 
for  the  entities115  and  the  cost  of  processing  and  transmitting  this  information 
should be limited. The specific targeting of the initiative should limit the impact 
of additional reporting to a very specific type of entities. Undertakings may need 
to accompany their tax return declaration with additional documentary evidence. 
  Tax  rulings:  In  case  an  entity  reports,  based  on  the  self-assessment,  that  it  is  a 
shell  entity,  but  considers  it  is  not,  it  could  prove  the  contrary  to  the  tax 
administration by requesting a tax ruling. This would require providing additional 
information to the tax administration, and thus generate additional administrative 
costs.  However,  these  costs  are  expected  to  be  limited  as  this  would  be 
information readily available to the company. 

114  See  here  the  Federal  Government/Normenkontrollrat’s  guidelines  for  complying  with  new  federal 
legislation (checklists on pp. 21,22), published by Statistisches Bundesamt. 
115 As presented in the description of policy option 2, in section 5: amount of  gross revenue, amount of 
business expenses, type of business activities performed to generate the relevant income, number of full-
time  equivalent  employees  qualified  to  perform  the  business  activities  that  generate  the  relevant  income, 
outsourced  business  activities,  number  of  directors,  their  qualifications,  authorisations  and  place  of 
residence for tax purposes, and bank account number) 

49 

 
 
 
 
 
                                                 
In the absence of regular and comprehensive data and information, estimating the number 
of  entities  potentially  in  scope  of  the  directive,  which  would  then  have  to  report 
substance  criteria  is  difficult.  Indeed,  this  is  an  area  where  this  EU  initiative  would 
clearly add value: it would increase data availability and knowledge on the  use of shell 
entities for tax purposes and in scope of the initiative, in a comparable manner across the 
EU,  and  lead  to  more  transparency  on  the  scale  and  role  of  shell  entities  used  for  tax 
purposes. To try to  give an estimate, different  data sources  can be used  (ORBIS, SPEs 
lists,  see  annex  4  on  methodology).  Between  29  000  and  75  000  companies  could  be 
found  to  be  potentially  requested  to  report  within  the  EU  (without  taking  into  account 
legal arrangements or other type of entities, such as partnerships, for which no data are 
available). Yet, these figures are more an order of magnitude than a proper estimate due 
to  the  difficulty  in  having  reliable  data  on  the  existence  of  such  companies,  which  are 
commonly  underreported  and  for  which,  when  they  are  reported,  only  limited  data  is 
available  (see  the  section  on  methodology).  The  upper  bound  of  this  estimation 
represents a max of 0.3% of companies in the EU. 

From a tax compliance cost point of view, one could assume that shell entities are close 
to SMEs (low number of workers). According to the ‘Study on tax compliance costs for 
SMEs’116, the corporate income tax (CIT) compliance cost for small companies in 2018 
was  around  EUR 6 000  per  year,  slightly  less  for  medium  companies.  Using  this  as  a 
proxy,  this  initiative  estimates  a  slight  increase  in  compliance  costs  of  around  5-10%. 
This  range  is  probably  already  too  high  as  the  additional  data  to  provide  are  not  so 
numerous and should be readily available. As mentioned in that same study, around 50% 
of the time spent in CIT compliance is in collecting data. The corresponding effort would 
be very small as the required additional data should be readily available and not require 
cost-intensive tasks. Moreover, according to the ‘Doing Business’ project117, the average 
amount of hours that medium sized companies invested in pay taxes in the EU in 2019 
was  around  173.  A  range  of  5-10%  will  represent  between  8.7  and  17.3  hours,  which 
should  be  enough  to  collect  and  provide  the  additional  information  required.  That  will 
represent  a  cost  per  company  and  year  of  EUR  300-600  and  the  total  costs  for  the 
companies  reporting  would  be  in  the  range  of  EUR  9  to  45  million  –  a  low  amount, 
relative to the potential tax gains118. The need to assess and report will be a recurrent cost 
for  business,  but  the  cost  burden  for  companies  will  decrease  over  years  due  to 
experience gained in the process. 

116  ‘Study  on  tax  compliance  costs  for  SMEs’,  DG  GROW,  2018,  https://op.europa.eu/en/publication-
detail/-/publication/0ed32649-fe8e-11e8-a96d-01aa75ed71a1/language-en,  
117 https://www.doingbusiness.org/en/doingbusiness 
118 see 6.4.4 above and Annex 4(A). 

50 

 
 
 
 
 
 
                                                 
6.7.2.  Regulatory charges Regulatory charges 

No sanctions are planned so no regulatory charges will be implemented. 

6.7.3.  Enforcement cost for tax administrations 

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 (in a check-the-box approach). For entities that self-assess as being non-
shell, the costs for tax administrations are limited (in case of an audit) or none. Where the 
self-assessment  leads  to  a  reporting  as  non-shell,  the  reporting  shall  feed  the  possible 
audit processes of the tax administration. It is worth noting that audits are conducted by 
tax  administrations  to  ensure  the  enforcement  of  the  law,  and  thus  auditing  costs 
generated by this initiative would be part of the recurrent cost for the administrations, not 
necessarily, or at least in a limited extent, an additional cost. 

However,  when  the  company’s  self-assessment  leads  to  a  reporting  as  shell,  tax 
consequences  apply,  and  the  entity  should  have  the  opportunity  to  prove  otherwise,  by 
requesting a tax ruling. This would require an assessment of facts and circumstances by 
the tax administration which involves a cost.  

The  proposal  provides  new  tasks  to  tax  administrations,  but  this  proposal  aims,  by 
design,  to  find  a  good  balance  between  impact  and  additional  burden.  To  facilitate  the 
handling of new responsibilities for tax administrations, the proposal relies on a limited 
amount of companies in scope (as described above) and self-assessment on a check-the-
box approach that facilitates the information analysis.  

The main risk could  be related to the management of tax rulings, especially in the first 
round  of  the  exercise,  and  the  audit  strategy.  Tax  administrations  should  put  in  place 
capacity  plans  to  deal  with  these  new  requirements.  There  may  thus  need  be  some 
training  effort.  But  again,  there  should  be  substantial  cost  reduction  over  time  through 
learning-effects.  

6.7.4.  Direct costs and benefits for Member States  

Tax gains can be expected due to  reduction in the number of shell entities used for tax 
abuse  purposes,  because  such  entities  would  be  identified  throughout  the  EU  and 
disqualify  for  tax  residence  in  the  Member  State  in  which  they  are  located,  thus  not 
benefitting from its tax regime. The criteria chosen as detailed above to identify whether 
an entity needs to report or not will target effectively the population of entities which are 
most  likely  to  be  prone  to  aggressive  tax  planning  practices  and  have  no  or  very  little 
substance. 

Entities particularly at risk of being used for tax avoidance or tax evasion purposes are 
those  receiving  passive  income  (interests,  royalties,  dividends  or  rents)  from  abroad. 
Such entities can be part of a group, play a conduit role to minimise taxes, or can be set 
up by an individual or a family, mainly to derive tax advantages when receiving income 
from assets located in another country. Overall these entities usually have no or just one 
employee,  no  own  premises  and  use  the  services  of  a  Trust  and  Company  Service 

51 

 
 
 
 
 
Provider  (TCSP).  In  the  case  of  an  entity  belonging  to  a  group,  it  may  have  more 
employees but with a disproportionately high ratio of profits over employees, indicating 
that there is a risk of tax avoidance being committed.  

Concerning  professional  intermediaries,  such  as  TCSP,  a  recent  OECD  report119 
highlighted how crucial some of them are in enabling tax evasion and how important it is 
for  States  to  design  a  proper  strategy  to  counter  their  tax  avoidance  or  tax  evasion 
practices.  It  highlights  that  “once  a  particular  structure  or  nefarious  service  provider  is 
uncovered,  this  gives  tax  authorities  the  ability  to  target  other  structures  established  by 
the same professional enablers”, and stresses that some indicators are a sign of structures 
possibly being used for tax avoidance or tax evasion, among them addresses of entities or 
directors  which  are  not  traceable,  multiple  shell  companies  from  the  same  address, 
multiple companies with directors in common and company’s address registered at a P.O. 
Box address known for illegitimate businesses120. 

Quantifying  the  impact  of  the  implementation  of  the  directive  is  difficult  due  to  data 
limitations  and  any  figure  must  be  taken  cautiously.  A  first  approximation  of  the 
phenomenon showed that the tax loss could be estimated at around EUR 23 billion, so a 
small  decrease  of  10%  of  tax  avoidance  through  shell  entities  would  recover  EUR  2.3 
billion per year for Member States’ public finances. Such a percentage is low, meaning 
that 90% of tax avoidance through shell entities would continue to occur. Yet, under this 
option,  neither  AEOI  nor  automatic  sanctions  are  planned,  which  implies  that  the 
incentive for tax payers to comply and the possibility for tax authorities, whose tax base 
is being eroded, to take action would remain low. The above figure on potential revenues 
recovered (EUR 2.3 billion) also takes into account behavioural changes of entities that 
can try to relocate outside of the EU to avoid being caught by the reporting obligation. 

6.7.5.  Indirect benefits 

Valuable information will be collected to better characterise the phenomenon of use 
of  shell  entities  for  tax  purposes.  This  directive  will,  as  a  first  result,  increase  our 
knowledge  about  the  phenomenon  in  the  tax  field,  making  reporting  compulsory  for 
entities that are captured by certain criteria. In addition, this option may have behavioural 
effects on other taxpayers or companies not within the scope of the initiative but with tax 
arrangements  that  can  also  be  used  for  tax  avoidance  purposes.  Such  taxpayers  could 
decide  to  voluntarily  comply  with  their  tax  duties.  Another  possible  change  is  the 
dismantling  of  the  structures  that,  due  to  the  new  requirements,  could  no  longer  fit  its 
purpose of tax avoidance or tax evasion. While difficult to anticipate the impact in this 

119 OECD (2021), Ending the Shell Game: Cracking down on the Professionals who enable Tax and White 
Collar Crimes, OECD Publishing, Paris.  
http://www.oecd.org/tax/crime/ending-the-shell-game-cracking-down-on-the-professionals-who-enable-
tax-and-white-collarcrimes.htm 
120 OECD (ibidem), p.24. 

52 

 
 
 
 
 
                                                 
specific  case,  this  kind  of  behavioural  changes  was  seen  for  example  in  Luxembourg 
where  the  introduction  of  a  new  registry  for  beneficial  owners  triggered  a  significant 
decrease  in  the  number  of  companies,  suggesting  that  many  of  these  beneficial  owners 
did not want to appear in a registry.  

Figure 6 Deletions of companies in Luxembourg (Source: Organized Crime and Corruption Reporting Project 
https://www.occrp.org/en/openlux/shedding-light-on-big-secrets-in-tiny-luxembourg ) 

At  social  and  political  levels,  and  for  the  general  public,  the  EU  will  be  seen  as 
addressing a sensitive topic and ensuring that everybody pays their fair share. 

6.8.  Option  3:  A  Directive  that  involves  reporting  of  shell  entities  with 
automatic  exchange  of  information  (AEOI)  but  without  common 
sanctions 

6.8.1.  Compliance costs for businesses 

As  the  conditions  for  business  do  not  change  in  relation  with  Option  2  in  terms  of 
assessments and data to be provided, compliance costs for businesses are similar to those 
of the previous option.  

6.8.2.  Regulatory charges 

No sanctions are planned so no regulatory charges will apply.  

6.8.3.  Enforcement costs for tax administrations 

The companies that will be caught by the gateway criteria will be put on a list that will be 
exchanged between national tax authorities using a model that exists already for similar 
provisions of the Directive on administrative cooperation, minimizing extra work for the 
tax authorities. Moreover, the initiative, complemented by the exchange of information, 
will  ensure  that  the  tax  administrations  of  all  Member  States  receive  the  relevant 
information and thus be given the opportunity to better protect their tax base.  

53 

 
 
 
 
 
 
 
In addition to the costs mentioned in the previous option, there are some additional costs 
related  to  the  adjustment  of121the  established  Commission  system122  for  the  automatic 
exchange of information concerning reporting entities and the required arrangements for 
uploading the information on the national level. These costs123 will mainly be IT-related 
and linked to the development and maintenance of the technical platform required for the 
exchange of information. They can be structured as: 

Table 2 Estimated costs on the implementation of the exchange of information IT platform (in EUR million) 

Development 
(one-off) 
2  

Tax 

costs 

Recurrent 
maintenance) 
0.8 

costs 

(yearly 

1  

0.12  

National 
Administrations 
European 
Commission 

6.8.4.  Direct costs and benefits for Member States 

A direct regulatory benefit will be an increase in tax gains due to better information by 
tax  administrations  about  the  existence  of  entities  that  may  be  shells  used  for  tax 
avoidance  purposes.  This  is  the  main  difference  and  value-added  compared  to  the 
previous options: not only the tax authorities of the Member State where the entity is tax 
resident but also the tax authorities of the Member State(s) whose tax base(s) is/are being 
eroded, will be made  aware, through  AEOI, of the existence of  certain  shell entities.  It 
turn,  this  will  provide  them  with  the  opportunity  to  act  to  recover  tax  that  should  have 
been  paid.  Greater  transparency  through  information  exchange  would  therefore  also 
further discourage companies to use the shell entities for tax avoidance purposes. 

Herwig Heller, Chair of the OECD Task Force on Tax Crimes and Other Crimes, in its 
last report124, recognises that “many crimes are facilitated through shell companies which 
operate  across  multiple  jurisdictions”.  He  calls  for  quicker  procedures  of  exchange  of 
information  between  criminal  investigators  and  better  access  to  tax  information  by 
financial intelligence units.  

An increase in tax revenues in the EU as a whole is  expected and which is higher than 
under  option  2,  as  the  AEOI  would  make  the  identification  of  shell  entities  easier  and 
quicker  by  all  Member  States,  and  thus  make  the  fight  against  tax  avoidance  and  tax 
evasion more efficient by the authorities whose tax base is being eroded. 

121 The platform could reuse in some extent existing elements of the DAC platforms. 
122 The platform could reuse in some extent existing elements of the DAC platforms. 
123 Estimated with support from TAXUD IT experts and costs from DAC3 as a similar approach.  
124 OECD (2021), Fighting Tax Crime  – The Ten Global Principles, Second Edition, OECD Publishing, 
Paris, https://doi.org/10.1787/006a6512-en. 

54 

 
 
 
 
 
 
 
                                                 
A quantification of the impact  of AEOI, compared with  option 2 (no AEOI), is  always 
difficult due to limited data about tax gain that can be achieved thanks to AEOI. Still, a 
recent  study by the OECD125  has shown that the AEOI has had a positive impact126 on 
the  amount  of  bank  deposits  held  in  international  financial  centres  (IFC)  by  non-bank 
actors (including households, corporates, general government, non-corporate enterprises 
such as trusts, and other non-financial institutions (e.g., charities and foundations)). The 
impact of AEOI, implemented since 2017, on the decrease of bank deposits held in IFCs 
has been estimated at 17%. It shows that greater transparency has an impact on the way 
wealth  is  located  and  thus  most  probably  declared.  This  gives  an  indication  that  AEOI 
may  have  a  significant  impact  on  the  compliance  rate  of  shell  entities  and  will  bring 
additional tax gains. 

6.8.5.  Indirect benefits 

The impact of AEOI would be stronger than the simple request to report to the tax 
authority where the entity is registered, as in option 2. It may also incentivise a better 
compliance  by  taxpayers  in  general,  knowing  that  more  information  is  exchanged  and 
that  more  people  are  paying  their  fair  share  of  taxes.  The  DAC  evaluation  has  also 
insisted on the pedagogical value of AEOI to increase general compliance behaviour127. 

A stronger impact would be a synonym of a more levelled playing field between firms so 
they can compete on a fairer basis. Fairer competition would in turn potentially stimulate 
innovation and productivity, and encourage lower prices for consumers. 

The  impact  on  EU  competitiveness  is  unclear.  From  the  point  of  view  of  pure 
attractiveness, discouraging the misuse of shell companies for tax purposes could reduce 
certain investments and financial flows. However, the flows at stake may not be desirable 
in  themselves  as  they  benefit  tax  avoiders,  are  linked  to  little  if  any  real  economic 
activity, distort the playing field, may be associated with illegal activities and fuel social 
discontent  regarding  tax  avoidance.  As  both  the  interest  and  royalty  directive  and  the 
parent-subsidiary  directive  do  not  apply  to  entities  located  outside  of  the  EU,  it  is  not 

125  O’Reilly,  P.,  K.  Parra  Ramirez  and  M.  A.  Stemmer  (2019),  "Exchange  of  Information  and  Bank 
Deposits in International Financial Centres", OECD Taxation Working Papers, No. 46, OECD Publishing, 
Paris, https://doi.org/10.1787/025bfebe-en. 
126 There is early evidence of the importance of bank deposits in the academic literature on tax evasion. 
Using data on Swiss bank liabilities, Zucman (2013) estimates that bank deposits form approximately 25% 
of  global  hidden  wealth.  Using  data  from  the  Italian  voluntary  disclosure  programme  for  hidden  assets, 
Pellegrini, Sanelli, and Tosti (2016) find that while bank deposits are the most commonly repatriated asset 
class, they comprise 13.5% of total disclosed wealth. A more recent study by Alstadsaeter, Johannesen and 
Zucman  (2018)  allocates  a  wealth  equivalent  of  about  10%  of  global  gross  domestic  product  (GDP)  to 
IFCs. 
127  Commission  staff  working  document,  Evaluation  of  the  Council  directive  2011/16/EU  on 
administrative  cooperation  in  the  field  of  taxation  and  repealing  directive  77/799/EEC,  SWD(2019)  327 
final. 

55 

 
 
 
 
 
                                                 
certain  that  genuine  shell  companies  would  be  relocated  in  third  countries,  given  that 
associated  financial  flows (interest,  royalties, dividends) would be taxed before leaving 
the  EU  (through  withholding  tax  or  non-deductibility  of  interest  and  royalty  costs), 
especially  with  the  increased  pressure  on  all  Member  States  to  put  in  place  adequate 
defensive measures against outbound payments leaving the EU untaxed. Moreover, even 
if EU Member States become less attractive for these financial flows, companies in scope 
would still need to remain within the Single Market to benefit from its advantages, thus 
making it unlikely they would be rerouted outside, at least not in a significant proportion.  

The social impact may be more positive than in option 2 because the measure will bring 
more in terms of tax gain and will be felt as more effective, as more actions will be taken. 
Clearly,  audits  will  be  needed  to  ensure  that  entities  in  scope  report  in  an  appropriate 
manner  and  it  would  also  be  important  to  ensure  that  these  reporting  be  correctly  and 
timely  exchanged  by  all  tax  authorities.  The  obligation  for  Member  States  to  proceed 
with  the  AEOI  which  is  reported  to  them  may  also  be  expected  to  encourage  Member 
States  towards  a  better  implementation  of  the  initiative  in  their  jurisdiction.  This  is 
particularly  important  because  the  Member  State  “hosting”  the  shell  entity  may  (and 
usually will) be different from the Member State whose tax base is being eroded due to 
the use of the shell entity. 

6.9.  Option 4: A Directive  with automatic exchange of information (AEOI) 

and common framework of sanctions 

6.9.1.  Compliance cost for businesses 

As  the  conditions  for  business  do  not  change  compared  to  Option  2  in  terms  of 
assessments and data to be provided, compliance costs are similar as for the previous two 
options.  

6.9.2.  Regulatory charges 

This  option  is  the  same  as  the  third  option  but  provides,  in  addition,  for  establishing  a 
common  framework  of  sanctions,  which  can  be  considered  regulatory  charges  for  the 
entities  that  would  not  comply  with  their  obligation  to  report  or  false  report.  The 
effectiveness  of  sanctions  will  depend  on  their  level  and  their  applicability.  As  a 
principle,  the  sanctions  shall  be  effective,  dissuasive  and  proportional.  The  Member 
States  will  remain  competent  to  define  concrete  sanctions  for  each  violation  of 
obligations described in the Directive. 

6.9.3.  Enforcement cost for tax administrations 

On  top  of  the  charges  estimated  for  the  previous  two  options,  additional  costs  are 
expected for the sanction process. The size of these costs 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.  This  is 
expected  to  be  more  than  compensated  by  the  income  generated  by  the  fine.  If  more 
serious sanctions are considered (e.g. possible imprisonment), provided by the applicable 
national law, additional resources would be needed to engage in legal proceedings. 

56 

 
 
 
 
 
It  is  worth  noting  that  these  costs  are  limited  to  the  necessary  costs  an  administration 
normally bears to ensure enforcement of the law. If no common framework of sanctions 
was  planned,  the  national  administration  would  still  have  to  apply  certain  sanctions  to 
ensure  compliance,  so  enforcement  costs  should  not  be  fundamentally  different  for  the 
national administration between option 2, 3 and 4. 

6.9.4.  Direct costs and benefits for Member States 

In  this  scenario,  the  tax  gains  are  expected  to  be  higher  than  for  the  previous  two 
regulatory  options  due  to  the  deterrent  power  of  sanctions  to  ensure  the  compliance. 
Moreover, a certain harmonisation of sanctions across the EU would ensure that the rules 
are enforced in a coherent and similar way by all Member States. Crucially, this would 
prevent companies in scope to ‘shop around’ the EU and relocate in those Member States 
that apply softer sanctions. 

6.9.5.  Indirect benefits 

The  use  of  sanctions  will  send  a  signal  that  tax  avoidance  and  tax  evasion  are  not 
tolerated anymore and it could also have a positive effect on tax compliance as a whole 
and not only concerning the scope of the initiative. The deterrent effect will be stronger 
than  in  the  previous  option  considered.  The  effectiveness  of  sanctions  schemas  are 
generally explained by the deterrence model128:  

  The  impact  of  the  sanction  (severity  of  the  sanction  and  probability  to  be 

sanctioned) is higher than the expected benefit for breaking the rules. 

This  option  would  send  a  strong  political  signal  that  the  EU  is  committed  to 
ending  tax  avoidance  and  tax  evasion  within  its  borders  and  have  a  positive 
impact  in  terms  of  social  cohesion  as  well  as  may  increase  EU  citizens’ 
willingness to comply with their tax obligations. Citizens would thus reckon that 
the EU is taking action to ensure everybody pay their fair share. 

The  impact  on  the  Single  Market  is  expected  to  be  positive  as  a  common 
framework of sanctions would remove the risk of fragmenting the Single Market 
with a multiplication of national sanctions. This would also improve transparency 
and certainty for businesses to operate within the Single Market. 

As this option is expected to be more effective than the others, the incentive not 
to  use  shell  companies  for  tax  purposes  would  be  more  significant  under  this 
option.  Thus,  the  unfair  competitive  advantage  of  these  companies  provided  by 
tax  savings  would  decrease,  in  turn  levelling  the  playing  with  other  companies. 

128 See Michael G. Allingham & Agnar Sandmo, Income Tax Evasion: A Theoretical Analysis,1  J.  PUB.  
ECON.  323  (1972) 

57 

 
 
 
 
 
                                                 
Fairer competition would have a positive impact on competition within the Single 
Market, with a potential positive spill-over effect on innovation, productivity and 
lower prices for consumers. 

As with the previous option, the effect on the EU competitiveness is unclear. A 
common  sanction  framework  should  make  the  use  of  shell  companies  for  tax 
purposes  within  the  EU  even  less  attractive  than  with  previous  options  as  this 
option is expected to be more effective. Moreover, companies will likely need to 
remain within the Single Market to benefit from its advantages, thus a significant 
relocation of companies performing real economic activity to non-EU countries is 
unlikely.  

58 

 
 
 
 
 
 
 
7.  HOW DO THE OPTIONS COMPARE? 

The chart presents a qualitative summary of the comparison of the four  main options129 
against  several  criteria.  The  higher  the  score  along  the  axis  of  the  chart,  the  more 
performing the option for the criterion considered.130  

Figure 7 Comparison of options 

7.1.  Effectiveness in reducing the misuse of shell entities for tax purposes 

The policy options show increasing levels of effectiveness in reducing the abusive use of 
shell entities for tax purposes with a clear difference between soft and hard law options. 
The soft law proposal provides some uncertainty about the benefits that it could bring as 
actions  by  Member  States  cannot  be  fully  anticipated.  In  that  sense,  options  with 
compulsory  and  homogenous  substance  criteria  seem  to  be  much  stronger  in  terms  of 
addressing the problem.  

Effectiveness  increases  substantially  with  the  inclusion  of  provisions  for  the  AEOI  as 
Member  States  will  be  able  to  identify  which  groups  or  individuals  are  using  shell 

129  The  two  soft-law  sub-options  are  here  assessed  jointly.  Both  of  them  are  considered  of  limited 
effectiveness overall.  
130 Annexes (Annex 8) include a table and more details on such comparison.   

59 

 
 
 
 
 
 
 
                                                 
entities. In particular, Member States will be receiving information which they could then 
use in identifying whether a shell entity is engaged in a tax planning scheme that erodes 
their tax base. A further increase of the effectiveness is expected with the use of common 
sanctions, because this is a point that increases compliance by ensuring that sanctions are 
adequate  and  effective  in  all  Member  States  and  sends  a  signal  that  can  have  indirect 
positive effects on general tax compliance, beyond shell entities. 

7.2.  Tax gains for public finances 

Tax revenue gains for public finances are closely link to the effectiveness in reducing the 
abusive use of shell entities for tax purposes. Fever opportunities for tax avoidance and 
tax evasion should lead to an increase the EU tax base and thus to positively impact tax 
revenues. As for the effectiveness of the measure, there is a clear difference between soft 
and hard low option, with the former having no to little positive impact on tax revenue 
and the latter a positive impact. Tax revenue gains are expected to increase substantially 
with  the  inclusion  of  a  provision  for  the  AEOI  as  this  would  make  the  measure 
significantly more effective. The use of common sanction is expected to further increase 
potential  tax  revenue  gains  by  further  decreasing  the  misuse  of  shell  entities  for  tax 
purposes, as explained above. 

7.3.  Compliance costs 

The policy options present increasing levels of tax gains which are however accompanied 
by higher costs for businesses and administrations. As these costs are expected to remain 
below  the  expected  tax  gains  for  public  finances,  the  most  efficient  option  is  also  the 
most complex. Costs for the business remain equal for all hard law options, while costs 
for  tax  administrations  increase  where  the  options  include  AEOI.  These  costs,  mainly 
related  with  the  development  of  platforms  for  exchanging  data,  have  an  important 
investment (one-off) component and lower recurrent costs (as experienced with DAC has 
shown). 

In determining the most suitable option, it is important that benefits remain greater than 
the costs under each option. In the options that include AEOI, the annualised cost over 10 
years  (including  one-off  and  recurrent  costs,  for  both  Commission  and  national  tax 
administrations)131 would be around EUR 1.2 million (for all EU Member States and the 
European Commission). That represents a small fraction of the estimated yearly tax gap 
due to the use of shell companies, less than 0.01%132. Thus, it is likely that the benefits of 
the provisions for AEOI have a positive and significant return on investment.  

131  The  annualised  costs  are  calculated  for  the  Commission  and  National  Tax  Administrations.  It  is  the 
result of dividing the one-off costs (EUR 3 million) by 10 years (EUR 0.3 million/year) and adding this to 
yearly recurrent costs (EUR 0.92 million): Total of EUR 1.22 million annualised costs. 
132 Approximate  estimate  obtained by dividing the  estimated  annualised cost over 10  years (EUR 1.2M) 
with the estimated potential tax revenue gain in paragraph 6.7.4 (EUR 23 billion).   

60 

 
 
 
 
 
                                                 
Similarly,  sanctions  have  a  positive  effect  on  compliance  which  adds  to  the  revenues 
specifically linked to the imposition of sanctions. Such revenues are higher than the cost 
of  applying  sanctions.  This  is  why  tax  administrations  use  sanctions  at  national  level. 
Here the use of the same set of sanctions at EU level aims to ensure that the incentive to 
comply will be the same in all Member States. The use of sanctions will be an additional 
tool to increase compliance. 

7.4.  Coherence with other policy initiatives 

The initiative responds to the central strategy of the EU to create an economy that works 
for people, by ensuring that everybody pays their fair share. Such a proposal is even more 
relevant in a time of post COVID-19 recovery, where public finances are so strained. The 
Commission has been consistent in its policies for fighting tax avoidance and tax evasion 
and in  its  latest  Communication on  Business Taxation for the 21th  century  emphasised 
the need to address the issue of tax avoidance and evasion through shell entities, as this is 
not specifically covered by (existing) EU directives. 

The coherence of the proposal is clearly higher for the regulatory options 2 to 4, because 
these options ensure a coherent framework throughout the EU. This is a cornerstone of 
the  EU  strategy  against  tax  avoidance  and  tax  evasion  and  is  currently  reflected  in  the 
ATAD and the DAC. In fighting tax avoidance and tax evasion, it is vital to make sure 
not  to  create  loopholes  by  having  different  rules  or  levels  of  implementation  between 
Member States.  AEOI brings a clear advantage to ensuring better  compliance  and is  in 
line  with  increasing  transparency,  as  promoted  by  the  successive  amendments  of  the 
DAC.  Moreover,  having  a  common  sanction  framework  between  Member  States  will 
incentivise  all  entities  to  comply  with  the  Directive  irrespective  of  their  place  of 
registration  within  the  EU.  This  would  be  consistent  with  the Single  market  dimension 
and  create  a  level  playing  field.  The  protection  of  the  level  playing  field  between 
countries, firms and citizens of the EU is a crucial element of EU action. 

As  shown  above,  in  Figure  7  Comparison  of  options,  policy  options  2,  3  and  4  are 
considered to be, to some degree and despite their costs, effective in meeting the various 
objectives  set  out  for  this  initiative.  The  option  4,  however,  appears  to  perform  best 
among the options, for the reasons outlined below. 

7.5.  Different stakeholder views on the opportunity for an intervention  

The  various  options  presented  above  in  chapter  6  can  be  clustered  into  three  main 
categories:  baseline,  soft  law  option  and  regulatory  intervention,  in  the  form  of  a 
directive.  On  the  basis  of  information  gathered  through  the  public  and  targeted 
consultation, it is possible to present different stakeholder views on the opportunity of the 
intervention.  

Stakeholders of category ‘Member States’, which includes civil servants in organisations 
such as ministries of finance and tax authorities in the specific case of this initiative, are 
mainly  supportive  of  the  intervention.  The  views  of  Member  States’  stakeholders  have 
been gathered via: a dedicated meeting of the Commission expert group Working Party 
IV on Direct Taxes, position papers by Member States and bilateral meetings.  

61 

 
 
 
 
 
Stakeholders  of  category:  ‘business’,  including  business  association  and  companies  are 
generally not in favour of an intervention. Business stakeholders seem to prefer the status 
quo,  or  the  baseline.  The  views  of  business  stakeholders  have  been  gathered  via:  the 
public  consultation,  publication  for  feedback  of  the  inception  impact  assessment,  the 
meeting of the Platform for Tax Governance held on 9 July as well as bilateral meetings.  

Stakeholders of category ‘civil society’, including NGOs and trade unions, are in favour 
of  the  intervention.  The  views  of  civil  society  have  been  gathered  via  the  public 
consultation,  publication  for  feedback  of  the  inception  impact  assessment  and  the 
meeting of the Platform for Tax Governance held on 9 July.  

EU  citizens  have  expressed  divergent  views  on  an  intervention.  The  views  of  citizens 
have been gathered via the public consultation, publication for feedback of the inception 
impact  assessment.  In  total,  9  EU  citizens  replied  to  these  consultations,  3  however 
without a specific input on the topic at stake.  

Finally, one Member of  the  Italian Parliament  and one  tax think tank, the  International 
Bureau of Fiscal Documentation (IBFD) also expressed their views replying to the public 
consultation. IBFD expressed a rather neutral view, while the parliamentarian expressed 
a view in favour of the intervention.  

62 

 
 
 
 
 
 
 
 
 
 
 
8.  PREFERRED OPTION 

This impact assessment has analysed a number of policy options, while making clear that 
data unavailability makes any attempt to quantify the impact of each option very arduous. 
However, taking into account such limitations, option 4 appears to be the most effective 
and  efficient  while  ensuring  coherence  with  the  EU  action  against  tax  evasion  and 
avoidance  practices:  a  Directive  to  set  up  common  substance  requirements  that  lead  to 
the application of common tax consequences to entities that qualify as ‘shell’ while the 
system is coupled with AEOI and a common sanction framework. 

8.1.  Description of the preferred policy option 

Among all options presented, option 4 appears best suited to meet the objectives of this 
initiative. In other words, option 4 is the preferred option. Compared to the baseline and 
to other options, the preferred option effectively and efficiently identifies and tackles the 
problem, the use of shell entities for tax avoidance or tax evasion.  

In terms of effectiveness, the preferred option ensures the highest level of compliance by 
entities.  Compliance  is  achieved  mainly  thanks  to  deterrence.  With  its  system  for  the 
AEOI  between  tax  administrations  and  the  creation  of  a  common  sanction  framework, 
the  preferred  option  has  the  highest  deterrent  effect  on  taxpayers.  AEOI  would  ensure 
that Member States whose tax bases are being eroded by the use of shell entities which 
are  registered  in  other  Member  States  are  made  fully  aware  of  this.  A  common 
framework  in  terms  of  reporting  requirements  and  definition  of  minimum  substance 
indicators would ensure equal treatment for all entities in the EU, independently of their 
place of registration and reinforce compliance. 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  Single  Market  by 
avoiding its fragmentation via the various possible choices of sanctions. 

In  terms  of  efficiency,  thanks  to  the  higher  tax  revenues  that  it  is  expected  to  generate 
with a limited additional cost of enforcement, the preferred option  appears to be the most 
efficient of all options. Higher benefits (higher tax revenues, more efficiency in reducing 
tax avoidance and evasion) imply higher costs of enforcement to ensure the compliance. 
However  each  additional  feature  (AEOI,  and  sanctions)  is  expected  to  provide  higher 
benefits than costs. Therefore, option 4 should be more efficient than option 3, building 
on  the  deterrent  effect  of  the  common  framework  of  sanctions  among  Member  States, 
while not imposing a disproportionate cost for tax authorities.  

It  is  important  to  stress  that  effectiveness  and  efficiency  are  achieved  also  thanks  to  a 
robust  filtering  mechanism.  The  preferred  option  includes  provisions  (carve-outs  and 
exemptions as well as the gateway criteria)133 that will allow tax administrations to focus 

133 Please refer to section 5.2.2. for more information on these elements.  

63 

 
 
 
 
 
                                                 
on the entities that pose the highest risk of being used for tax avoidance and tax evasion. 
While the filtering mechanism is not unique to the preferred option, it is the latter than 
maximises  its  potential  effect  and  efficiency,  combining  the  filtering  mechanism  with 
tools to make sure it is properly complied with, namely AEOI and sanctions.  

In terms of coherence, the preferred option ensures an appropriate match with the current 
EU  agenda  on  fighting  tax  evasion  and  avoidance.  Thanks  to  its  AEOI  system,  it 
complements current means of AEOI which are already in place for financial accounts, 
tax  rulings,  country  by  country  reports,  cross-border  tax  arrangements  and  platform 
revenues.  That  is  true  for  options  3  and  4.  In  addition,  the  preferred  option  provides  a 
common set of sanctions for all EU Member States, which increases effectiveness of this 
policy  option,  which  provides  for  a  common  minimal  substance  definition,  which  was 
lacking in the current anti-tax abuse framework of the EU.  

The current model of governance for administrative cooperation will be followed for the 
implementation  of the preferred  option. To support its actual delivery,  the Commission 
will organise meetings of Member States’ experts with the purpose of providing guidance 
on  implementation.  In  the  context  of  provisions  concerning  administrative  cooperation, 
this  is  done  via  regular  meetings  of  the  Commission  expert  group  Administrative 
Cooperation in Direct Taxation. The expert group includes an IT sub-group to assist on 
the implementation of exchange of information matters, a crucial aspect of the preferred 
option.  

8.2.  Different stakeholder views on the preferred option  

Different groups of stakeholders have expressed different views on the preferred option. 
From  the  consultation  activities  conducted  for  preparing  this  initiative,  business 
stakeholders prefer the status quo, or baseline, while civil society stakeholders prefer an 
EU intervention. 

Table 3 Different stakeholders' views on the preferred option 

of 

Category 
stakeholders 
Member States 
Business 
stakeholders  
EU citizens  
Civil society  
Other  (one 
tank 
and 
Member 
Italian Parliament)  

think-
one 
the 

of 

View 

Mainly supportive  
Not in favour of the intervention  

Mixed views  
Supportive  
Neutral (think tank) and supportive (Italian MP)   

64 

 
 
 
 
 
Specifically,  some  business  stakeholders  contested  elements  of  the  preferred  option, 
sanctions  and  tax  consequences  in  particular.  For  instance,  the  Investment  Association 
considers  sanctions  and  tax  consequences  for  shell  entities  as  “extremely  anti-
competitive”.134  Sanctions  and  tax  consequences  would  go  against  the  “freedoms  and 
guarantees  of  the  taxpayer”,  according  to  the  French  Association  of  Large  Companies 
(AFEP).135  In  general  terms,  “no  additional  compliance  or  reporting  should  be  forced 
upon EU businesses because they already face high compliance costs today and most of 
the compliance rules have quite harsh sanctions”, according to the American Chamber of 
Commerce in Belgium.136 The opinion that current, existing rules against tax avoidance 
are  already  sufficient  is  widely  shared  among  business  stakeholders  which,  overall,  far 
and large are not in favour of an intervention and would rather favour the status quo.  

On the other hand, civil society stakeholders have supported the preferred option and/or 
some of its key features.137 In their reply to the publication for feedback on the inception 
impact assessment for this initiative, Oxfam International expressed their preference for a 
including,  among  others:  “penalties  for  non-compliant 
regulatory 
companies or companies that report false information”.138  

intervention, 

134  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", written input by The Investment Association.  
135 Ibid., written input by AFEP.  
136 Ibid., written input by AmCham EU.  
137 It should be noted that while most business stakeholders have provided written input, in addition to the 
replies to the public consultation survey, none of the NGOs / trade unions has done so.  
138 DG TAXUD (2021) – Publication for feedback "Tax avoidance - Fighting the use of shell entities and 
arrangements 
at: 
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12999-Tax-avoidance-fighting-the-
use-of-shell-entities-and-arrangements-for-tax-purposes/F2636045_en  

International.  Online 

purposes",  written 

by  Oxfam 

input 

tax 

for 

65 

 
 
 
 
 
 
                                                 
 
9.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

Monitoring is a key element of this initiative, regardless of the policy option to be finally 
selected.  This  is  in  particular  because  any  measure  will  necessarily  rely  on  Member 
States where the potential shell entities are located to identify such entities, while another 
Member  State’s  tax  base  is  most  likely  to  be  eroded  due  to  the  presence  of  the  shell 
entity.  Monitoring  should  therefore  act  as  an  incentive  to  Member  States  to  implement 
and properly enforce measures, the primary positive impact of which is for other Member 
States. Within this context, monitoring should be twofold: 

1.  Reporting  of  data  by  Member  States  on  the  implementation  and  enforcement 
actions  as  dictated  by  the  initiative;  such  reporting  should  be  public,  at  least  in 
part,  for  the  purpose  of  transparency  and  to  enable  public  scrutiny  in  Member 
States;  and  

2.  Reporting  by  the  Commission  of  its  assessment  on  the  implementation  and 
enforcement of the initiative in the various Member States, on the basis of data, 
including reports by Member States and data on administrative cooperation in line 
with, or due to, the initiative. This report will include data under 1) and will be 
made public. 

Publication  of  data  under  1)  and  2)  is  required  to  ensure  transparency  to  ensure  the 
compliance of legal  entities  and arrangements  in  the EU with  the obligations under the 
Proposal. Furthermore, publication of such data will contribute to greater knowledge of 
the existence of shell entities in the EU. 

The following table illustrates the indicators to be used for the objectives of the initiative 
identified in chapter 4. 

Table 4 Monitoring indicators 

criteria 

Specific objectives 
1)  The  use  of  common 
substance 
to 
identify  shell  entities  to 
prevent  tax  revenue  loss 
due  to  tax  evasion  and 
tax avoidance. 

Indicators 
revenues 
tax 
Additional 
secured 
the 
to 
thanks 
initiative  preventing  shell 
entities  from  obtaining  a 
tax  benefit  at  national  or 
cross-border level. 

2)  Providing  information 
to  Member  States 
to 
identify shell entities used 
for tax abuse purposes.   

3)  Deterrent  effect  on 
TCSP’s 
  creating  shell 
entities in the EU.   

Number of shell exchanges 
made 
compliance 
activities of Member States 

and 

Qualitative  assessment  by 
Member  States  of 
the 
impact  of  the  initiative  on 
deterring  TCSP’s 
from 
offering  services  to  set  up 

66 

assessment 
exchange 

Measurement tools 
Yearly 
automatic 
information 
Member 
administrations) 

States’ 

of 
of 
(source: 
tax 

to 

Data  to  be  submitted  by 
Member  States 
the 
Commission under 1) to 8) 
(source:  Member 
below 
States’ tax administrations)  
of 
Yearly 
of 
automatic 
(source: 
information 
Member 
tax 
administrations)  

assessment 
exchange 

States’ 

 
 
 
 
 
 
  
  
  
shell entities. 

The data to be collected from Member States under specific objective 2) should include 
the following.  

1.  Number  of  entities  in  the  Member  State  that  are  subject  to  reporting  under  the 

initiative; 

2.  Number of entities that reported in line with the requirements; 
3.  Penalties imposed for non-compliance with the requirements of the initiative; 
4.  Number  of  entities  presumed  not  to  fulfil  the  minimum  substance  requirements 

and number of those that rebutted such presumption; 

5.  From an advance exemption from the requirements of the initiative by virtue of a 

decision of the authority of the Member State; 

6.  Number of audits to entities that are subject to reporting under the initiative,  
7.  Number  of  cases  where  an  entity  presumed  to  meet  the  minimum  substance 
requirements was found not to have substantial activity, in particular following an 
audit; 

8.  Number  of  requests  for  exchange  of  information  submitted  and  number  of 

requests received. 

Information on the indicators for the specific objectives in Table 4 Monitoring indicators, 
including  data  to  be  submitted  under  1)  to  8)  above,  should  be  supplied  to  the 
Commission on an annual basis. The challenge of gathering comprehensive and accurate 
information  is  acknowledged,  as  monitoring  and  evaluation  will  be  dependent  on  data 
gathered by Member States. However, past results139 show that it is feasible to deliver a 
sufficiently  detailed  and  robust  assessment  of  policies’  implementation  mainly  on  the 
basis of data collected by Member States.   

Monitoring  will  build  upon  existing  monitoring  arrangements  for  the  directive  on 
administrative  cooperation  in  direct  taxation.140  The  same  approach  seems  relevant  to 
monitor  the  implementation  of  the  preferred  option.  In  line  with  existing  monitoring 
arrangements,  five  years  after  the  implementation  of  the  instrument,  the  Commission 
plans to  evaluate the results of the policy, with  respect  to  its objectives and the overall 
impacts  on  tax  revenues,  businesses  and  the  internal  market.  In  this  context,  the  data 
collected from Member States as above will be taken into account, together with any data 
collected  from  businesses.  The  evaluation  will  consider  international  multilateral 
developments  in  the  area  of  substance  requirements  and  substance,  in  particular  at  the 
level of the OECD. Based on these elements, the evaluation will also determine if there is 

139 Key examples are: European Commission (2019) Evaluation of the Council Directive 2011/16/EU on 
administrative  cooperation  in  the  field  of  taxation  and  repealing  Directive  77/799/EEC;  European 
Commission (2018) Report on overview and assessment of the statistics and information on the automatic 
exchanges in the field of direct taxation.  
140 As put in the directive 2011/16/EU, article 27 and recital 24 in particular.  

67 

 
 
 
 
 
  
                                                 
a need to review the scope of the measures (carve-outs and gateway criteria) as well as 
the substance requirements prescribed. The report shall be published. 

68 

 
 
 
 
 
 
ANNEX 1: PROCEDURAL INFORMATION 

1.  Lead DG, Decide Planning/CWP references 

DG TAXUD, Planning reference: PLAN/2021/10793.  

The  initiative  is  part  of  the  Commission  Communication  on  Business  Taxation  for  the 
21st Century.  

2.  Organisation and timing 

An  interservice  steering  group  was  set  up  to  steer  and  provide  input  to  this  impact 
assessment report. The steering  group, led by the Secretariat-General,  met on:  18 May, 
24 June, 14 July and 14 September 2021.  

The report was submitted to the Regulatory Scrutiny Report on 23 September 2021.  

3.  Consultation of the RSB 

On  23  September  2021,  DG  TAXUD  submitted  the  draft  Impact  Assessment  to  the 
Regulatory  Scrutiny  Board.  The  Board  meeting  took  place  on  20  October  2021.  The 
opinion  of  the  Board,  as  issued  on  25  October  2021,  was  “positive  with  reservations”. 
The Board’s recommendations have been addressed as presented below. 

RSB recommendation 

The  report  should  better  justify  why  it 
addresses  both 
tax 
avoidance,  in  particular  discussing  and 
distinguishing  between  legal  and  illegal 
aspects as well as what is fair and unfair.  

tax  evasion  and 

The  report  would  benefit  from  clearer 
definitions  of  the  terms,  accounting  for 
how the perceptions of tax evasion and tax 
avoidance have changed over time.    

In addition, the report should better explain 
why  the  existing  EU  legislation  and  the 
international 
frameworks  are  not 
tax 
sufficient to address the problem.  

needs 

problem 

description 

The 
to 
distinguish  clearly  between  shell  entities 
that are problematic because they are set up 
to avoid or evade taxes and legitimate shell 
entities.  It should clarify that shells can be 

How  have  the  recommendations  led  to 
changes to the report? 
The  recommendation  has  been  addressed 
by  expanding 
the 
problem,  adding  a  new  section  (section 
2.1.4).  Overall,  the  revised  report  now 
includes  an  extensive  discussion  of  illegal 
and  legal/fair  and  unfair  uses  of  shell 
entities.  

the  discussion  of 

international 

This  recommendation  has  been  addressed 
by  clarifying  the  terms  used,  with  a  focus 
in particular on tax avoidance, the topic of 
new  text  box  within  section  2.1.4,  and  of 
additional clarifications in section 2.1.4.1.  
To  better  explain  why  the  existing  EU 
legislation  and 
tax 
the 
frameworks  are  not  sufficient  to  address 
the  problem,  the  discussion  in  Section  2 
has  been  extensively  expanded  (refer  in 
particular to section 2.1.2.).  
The  recommendation  has  been  addressed 
by clarifying the problem  (i.e. problematic 
uses  of  shell  entities).  Changes  have  been 
made  in  particular  to  section  2.1.1.,  where 
the  discussion  has  been  enriched  with 

69 

 
 
 
 
 
 
 
RSB recommendation 

set  up  for  ‘fair’  tax  purposes,  such  as 
avoiding double taxation.  

The  report  needs  to  present  the  options  of 
the initiative within the context of possible 
alternative  and  complementary  measures, 
such  as  regulating  trust  and  company 
service  providers  or  advisory  services  that 
advocate the use of problematic shells. 
It  should  make  clear  that  it  considered  a 
wide range of feasible options and explain 
why it discarded some of these. 
It  should  clearly  outline  whether  and  to 
what  extent  the  introduction  of  substance 
requirements is the most feasible option. 

identify 

The  report  should  better  justify  the  scope 
and  thresholds  for  the  exemptions,  carve- 
outs and gateway criteria. It should explain 
to  what  extent  the  preferred  option  can 
precisely  and  effectively 
the 
problematic shell entities. It should analyse 
what type of companies would need to use 
exemptions  or  tax  rulings  to  avoid  being 
treated unduly as a problematic shell entity, 
It  should  estimate  to  the  greatest  extent 
possible  how  many  companies  would  be 
affected.  The  report  should  more  clearly 
describe  the  trade-offs  between  a  large 
scope  and  costs  for  legitimate  companies 
and shell entities.  
In  addition, 
the  report  should  clearly 
outline  how  the  two  soft-law  sub-options 
differ, and separately analyse their impacts.  

for 

In  view  of  the  claimed  low  compliance 
costs 
tax 
businesses 
administrations,  the  report  should  better 
describe and substantiate the robustness  of 
the  related  estimates.  The  report  needs  to 
be  transparent  about  what  is  known  and 

and 

How  have  the  recommendations  led  to 
changes to the report? 
clarifications  of  cases  of  shell  entities  set 
up  for  “fair”  uses,  including  avoidance  of 
double  taxation,  and  clarification  about 
what Special Purpose Entities (SPEs) are.  
To  address 
the 
option  of  regulating  trust  and  company 
service  providers  has  been  presented  in 
section 5.3.  

recommendation, 

this 

The  discussion  in  section  5.3  concerning 
discarded  options  has  been  expanded  to 
address this recommendation.  
To provide more clarity on whether and to 
what  extent  the  introduction  of  substance 
requirements  is  the  most  feasible  option, 
the  discussion  in  section  5.2.2.  has  been 
expanded.   
The  recommendation  has  been  addressed 
by a clearer explanation of the exemptions, 
and how they interplay with carve-outs and 
gateway criteria. Changes have been made 
to section 5 (5.2.2.1 and 5.2.2.2).  

(Annex 

companies 

Estimates  of  the  number  of  companies 
impacted  have  been  expanded  with  a  new 
analysis based on extrapolation from Dutch 
4(B)). 
letterbox 
Moreover,  clarifications  have  been  made 
on the estimations in section 2.1.3. T 
The  recommendation  has  been  addressed 
the  differences 
by  clearly  outlining 
between the two soft-law sub options, with 
clarifications  and  explanations  added  in 
Section  6,  in  particular  sections  6.5  and 
6.6.  
Several changes have been made to address 
this  recommendation.  The  estimates  of 
compliance  costs  have  been  revised  and 
enhanced,  with  changes  done  in  particular 
in  Section  6  (6.7.1).  To  reflect  better 
possible negative effects on the capacity of 

70 

 
 
 
 
 
RSB recommendation 

estimates. 

tax  administrations 

what  is  unknown,  in  particular  in  case  of 
cost 
addition,  when 
In 
describing  the  impact  of  the  options,  the 
report  should  pay  more  attention 
to 
possible  risks  such  as  the  capacity  of 
to 
Member  States’ 
handle  additional  responsibilities  and  the 
risk  of  imposing  unnecessary  burden  on 
legitimate shell entities.  
The  report  should  better  account  for  how 
the 
effective 
consider 
implementation  and  governance  of  the 
initiative.  It  should  explain  how  effective 
information 
(including 
cooperation 
exchange)  between 
tax  authorities  of 
affected Member States and the availability 
of adequate resources would be ensured.  

options 

an 

How  have  the  recommendations  led  to 
changes to the report? 
Member  States’ 
administrations, 
tax 
changes  have  been  made  to  Section  6,  in 
particular  when  describing  the  Option  3 
(which 
administrative 
cooperation) (6.8).  

includes 

the  discussion  under 

The  recommendation  was  addressed  by 
the 
expanding 
introducing 
presentation  of  option  3, 
administrative 
including 
cooperation, 
exchange  of  information  (Section  5).  An 
introduced, 
additional  paragraph  was 
outlining 
cooperation 
effective 
that 
depends  on  quality,  use  and  timeliness  of 
exchanges  as  well  as  adequate  resources 
being  allocated  to  it.  The  explanation 
clarifies  the  importance  of  the  role  of  the 
incentivizing  effective 
Commission  for 
cooperation,  via  monitoring  activities 
mainly,  as  well  as  through  its  role  in 
transposition. 
checking 
Furthermore,  additional  clarifications  have 
been 
and 
governance 
on 
implementation issues (Section 8.1).  

correct 

added 

legal 

by 

different 

The  report  should  explain  to  what  extent 
is  contested  or 
the  preferred  option 
supported 
of 
groups 
stakeholders.  It  should  better  explain  how 
and  why  it  took  into  account  different 
stakeholder views in the main analysis.  
In  particular,  the  report  should  better 
integrate  the  concerns  raised  by  business 
associations  on  the  proportionality  of  the 
initiative.  

When  defining  the  objectives  and  the 
monitoring  arrangements,  the  report  needs 
to  define  clearly  what  success  would  look 

In  section  8  on  the  preferred  option,  the 
different  views  of  various  groups  of 
stakeholders and in particular business and 
civil  society  stakeholders  are  now  clearly 
presented and explained. 
In 
the  discussion  of  proportionality 
(Section  3.3),  the  concerns  of  business 
associations  are  now  better  integrated, 
providing details (including quotes) of key 
opinions  expressed  on  the  matter  by  this 
group  of  stakeholders.  In  Annex  2,  a  new 
section 
(section  2)  has  been  added 
explicitly  on  the  use  of  the  consultation 
results.  
The  recommendation  has  been  addressed 
by  more  clearly  defining  success  and  the 
definition of general objectives (Section 4). 

71 

 
 
 
 
 
 
 
RSB recommendation 

like  for  this  initiative.  Furthermore,  the 
description  of  the  objectives  should  not 
pre-determine the policy choice.  

results, 

address 

improve 

report  should  also 

The 
the 
the  planned  monitoring 
description  of 
arrangements  to  explain  more  clearly  how 
the  objectives,  collect 
they  build  on 
information  on 
the 
the  data  collection,  and 
feasibility  of 
explain  how  they  will  feed  into  robust 
future  evaluation.  This 
is  particularly 
important given the current lack of data on 
shell entities. It should adjust the timing of 
the  reporting  by  Member  States  to  the 
needs of the planned evaluation. 
Table 5 RSB recommendations for improvement 

How  have  the  recommendations  led  to 
changes to the report? 
In  Section  4,  the  specific  objectives  have 
been  redrafted  to  link  to  problem  drivers: 
lack of substance/tax consequences; lack of 
information; and curtailing the activities of 
TSCP's.  The  effects  of  the  objectives  are 
now emphasised rather than how to achieve 
the  specific  objectives,  to  avoid  to  pre-
determine the policy choice.  
Section  9  has  been  updated  to  include  the 
following:  (i)  Evaluation  indicators  linked 
to  the  specific  objectives  in  Section  4;  (ii) 
including  new  indicators  to  quantify  the 
reduction of tax losses due to shell entities; 
(iii) Member States to assess the impact of 
the intervention on TCSP's setting up shell 
entities;  (iii)  Alignment  of  evaluation  (and 
the 
monitoring/reporting)  with 
Directive on Administrative Cooperation.  

that  of 

4.  Evidence, sources and quality 

The  evidence  for  the  impact  assessment  report  was  gathered  through  various  activities 
and from different sources: 

  Feedback on the Inception Impact Assessment 
  Replies to the public consultation, including a very comprehensive reply by a tax 

think tank (IBFD).  

  Meetings  with 
representatives. 

stakeholders, 

including  meetings  with  Member  States 

  Other input gathered from stakeholders.  
  Desk research (please see a selective bibliography below).  

Selective bibliography 

at: 

available 

CBS  (2018),  The  Netherland’s  national  statistical  office,  ‘80 %  of  inward  investments  channelled  out 
directly’, 
https://www.cbs.nl/en-gb/news/2018/50/80-percent-of-inward-investments-
channelled-out-directly 
Commission SWD (2019), Evaluation of Council Directive 2011/16/EU on administrative cooperation in 
direct taxation  
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 
Ecorys (2021), Study on monitoring the amount of wealth hidden by individuals in international financial 
centres and the impact of recent internationally: 77-104. Available at: https://op.europa.eu/en/publication-
detail/-/publication/0f2b8b13-f65f-11eb-9037-01aa75ed71a1/language-en/format-PDF/source-225280727 

72 

 
 
 
 
 
Frunza,  M.C.  (2017)  ‘Assessment  of  EU’s  VAT  gap  due  to  shadow  economy’,  25  November  2017, 
Available at SSRN: https://ssrn.com/abstract=3077312, p. 2. 
ICF Consulting Services Limited (2021), Study on Letterbox Companies. 
The  study  can  be  found  at:  https://op.europa.eu/fr/publication-detail/-/publication/66764f95-5191-11ec-
91ac-01aa75ed71a1/language-en/format-PDF/source-244340321  
Lejour, A. (2021). The Role of Conduit Countries and Tax Havens in Corporate Tax Avoidance.  (CentER 
Discussion Paper; Vol. 2021-014). CentER, Center for Economic Research. 
Michele, A., Vaudano, M., Baruch, J. (2021), Open-Lux: l’insatiable appétit des Français pour les sociétés 
luxembourgeoises:  https://www.lemonde.fr/les-decodeurs/article/2021/02/09/openlux-l-insatiable-appetit-
des-francais-pour-les-societes-luxembourgeoises_6069268_4355770.html 
OECD (2021): Ending the Shell Game – ‘Cracking down on the Professionals who enable Tax and White 
Collar Crimes’ 
OECD (2021) Tax Administrations 2021 report.  
Pacini, C., Forbes, N. (2020), Panama Papers and the abuse of shell entities  
Pacini, C., Waldinger, N. (2018), How Shell Entities and Lack of Ownership Transparency Facilitate Tax 
Evasion and Modern Policy Responses to These Problems, Marquette Law Review. 
SOMO 
to 
https://www.somo.nl/dutch-efforts-combat-letterbox-companies-no-effect/. 
SOMO  (2021),  Centre  for  Research  on  Multinational  Corporations,  Keep  watching:  The  tax  avoidance 
structures of Viacom. 
Stiglitz, J.E. (2016) "Inequality and economic growth": 134-155. 
available 
Taylor,  D. 
https://jhulr.org/2018/10/15/the-siphon-state-the-9-5-billion-reason-why-corporations-love-delaware/ 

letterboxes  have  no 

Incorporation  Rules, 

(2018),  Abuse 

of  Delaware 

available 

JHULR, 

combat 

(2018), 

effect’, 

‘Dutch 

efforts 

at: 

at: 

Selective list of relevant case law 

Interest  and  Royalty  Directives  (ECJ  cases  C-115/16,  C118/16,  C-119/16  and  C-299/16)  and  Parent-
Subsidiary Directive (cases C-116/16 and 117/16)    

73 

 
 
 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION 

1.  The stakeholders’ engagement strategy 

For  the  preparation  of  this  initiative,  the  Commission  designed  a  stakeholder´s 
consultation strategy, which is summarized in the chart below. The aim of this report is to 
present  the  outcome  of  the  consultation  activities  and  to  show  how  the  input  has  been 
taken into account. 

The  consultation  strategy  encompasses  both  public  and  targeted  consultations.  Further 
details are given in the chart below: 

Stakeholder group  Consultation 

Methods of consultation 

Inception 
(feedback mechanism) 

Impact  Assessment 

Targeted 
Consultation 

Member States 

Academic/research 
institution 
Business 
association 
Company 
EU citizen 
Non-EU citizen 
Trade Union 
NGOs 
Public authorities 

Public authorities 

Expert  group  for 
States 
Member 
(WPIV  –  Direct 
Tax) 

Stakeholder’s 
meetings 
(Platform 
TGG) 

for 

Public consultation 

9 July 2021 

Public authorities  
Business 
associations 
NGOs 
Companies 
Academic/research  4  June  –  27  Ascertain  the 

74 

– 

of 

the 

period 

20  May  –  17 
June 2021 

June 
September 
2021 

Objective/ 
Scope 
consultation 
Collect 
feedback  on 
the  inception 
impact  
assessment 
outlining 
initial 
structure  
of the project 
Gather 
information 
on  Member 
States’ 
existing rules. 
Gather  views 
on 
possible 
EU initiative. 
22 June 2021  Gather  views 
experts 
of 
from national  
authorities  on 
the  need  for 
EU action  
and 
possible 
policy design 
Gather  views 
of 
business 
and NGOs on 
a possible EU 
initiative  

on 

 
 
 
 
 
August 2021 

institution 
Business 
association 
Company 
EU citizen 
Non-EU citizen 
Trade Union 
NGOs 

views  of  a 
broad 
range 
of 
stakeholders 
mainly on the 
added  value 
of a European 
action and the 
potential 
scope  of  the 
initiative 

Table 6 Overview of the stakeholders' strategy 

The main objectives of the different consultation streams are (i) provide stakeholders and 
the wider public with the opportunity to express their views on all relevant elements, (ii) 
gather specialised input to support the analysis of the impact of the initiative and the risk 
it may entail, (iii) contribute to design the technical aspects of the future initiative, (iv) 
satisfy transparency principles and help to define priorities for the future initiative. 

The consultation began with the launch of the Inception Impact Assessment published on 
20 May 2021 and continued until end September 2021.  

2.  Use of the consultation results  

Different stakeholder views are referred to in several points in the main analysis:  

  As part of the problem definition, in chapter 2 of the main analysis, the results of 
the consultation are used to present different stakeholders’ opinion of whether the 
use of shell entities is problematic or not from a tax perspective.  

  Concerns  raised  by  business  associations  on  the  proportionality  of  the  initiative 
are integrated to the discussion on “Why should the EU act?” in chapter 3 of the 
main analysis.  

  Different  stakeholder views are presented as part of the comparison of different 

options, in chapter 7 of the main analysis.  

 

In chapter 8 of the main analysis, on the preferred option, it is explained to what 
extent the latter is contested or supported by different groups of stakeholders.  

  At various points in the main analysis, there are several quotes and references to 
input  received  during  the  consultation  to  provide  evidence  and  context  for  the 
arguments and statements made.   

3.  Feedback on the inception impact assessment  

75 

 
 
 
 
 
The  consultation  period  through  this  feedback  mechanism  took  place  between  20  May 
and 17 June 2021 via the Commission website141. The period started when the inception 
impact assessment was published outlining the initial structure and options of the project. 
Thirteen  comments  were  submitted  during  this  consultation  period  by  the  following 
categories of stakeholders: 

Chart 1 Overview of stakeholders providing feedback to the inception impact assessment 

Key results:   

Overall, the persisting problem of tax avoidance in the EU was recognised and the need 
for further EU action in this direction was acknowledged. Respondents expressed mixed 
views  on  the  appropriate  content  of  a  potential  new  initiative  with  several  of  them 
arguing  for  further  harmonisation  of  taxation  in  the  single  market  rather  than  anti-tax 
avoidance measures. Some respondents expressed concerns on the increased compliance 
burden on  EU taxpayers under  existing rules  and the risk that  new rules are abused  by 
Member States’ tax administrations.  

In more specific terms, at least four respondents suggested that further EU action should 
aim  at  harmonising  taxation  amongst  Member  States.  Two  NGOs  warmly  welcomed  a 
potential initiative to discourage the use of entities and arrangements without substance 
for  tax  purposes.  One  feedback  was  received  from  a  business  association  expressing 
scepticism  that  the  additional  obligations  such  initiative  could  entail  for  EU  business 
would be disproportionate in relation to its added value. 

141  https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12999-Tax-avoidance-fighting-
the-use-of-shell-entities-and-arrangements-for-tax-purposes_en  

76 

 
 
 
 
 
 
                                                 
4.  Public consultation 

Overview  

The public consultation was launched on 4 June 2021. It remained open until 27 August 
2021 for a total of 12 weeks. A derogation has been granted with respect to the language 
of  the  consultation  questionnaire,  which  has  been  published  first  in  English  alone  and 
two weeks later in the other 22 official EU languages.  

In  addition  to  the  general  identification  questions,  the  questionnaire  of  the  public 
consultation  consisted  of  32  questions  which  cover  all  impact  assessment  elements  in 
terms  of  problem,  subsidiarity,  options  and  impacts  of  the  initiative.  In  particular, 
information was requested on the different uses of entities that may have low substance 
for  tax  purposes,  including  potential  abusive  schemes,  the  key  features  commonly 
observed in abusive schemes, the business sectors and legal forms most prone to abuse. 
Furthermore, input was requested on the appropriate form and objectives of potential EU 
action in relation to abuse of shell entities for tax purposes, on the appropriate treatment 
from a tax perspective and on mechanisms to monitor implementation by Member States. 
Stakeholders could also upload additional contributions. In order to increase the visibility 
of the public consultation, the Commission promoted this consultation on social media. 
In total, 50 responses were received (33 of them chose to attach position papers instead 
of or in addition to the replies to the standardized questions), coming from the following 
respondents  

Chart 2 Overview of stakeholders providing feedback to the public consultation 

77 

 
 
 
 
 
 
Type of respondent  

Total 

Academic/research institution 

Business association 

Company/business organisation 

EU citizen 

1 

26 

9 

5 

Non-governmental organisation (NGO) 4 

Other 

Public authority 

Trade union 

Grand Total 

1 

2 

2 

50 

Table 7 Overview of stakeholders providing feedback to the public consultation 

In terms of breakdown among origin countries of the respondents, the chart below shows 
a  diverse  representation.  The  increased  number  of  respondents  from  Belgium  may  be 
explained by the fact that Belgium hosts several professional and business associations at 
EU level: 

Chart 3 Country of origin of stakeholders providing feedback to the public consultation 

From the point of view of the size of the organisations replying to the survey, 6 are micro 
(1 to 9 employees), 18 small (10 to 49 employees), 9 medium (50 to 249 employees) and 
12 large (more than 250 employees).  

78 

 
 
 
 
 
 
 
Chart 4 Organisation size of stakeholders providing feedback to the public consultation 

Thirty  three  position  papers  were  submitted  by  stakeholders  in  addition  to  the  answers 
provided  by  them  to  the  standardized  questionnaire.  Position  papers  were  submitted, 
mainly, by research institutions and business associations.  

A  comprehensive  presentation  of  the  results  of  the  public  consultation  is  available, 
alongside  the  questionnaire  and  position  papers  received,  on  the  CIRCABC  website  of 
the European Commission.142   

Summary of main results: 

Challenge and possible solution 

Overall  the  respondents  acknowledge  the  ongoing  challenge  of  tax  avoidance, 
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 
via  shell  entities,  others  take  the  view  that  an  EU  legislative  initiative  in  this 
direction may be premature.  

Causes of tax avoidance 

Furthermore, 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.  This 
comes  in  contrast  to  the  argument  expressed  above  that  the  EU  should  not  take 

142 https://circabc.europa.eu/ui/group/6868da3c-d21c-4ce4-98d9-d5448986e44e  

79 

 
 
 
 
 
 
                                                 
legislative  action  before  the  impact  of  the  recent  directives  is  quantifiable:  an 
important part of the recent initiatives regards administrative cooperation.  

Chart 5 Causes of tax avoidance, results for feedback on insufficient cooperation 

Assuming that legislative action is taken at EU level to target harmful tax practices 
using  shell  entities,  respondents  identified  the  indicative  elements  of  relevant 
structures. 19 respondents143 agreed that the lack of own bank account may  be the 
most indicative feature of shell entities.144  

143 Sum of 3 (very indicative) replies and 16 (indicative) replies.  
144 Note that answer options range from very indicative to not indicative at all. 

80 

 
 
 
 
 
 
                                                 
Chart 6 Lack of own bank account and its relevance as indicator for a shell entity 

12  respondents145  also  considered146  indicative  the  place  of  residence  of  the 
directors  of  the  entity:  it  is  more  likely  that  an  entity  is  a  shell  entity  where  the 
majority  of  the  directors  reside  in  a  jurisdiction  other  than  the  jurisdiction  of  the 
entity.  

145 Sum of 4 (very indicative) replies and 8 (indicative) replies. 
146 Note that answer options range from very indicative to not indicative at all. 

81 

 
 
 
 
 
 
 
                                                 
Chart 7 Residency of directors and its relevance as indicator for a shell entity 

On the other hand, respondents did not attach significant indicative value to the type 
of income received by the entity, the lack of own employees or the employment of 
third parties to provide administration and management services.  

Activities most often performed by shell entities and legal forms  

In relation  to  the range  of activities usually performed by shell entities abused for 
tax purposes, several respondents identified the following business activities as most 
relevant: 

(i)  Holding and managing equity (11 respondents)  

(ii) Holding and managing intellectual property (10) 

(iii) Financing and leasing activities (9) 

Chart 8 Business activities most likely to be performed by shell entities 

In relation to the legal forms normally used to incorporate entities aimed to serve as 
shell, 14 respondents agreed that trusts or fiduciary entities may be preferred for this 
purpose  and  can  be  considered  at  high  risk.  Companies,  partnerships  and 
foundations were also considered relevant, at a slightly lower rate.  

82 

 
 
 
 
 
 
Chart 9 Legal forms which could be used by shell entities 

Nevertheless,  the  above  results  have  to  be  considered  with  the  caveat  that  a  significant 
percentage  of  the  contributors  to  the  survey  did  not  provide  replies  directly  to  the 
questions but submitted own comments through position papers.  

Position papers 

A total of 33 position papers has been received. A synopsis of the comments received in 
position papers is provided below. Such feedback is grouped in 4 categories depending 
on the industry / sector of the respondent: 

  Professional  associations of tax consultants  and firms  providing tax consultancy 

services (8 respondents) 

  Business associations (11 respondents)147 
  Associations representing funds and investment managers (13 respondents) 
  Contributors from the academic research area (1 respondent) 

Eight respondents come from the area of tax consultancy. Respondents of this category 
argue,  first,  that  in  the  continuous  fight  against  tax  avoidance  and  evasion,  including 
through  shell  entities,  the  evaluation  of  the  existing  framework  should  be  a  priority.  A 
new framework to complement the existing EU rules entails a risk to increase the cost of 
doing business in the EU. Furthermore, this group of respondents draws the attention to 
the  fact  that  shell  entities  can  be  misused  in  various  areas,  including  taxation  and  anti-
money laundering. Therefore, it is essential that any new EU initiative be clear as to the 
misuse it seeks to target. Should the EU opt, indeed, to take further targeted action in this 

147 One paper was a joint contribution of two business associations.  

83 

 
 
 
 
 
 
                                                 
domain,  soft  law  options  should  be  prioritised  to  binding  acts.  Any  such  action  should 
also  depart  from  the  identification  of  tax  avoidance  elements  before  entering  into  a 
control of substance.  

Ten  respondents  qualify  as  associations  representing  business  from  at  least  6  Member 
States and from outside the EU. Respondents of this category expressed the view that the 
current  EU  framework  is  adequate  to  curb  tax  avoidance  through  shell  entities.  The 
outstanding problem of tax avoidance is due to the fact that the existing tools have still 
not  produced  quantifiable  impact.  In  any  case,  as  business  associations  stressed,  a  new 
international  tax  framework  is  taking  shape,  through  the  negotiation  of  Pillars  1  and  2. 
This new framework is expected to effectively contribute to curb tax avoidance practices, 
including through the misuse of entities that lack of substance. In a scenario where EU 
took the decision to take further action, this category of respondents pointed out that any 
action  should  duly  take  into  account  taxpayers’  rights  to  evidence  the  business  reasons 
for maintaining entities that have little or no substantial activity. It was also recalled that 
what  constitutes  substance  is  a  matter  of  facts  and  circumstances  that  can  only  be 
assessed  taking  into  account  the  specific  circumstances  of  each  business  case.  In  the 
same vein, this category of respondents pointed to the element of tax avoidance, which, 
in their view, should be the entry criterion for any scrutiny of substance: in absence of a 
tax  avoidance  element  the  question  of  substance  should  not  arise.  At  least  two 
respondents  in  this  category  also  proposed  that  substance  should  be  measured  by 
reference to  a jurisdiction and not by reference to an entity. Finally, the respondents of 
this category called for the EU to minimize burden on taxpayers and to ensure that any 
new initiative does not replicate obligations already imposed under other EU legislation, 
in particular directives on administrative cooperation.  

Position papers have also been submitted by thirteen respondents from the banking and 
investment fund management industry. All of these respondents point out the extensive 
regulation  of  their  activities  in  the  EU,  which  ascertains  a  particularly  high  level  of 
transparency  for  their  sector.  In  the  view  of  this  category  of  respondents,  so  highly 
regulated  entities  should  be  excluded  from  the  scope  of  a  new  initiative  targeting  shell 
entities.  In  the  same  vein,  the  respondents  of  this  category  have  provided  various 
examples  of  common  structures  built  for  investment  purposes,  which  while  may  be 
considered to  have little substantial  economic activity, they  are not  put  in  place for tax 
avoidance purposes but for good business reasons including to facilitate investment. The 
respondents  of  this  category,  further,  stress  the  risk  that  new  rules  result  in  double 
taxation of investment vehicles in the EU, which could discourage doing business in the 
single market. One of the respondents from this category also raises concerns that an EU 
wide  initiative  on  substantial  economic  activity  could  imply  discrimination  of  foreign 
investors.  

Furthermore,  one  research  organisation  submitted  its  views  through  a  detailed  position 
paper welcoming an EU initiative targeted to shell entities while drawing the attention to 
the challenges of such undertaking. It is argued that existing anti-avoidance measures in 
the EU do not suffice to curb tax abuse involving shell entities, especially because of the 
patchwork  of  rules  in  the  Member  States  as  regards  withholding  taxation  and 
consequences attached to findings of abuse. It is also recognised that domestic tax rules 
against shell entities are rather uncommon in Member States. In light of the above, this 

84 

 
 
 
 
 
respondent  welcomes  an  EU  comprehensive  tax  initiative  on  shell  companies  as 
coordinated action promoting cross-border consistency in the applicable tax treatment to 
shell arrangements. This should allow to have one single EU standard definition of what 
is admissible and what is not, also providing tax certainty to taxpayers and advancing the 
internal  market.  As  regards  a  potential  solution  to  the  problem,  this  could  lie  with  a 
general  denial  of  tax  benefits  provided  by  EU  law  to  arrangements  identified  as  shell. 
However,  in  this  context,  the  respondent  calls  for  caution  to  ensure  that  fundamental 
freedoms are respected and restricted only in a proportional manner. The respondent also 
calls  for  any  action  to  take  into  due  account  the  challenges  inherent  in  assessing 
substance, which cannot be compatible with a non-rebuttable presumption.  

5.  Targeted consultation  

Working Party on tax questions (Working Party IV, Member States)  

On 22 June 2021, the Working Party  IV expert group met through Webex to  exchange 
views on a potential initiative to fight the use of shell entities and arrangements for tax 
purposes. The meeting focused on the need for such initiative to complement the recently 
adopted EU rules against tax avoidance, in particular the Anti-Tax Avoidance Directive, 
as amended and on Member States’ existing rules and practices in this area. The meeting 
benefitted from the participation of delegates of the 27 Member States. 

Overall Member States expressed broad support for an EU initiative to tackle the use of 
entities with little substance for tax avoidance purposes. Several Member States provided 
detailed  information  on  domestic  rules  and  practices  to  tackle  the  tax-related  problems 
posed by entities without sufficient substance. Many of the tools mentioned by Member 
States are based on the anti-tax avoidance directive.  

On the problem identification and the need for EU action, most Member States expressed 
general,  even  if  preliminary  support,  stressing  that  common  rules  and  a  framework  for 
cooperation  were  considered  useful  to  tackle  the  problem.  Some  Member  States 
highlighted the thin line between tax avoidance and other problems linked to the abuse of 
entities without substance, especially money laundering.  

On the scope of a potential initiative, some Member States expressed in favour of a broad 
scope  of  a  potential  initiative,  underlining  that  SMEs  should  not  be  excluded  from  the 
scope as such. Some Member States also draw the attention to the existing rules on tax 
avoidance  that  should  be  duly  considered  when  tailoring  new  rules.  Taxpayers’  rights 
should  also  be  taken  into  account:  taxpayers  should  have  an  effective  opportunity  to 
provide evidence on a case-by-case basis.  

On  the  appropriate  type  of  EU  action,  some  Member  States  favoured  explicitly  a 
regulatory intervention, acknowledging that soft law instruments should also be analysed. 
Caution  should  be  paid  to  ensure  the  proportionality  of  any  administrative  burden  that 
might result from a new initiative.   

Platform for tax good governance (businesses, NGOs and Member States)   

85 

 
 
 
 
 
On 9 July 2021, the Platform for Tax Good Governance met informally through Webex 
to  discuss  a  potential  Commission  initiative  to  fight  the  use  of  shell  entities  and 
arrangements for tax purposes.  

The  Platform  is  a  Commission  expert  group  whose  members  are:  Member  States’ 
representatives  and  the  following  15  organisations,  representing  business,  civil  society 
and tax/accountancy practitioners as well as researchers/academia:  

1.  Accountancy Europe (tax/accountancy professionals)  
2.  ActionAid (NGO, civil society)  
3.  American Chamber of Commerce in EU (business association) 
4.  BEPS Monitoring Group (NGO, civil society) 
5.  Business Europe (business association) 
6.  European Confederation of Independent Trade Unions (CESI) (trade union)  
7.  European Association of Tax Law Professors (EATLP) (researchers/academia)  
8.  European 

International 

Economy 

Political 

Centre 

for 

(ECIPE) 

(researchers/academia)  

9.  European Network on Debt and Development (EuroDaD) (NGO, civil society) 
10.  Confédération  Fiscale  Européenne  (CFE)  Tax  Advisers  Europe  (tax/accountancy 

professionals) 

11.  International Chamber of Commerce (ICC) (business association) 
12.  Oxfam (NGO, civil society) 
13.  SMEunited (business association)  
14.  Tax Executives Institute (TEI) (business association) 
15.  Tax Justice Network (TJN) (NGO, civil society) 

The  meeting  of  the  Platform  focused  on  the  structure  such  initiative  could  take  to 
effectively  target  such  entities  and  arrangements  in  the  internal  market.  Stakeholders 
expressed  views  on  the  risk  such  an  initiative  could  entail  to  discourage  genuine 
economic activity in the EU and how it can be tackled. The meeting benefitted from the 
participation of delegates of several business and professional associations.  

Participants in the informal meeting of the Platform for Tax Good Governance expressed 
rather  tacitly  their  consensus  on  a  potential  EU  action  to  tackle  shell  entities.  No 
objections were raised on the objective of such Commission initiative.  

One  participant  expressed  strong  support  for  common  EU  rules  to  prevent  the  use  of 
entities  or  arrangements  without  substance  for  tax  purposes.  It  was  argued  that  such 
common  rules  are  all  the  more  important  following  recent  CJEU  jurisprudence  that 
renders challenging the use of transfer pricing rules against tax avoidance through such 
structures.   

86 

 
 
 
 
 
 
Another  participant  stressed  the  challenges  in  identifying  a  proper  definition  for  shell 
entities and arrangements reminding the difficulties in defining hallmarks in the context 
of DAC6. 

Bilateral meetings with Member States (Germany, Ireland, Luxembourg, Netherlands)148  

The  consultation  focused  on  abusive  practices  identified  by  Member  States’  tax 
administrations to involve entities without adequate substance and the available domestic 
and EU rules to fight such practices. Purpose was to gather data on the appropriate form 
of  EU  action  and  the  scope  of  a  potential  initiative.  Purpose  was  also  to  gather 
information on the existing domestic rules and practices.  

Overall, Member States consulted bilaterally welcomed a potential initiative to tackle the 
use of entities without substance for the purpose of obtaining tax advantages in the single 
market.  Member  States  highlighted  that  a  new  framework  should  fit  with  the  existing 
rules for anti-tax avoidance.  

In  more  specific  terms,  two  Member  States,  while  expressing  general  support  for  a 
potential  initiative,  raised  questions  on  how  it  would  fit  with  the  General  Anti-Abuse 
Rule (GAAR) in the ATAD and with the Principal Purpose Test (PPT) in DTAs. In this 
context, it should be explored whether a new initiative should take the form of a directive 
or  the  form  of  guidance  on  the  application  of  existing  rules.  The  same  Member  States 
stressed that identifying appropriate indicators of lack of substance may be a particularly 
challenging exercise, while a case-by-case analysis may be more appropriate.  

Other two Member States expressed support for the Commission initiative and provided 
information  on domestic initiatives in  the same direction. One Member State explained 
that introduction of measures to tackle the abuse of entities without substance in the tax 
area has been a domestic policy priority in recent years. However, domestic efforts faced 
challenges due to relevant jurisprudence of the CJEU in the area of substance. Common 
EU rules in this direction are necessary to facilitate identification of this type of entities 
and abusive practices.  

Another  Member  State  explained  that  it  has  recently  introduced  some  requirements  on 
substance for specific types of entities, while a specific committee has been designated to 
analyse  the  tax  challenges  linked  to  conduit  companies.  This  Member  State  shared  the 
difficulties  in  defining  a  set  of  elements  to  identify  lack  of  substance  in  an  entity.  In 
terms of consequences, denial of tax advantages could be an appropriate solution, which 
can  be  implemented  in  practice  through  appropriate  indication  in  the  certificate  of  tax 
residence. 

148  These  Member  States  were  selected  because  they  have  developed  /  are  in  the  process  of  developing 
rules to target entities without substance or they host a significant number of entities that might be targeted 
by  a  potential  initiative  or  because  they  requested  a  bilateral  discussion  with  the  Commission  on  this 
subject. 

87 

 
 
 
 
 
                                                 
ANNEX 3: WHO IS AFFECTED AND HOW? 

1.  Practical implications of the initiative 

Legal entities and legal arrangements  

All legal persons and legal arrangements that are resident for tax purposes in a Member 
State would need to check whether they meet the reporting requirements to self-assess for 
the substance indicators under the initiative. The reporting requirements provide that only 
entities and arrangement that are most at risk of tax avoidance or tax evasion are required 
to self-assess. The reporting requirements are based on information already available to 
the entity and arrangement, therefore any additional burden is considered negligible, and 
would just require an additional box to be checked in the tax declaration. Furthermore, in 
order  to  ensure  that  the  measures  are  proportionate,  there  are  a  number  of  exemptions 
from the reporting obligations, for example, businesses already regulated at EU level and 
not-for-profit organisations, are not required to self-assess.  

At the self-assessment stage, entities and arrangements would need to verify if they pass 
the  substance  indicators.  The  indicators  are  objective  and  readily  verifiable  using 
available  information.  Additional  information  would  need  to  be  provided  to  their  tax 
authority  that  may  not  be  provided  currently  under  their  national  tax  and  accounting 
systems.  Nevertheless,  such  information  is  already  at  their  disposal  in  their  accounting 
and registration records even if not publically disclosed.  

The proposal recognises that entities and arrangements that fail the substance indicators 
may  also  be used for legitimate purposes. Such  entities and  arrangements may avail of 
the rebuttal provisions of the proposal in order to carry on their legitimate activities and 
be entitled to tax benefits. The rebuttal procedure is an additional burden but is justified 
by  the  need  to  counter  tax  avoidance  or  tax  evasion  by  entities  and  arrangements  with 
high-risk characteristics that do not meet substance requirements.   

The  main  benefit  for  entities  and  arrangements  in  the  EU  is  that  the  proposal  will 
contribute  to  creating  a  level  playing  field  between  businesses  in  the  EU  who  operate 
domestically  and  those  that  are  part  of  a  cross-border  structure.  This  level  playing  will 
ensure  a  fairer  taxation  burden,  and  reduce  the  likelihood  of  tax  avoidance  and  tax 
evasion in the EU.   

Tax Authorities  

Tax  authorities  will  incur  costs  for  implementing  the  new  system,  notably  on  staff 
resource  allocation  or  hiring  and  staff  training.  However,  this  is  not  considered 
significant  as  the  new  system  could  be  accommodated  by  the  existing  human  and  IT 
resources  used  to  address  tax  avoidance  and  tax  evasion,  notably  the  exchange  of 
information  provisions  under  Directive  2011/16/EU  on  administrative  cooperation  in 
direct  taxation.  The  main  costs  for  tax  authorities  would  be  to  process  the  self-
assessments  and,  if  the  case  of  entities  and  arrangements  not  fulfilling  the  substance 
indicators, sending the information to the national tax authorities of other Member States. 
The verification of the self-assessment by the entity or arrangement will be required to be 
undertaken by the tax authorities in addition to any other normal controls. However, as 

88 

 
 
 
 
 
this  verification  will  take  place  at  the  time  of  the  audit  then  the  additional  burden  is 
minimised. 

The main benefits of the scheme could be to act as a deterrent to tax avoidance and tax 
evasion,  in  addition  to  risk  management  and  for  audit  purposes.  Furthermore,  the 
initiative 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. 

2.  Summary of costs and benefits 

Table 8 Overview of costs and benefits 

I. Overview of Benefits (total for all provisions) – Preferred Option (Option 4: Directive with automatic 
exchange of information (AEOI) and common sanctions) 
Description 

Comments 

Amount 

Direct benefits 

Tax revenue gains 

Regulatory charges 

Indirect benefits 

Social impact 

Single Market 

Not  quantified,  but 
the  estimated 
revenues  lost  is  around  23  billion.  A 
small share of that tax gap would be very 
significant. 

In  this  preferred  option  revenues  should 
be higher than in other options due to the 
more  significant  deterrent  effect  of 
sanctions included in this option 

Public  administrations  are  the  main 
beneficiary.  A  higher  amount  of  tax 
revenues  should  be  collected  as 
schemes  used 
tax 
payments  via  shell  entities  will  be 
tackled.  

to  minimize 

Public  administrations  are  the  main 
beneficiary.  

show 

EU Citizens are the main beneficiary 
of  positive  social  impacts.  With  this 
the  EU 
initiative 
its 
schemes 
to 
commitment 
leading to tax avoidance and evasion. 
It  will  reinforce  the  role  of  the  EU 
the  willingness  of 
and 
tax 
taxpayers 
obligations 

to  comply  with 

increase 

tackle 

the  main 
EU 
are 
companies 
substance 
beneficiary.  Common 
requirements,  combined  with  AEOI 
between  tax  administrations  and  a 
common  framework  for  sanctions 
would ensure a uniform treatment of 
all  legal  entities  and  arrangements 
and  remove  the  risk  of  fragmenting 

89 

 
 
 
 
 
 
 
 
 
the Single Market..  This would also 
improve  transparency  and  certainty 
for  businesses  to  operate  within  the 
Single Market, as well as ensuring a 
level playing field. 

II. Overview of costs – Preferred option 

Citizens/Consumers  

Businesses 

Administrations 

One-off  Recurrent 

One-off 

Recurrent 

One-off  Recurrent 

For 
companies  in 
scope 
they 
to 
need 
provide  self-
assessment 
on  substance 
requirements   

2 

the 

EUR 
Million 
for 
national 
tax 
administra
tions  and 
EUR 
1 
Million 
for the EC 

Tax 
Administrat
ions  will 
to 
need 
assess  self-
assessments
. 
They  will 
need 
to 
provide  tax 
in 
rulings 
certain 
cases 

EUR 
0.8 
Million  for 
the  
National 
tax  
administrati
ons 
and 
EUR  0.12 
Million  for 
the EC 

Tax 
administrati
will 
ons 
to 
need 
execute 
regular 

Substance 
criteria   

Direct costs 

Indirect 
costs 

Direct costs 

Automatic 
Exchange 
of 
Information   

Indirect 
costs 

Sanctions 
Regime 

Direct costs 

90 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
audits  and 
inspection. 
These 
be 
could 
followed by 
legal 
proceedings 

Indirect 
costs 

91 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 4 (A): METHODS FOR ESTIMATES - ESTIMATION OF POTENTIAL TAX LOSSES 

1. 

Introduction 

Due to strong data limitations it is not possible to deliver an accurate estimate about the 
current loss of corporate tax revenues due to corporate tax avoidance and evasion through 
shell companies. Empirical evidence about  the extent of the resulting tax advantages of 
shell companies is sparse. Most recently, Demeré et al (2020)149 have estimated for the 
US that Special Purpose Entities (SPE) could generate additional tax savings equivalent 
to 6% of the US  federal corporate income tax collection. If one applied that rate to the 
EU-27’s  2018  corporate  income  tax  revenues,  this  would  imply  tax  savings  of  some 
EUR 23 billion per year. 

One could try to roughly estimate an upper bound of the current loss, i.e., a pessimistic 
scenario  of  potential  tax  savings  through  SPE  by  looking  at  Eurostat’s  Balance  of 
Payment Statistics (BPM6), more concretely:  the statistics on direct  investment  income 
in  the  EU.  It  is  important  to  underline  that  this  approach  is  not  intended  to  provide  an 
accurate  figure  –  which  would  require  data  that  is  not  available.  The  statistics  show 
income  from  Foreign  Direct  Investment  in  EU  countries,  where  the  partners  may  be 
located in another EU country or outside the EU. Income in this context thus ‘represents 
the  return  accruing  to  direct  investors,  during  a  reference  year,  for  the  provision  of 
financial  assets.’150  BPM6  explicitly  distinguishes  between  direct  investments  in  SPEs 
from investment in other entities (despite there being significant data gaps).   

Following that approach, the (hypothetical) upper bound of foregone tax revenue through 
the use of SPEs could amount to some EUR 60 billion per year, as show in Table 9. The 
majority of this amount (some EUR 40 billion) stems from investors outside the EU. This 
figure stems almost exclusively from those two EU countries showing by far the highest 
inward  FDI  in  SPEs151 and  income flows  (and thus:  imputed forgone tax revenue): the 
Netherlands and Luxembourg, ‘the world’s largest recipients of FDI also ranked in the 
global top three for outward FDI along with the United States.’152  

149 Demeré, Donohoe, Lisowsky 2020  - The Economic Effects of Special Purpose Entities  on  Corporate 
Tax Avoidance, Contemporary Accounting Research Vol. 37 No. 3 (Fall 2020) pp. 1562–1597. 
150 See Eurostat on European Union direct investments (BPM6) (bop_fdi6) (europa.eu). 
151 Damgaard, Jannick and Thomas Elkjaier – The Global FDI Network: Searching for Ultimate Investors, 
IMF Workig Paper WP/17/258, November 2017, Annex 1. 
152 Damgaard, Jannick and Thomas Elkjaier – The Global FDI Network: Searching for Ultimate Investors, 
IMF Workig Paper WP/17/258, p 4.  

92 

 
 
 
 
 
 
 
                                                 
 
Table 9 Income from inward FDI in EU countries (from Special Purpose Entities), hypothetical maximum tax savings 
through the use of SPEs 

This upper-bound estimation of foregone CIT taxes is bound to a number of very strong 
assumptions and is thus to be treated with due car. It implicitly assumes that: 

1.  all  registered  income  flows  back  to  the  foreign  partner  (investor),  i.e.: 

there is no reinvestment;  

2.  all these payments were used to avoid taxes in the EU (i.e., all SPEs’ only 

purpose is to avoid taxes); 

3.  there is no behavioural change, i.e., firms adjusting to the new situation. 
4.  taxes are fully avoided (zero tax in the EU)  
5.  CIT rates are the relevant tax rates when calculating potential tax losses. 
However,  to  the  extent  income  from  FDI  flows  back  to  the  investor  as 
outbound  payment  in  the  form  of  royalties  or  interest/dividends, 
withholding  taxes  may  be  applied.  As  the  level  of  withholding  taxes  on 
outbound  payments  from  the  countries  displayed  in  Table  7  is  usually 
much lower than the statutory CIT, so would be the tax losses. This holds 
at  least  in  the  absence  of  further  defensive  measures  taken  by  Member 
States  to  address  aggressive  tax  planning  (ATP)  by  abolishing  generous 
exemptions from the application of a withholding tax on those payments. 
Indeed, all but one Member State displayed in the table have  received a 
Country  Specific  Recommendation  on  ATP  over  the  last  two  years153  
and  are  therefore  analysed  by  the  Commission  in  the  framework  of  the 
Recovery and Resilience Facility (RRF).154  

153 This does not hold for Denmark.  
154 The Netherlands have expanded the scope of the withholding taxes from 1st January 2021 to also cover 
outbound payments of interests and royalties. 

93 

Total.. of which: Extra-EU27CIT revenue.. of which: Extra-EU27124 (=1x3)4 (=2x3)Netherlands129,29181,59632,32320,399Luxembourg104,58378,77226,08319,646Cyprus22,23320,2832,7792,535Hungary3,8161,844343166Ireland783-11198-14Denmark342967521Sum61,70242,753Sources: Col. 1,2: Eurostat series 'bop_fdi6_inc'; col. 3: OECD statistics (Corporate Income Tax rates)9.0%12.5%22.0%ForegoneDirect investment income on inward FDIStatutory CIT rate325.0%24.9%12.5% 
 
 
 
 
 
 
                                                 
The  OECD’s  FDI  statistics155  with  information  on  partner  countries  is  used  to  analyse 
more  in  depth  the  stocks  of  foreign  capital  and  the  income  flows  thereof.  A  regression 
analysis is carried out, based on this data which also distinguishes ‘regular’ firms/entities 
from  Special  Purpose  Entities  (SPE).  For  both  type  of  entities,  the  regression  tries  to 
identify determinants of (1) FDI position  of EU countries relative to partner economies 
and (2) income generated by FDI in partner economies.  

2.  FDI Position as the dependent variable 

From the point of view of an observed EU country, the dependent variable is the FDI 
position of that country vis-à-vis its partner countries.   

Assets : Parent companies, subsidiaries resident in the country observed (either SPEs or 
non-SPEs)  invest  in  subsidiaries,  Parent  companies  resident  in  the  partner  countries 
(equities and lending) 

Liabilities  :  the  other  way  around;  that  is:  investment  from  the  partner  country  in  the 
observed country 

The FDI position is expressed as percentage of the EU country’s GDP. There are major 
data gaps concerning SPE. Therefore, the FDI position of six countries is considered: SI, 
PT, IE, HU, FR, EE, AT. 

Explanatory variables: 

-  The bilateral difference in statutory corporate tax rates, that is, CIT in the country 

observed minus CIT in the partner country 

-  Fixed effects capturing specificities of the resp. country hosting the partner entity 
abroad:  a  dummy  variable  for  each  EU  country,  a  dummy  for  the  ‘basket’  of 
countries where there is a statutory CIT rate of zero (15 jurisdictions), a dummy 
for the US, a dummy for the UK. Those dummies would also capture favourable 
tax treatment of FDI (beyond low CIT) that may apply in the respective partner 
country, for example: the absence of a withholding tax on outbound payments as 
income from the FDI. 
Further control variables are:  

- 

- 

country fixed effects for capturing specificities of the observed country which are 
not  captured  explicitly  by  the  model.  Those  also  (implicitly)  control  for  cross-
country differences in data quality. 
time fixed effects as we look at time series 2005-2019 

Core findings 

All else being equal:  

155 BMD4 database, see here. 

94 

 
 
 
 
 
                                                 
  SPEs  are  disproportionally  often  used  to  shift  EU  capital  to  where  CIT  is 
lower:  One  expects  that  the  bilateral  difference  in  STR-rates  vis-à-vis  a  certain 
partner  countries  is  positively  linked  with  the  level  of  assets  held  by  domestic 
entities  against  firms  in  that  partner  country.  EU  firms  would  shift  capital  to 
where CIT rates are lower. However, this tendency is visible only if one considers 
SPEs  resident  in  the  sending  countries,  not  for  resident  operating  units  (non-
SPEs) where the link is even negative156. It seems that SPEs, rather than ‘regular’ 
firms, are used as vehicle for shifting capital to lower-tax destinations.  

  SPEs  have  a  specific  geographic  investment  profile:  As  of  the  geographical 
profile where EU capital is being channeled: Investment of ‘regular’ firms (non-
SPE)  is  being  attracted  to  a  number  of  EU  countries.  However,  the  profile  of 
SPEs  is  very  different:  Only  the  dummies  for  Luxembourg  and  the  US  are 
positive and (highly) significant.  After controlling for cross-country differences, 
those  two  countries  host  by  far  the  most  foreign  capital  stemming  from  EU 
countries.157   

  Also when looking at liabilities (SPEs/non-SPEs in observed EU countries as 
debtors),  the  pattern  SPE  vs  non-SPE  is  different:  Capital  from  around  the 
world, invested in EU SPEs, originates mainly in Ireland, the Netherlands, Spain 
and zero CIT jurisdictions while the profile for non-SPEs is much more diverse.  

3. 

Income from FDI as the dependent variable 

From  the  perspective  of  SPEs  or  non-SPEs  resident  in  some  EU  country,  income  from 
foreign FDI are payments they make to their foreign investors. In turn, if domestic SPEs 
or  non-SPEs  are  investors  as  they  receive  income  from  capital  they  have  invested  in 
foreign  countries  (income  from  outward  FDI).Both  magnitudes  are  taken  as  dependent 
variables in a regression model158 (). The independent (explanatory and control variables) 
are the same as mentioned above in the case of FDI position. 

Core finding:  

EU  payments  through  SPEs  are  mainly  being  channeled  through  Irish  and  Dutch 
entities.  With  regard  to  both  payments  and  receipts  of  firms  in  EU  countries,  the 
Netherlands,  Ireland,  the  UK  and  the  US  stand  out  as  destination/origin  of  these 
payments  (partners).  This  finding  holds  much  more  for  payments  and  receipts  of  SPEs 
than  for  non-SPEs.  With  a  view  to  the  first  two  (EU)  countries,  it  implies  that  a  high 
volume  of  payments  is  done  by  EU  SPEs  to  the  Netherlands  and  Ireland,  and  a  high 
volume  of  payments  is  received  by  EU  SPEs  from  the  Netherlands  and  Ireland.  This 
could  imply  that  SPEs  are  used  for  channeling  many  payments  from  and  to  third 

156 Hence, other factors not captured by the regression model kick in. 
157 The coefficients in the regression model show a multiple of non-SPE investment despite serious under-
reporting of SPE investment. 
158 As above, income is expressed as percent of the GDP of the country in which the EU SPEs/non-SPEs 
are located. 

95 

 
 
 
 
 
                                                 
countries  via  the  Netherlands  and  Ireland.  This  finding  is  all  but  new.  Damgaard  et  al 
confirm  a  high  volume  of  “transfers  of  profits  between  subsidiaries  in  Ireland  and  the 
Netherlands with tax havens in the Caribbean as the typical final destination.”159 

159  Damgaard,  Jannick,  Elkjaer,  Thomas  and  Nils  Johannesen,  “The  Rise  of  Phantom  Investments”, 
Finance & Development, September 2019, p. 12. 

96 

 
 
 
 
 
 
                                                 
ANNEX  4  (B):  METHODS  FOR  ESTIMATES  -  ESTIMATION  OF  COMPANIES  IN  SCOPE  OF 

THE INITIATIVE  

To  approach  the  population  of  firms  potentially  targeted  by  the  substance  criteria 
mentioned in section 5, the focus is on certain sectors of mobile and cross-border activity 
with  a  majority  of  passive  income.  These  includes  mostly:  (i)  holding  and  managing 
equity,  (ii)  holding  and  managing  assets/real  estate,  (iii)  investment/fund  management, 
(iv)  financing/leasing,  (v)  IP  holding,  (vi)  HQ,  and  (vii)  Services  entities.  The  NACE 
codes to approximate these sectors are: 

Table 10: List of NACE codes selected to approximate gateway criteria 

Description of activity 

NACE 
Code 
64.2  
64.20   
64.3   
64.30   
64.9   
64.91   
64.92   
64.99   

 Activities of holding companies   
Activities of holding companies   
Trusts, funds and similar financial entities   
Trusts, funds and similar financial entities   
Other financial service activities, except insurance and pension funding   
Financial leasing   
Other credit granting   
Other  financial  service  activities,  except  insurance  and  pension  funding 
n.e.c 
Activities of head offices   
Activities of head offices   
Other business support service activities n.e.c. 

70.1   
70.10   
82.99 
These  sectors  match  to  a  great  extent  the  preferences  expressed  by  respondents  to  the 
public  consultation  for  this  initiative.  When  asked  “which  of  the  following  business 
activity do you consider most likely to be performed by shell entities for tax purposes?”, 
a  relative  majority  of  respondents  indicated  holding  and  managing  equity  followed  by 
holding and managing IP assets and then financing and leasing activities, all covered by 
the NACE codes listed above.  

Figure  8  DG  TAXUD  (2021)  –  Public  Consultation  "Tax  avoidance  -  Fighting  the  use  of  shell  entities  and 
arrangements for tax purposes", replies to question 3.9.  

97 

 
 
 
 
 
 
Data  on  companies  on  these  sectors  is  gathered  from  ORBIS,  one  of  the  biggest 
commercial databases on company data. The identified sectors show significantly higher 
levels  of ratios  per employee for turnover, profit and fixed assets than  companies from 
other sectors, as shown in Table 11. In particular, a remarkable difference can be seen on 
the  ‘Others  fixed  assets  per  employee  indicator’,  which  represents  primarily  financial 
assets. Companies in the selected sectors significantly report less data on  the number of 
employees and turnover  as seen in  Table 11. There is  around 1.9 million  companies  in 
in  Chart  10.  
those  sectors  and 

the  share  per  Member  State  can  be  seen 

Chart 10 Share by country of companies in selected NACE codes in the EU (source: ORBIS) 

Table 11: Comparison for selected indicators between selected NACE code and the rest of economy 

Selected 
codes 

NACE 

All 
sectors 

other 

Average number of employees 
Share  of  companies  with 

less 

8.2 
than  3  81.8 

9 
63.2 

98 

 
 
 
 
 
 
 
 
 
 
 
 
employees (%) 
Turnover per employee (000’s €) 
Profit per employee (000’s €) 
Total fixed assets per employee160 (000’s €) 
Intangible  fixed  assets  per  employee  (000’s 
€) 
Other fixed assets161 per employee (000’s €) 
With data on employees (%) 
With data on turnover (%) 
With data on profit (%) 
With data on fixed assets (%) 
With data on intangible fixed assets (%) 
Source: ORBIS, financial data 2019 

407.0 
126.7 
7409.6 
63.5 

6972.0 
43.9 
18.1 
14.0 
75.9 
64.4 

176.4 
90.9 
298.0 
9.2 

191.0 
78.2 
37.9 
5.9 
50.4 
43.7 

Precise estimations of the number of companies in scope of the initiative are not possible 
due  to  the  lack  of  detailed  data.  To  estimate  the  number  of  companies  in  scope  three 
different methods were used to provide a range. 

Method 1: Extrapolation from Irish SPEs 

According  to  the  Bank  of  Ireland162  there  are,  in  2018,  approximately  1120  entities 
considered as ‘Other Special Purpose Entities (SPEs)’ which share several characteristics 
with  the  entities  in  scope  of  this  initiative.  In  Ireland,  according  to  ORBIS,  there  are 
around 29 000 companies in the identified NACE codes. Applying the same ratio to the 
EU, the amount of companies in scope could be around 75 000.  

This could be an over estimation and could work as an upper-bound-limit if Ireland has a 
higher than average incidence of this kind of companies. 

Method 2: Detecting outliers  

In  this  case,  the  goal  is  to  detect  the  companies  from  the  selected  NACE  codes  with 
higher ratios of turnover, profit and total fixed assets (including tangible, intangible and 
other fixed assets) per employee. The threshold to define the outliers were rounded from 
the mean plus 1.5 times the standard deviation. 

This calculation is based on the 2019 financial data from ORBIS and the main limitation 
of this method is the low reporting rate of the data. This lack of representativeness has 

160  In  ORBIS  ‘Fixed  assets’  represented  the  total  amount  (after  depreciation)  of  non  current  assets 
(Intangible assets + Tangible assets + Other fixed assets). 
161  In  ORBIS  ‘Other  fixed  assets’  represents  primarily  financial  assets  such  as  long  term  investments, 
shares and participations, pension funds etc. 
162  https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2018-no-11-shining-
a-light-on-special-purpose-entities-in-ireland-(golden-and-hughes).pdf?sfvrsn=8 

99 

 
 
 
 
 
                                                 
been  compensated  applying  some  weights  to  represent  the  missing  values.  This 
introduces additional uncertainty in the results.  

The thresholds defined are: 

  Turnover/employee: 4M€ 
  Profit/employee:3.5 M€ 
  Total fixed asset/employee: 75M€ 

To calculate the ratios for companies with 0 employees, 0.5 employees was imputed in 
those cases. 

With these values, around 29 000 companies were estimated to be in scope. 

Method 3: Extrapolation from Dutch letterbox companies.  

According to the Dutch Central Bank163, there are around 14.000 letterbox companies in 
the Netherlands. Assuming this kind of companies to be a proxy for companies in scope 
of this initiative, this can be extrapolated to the EU in a similar way as done in Method 1. 
The number of letterbox companies represents approximately 2.6% of the 530.000 Dutch 
companies in the selected sectors. That represents around 52.000 companies for the EU, a 
mid-point between the two previous estimates.  

163 https://www.somo.nl/dutch-efforts-combat-letterbox-companies-no-effect/ 

100 

 
 
 
 
 
 
 
                                                 
Figure 9 Illustration of the steps to estimate the number of shell entities 

Datasources 

ORBIS (Bureau van Dijk)  

The  ORBIS  database  provides  commercially  available  firm-level  data,  which  include 
financial accounts and ownership structures. The choice of the ORBIS database provided 
by Bureau van Dijk implies several advantages and limitations. The key advantages are 
the  public  availability  which  ensures  that  the  analysis  is  (in  principle)  replicable  by 
everybody  with  a  commercial  access  to  the  dataset.  The  second  and  most  important 
advantage  is  the  wide  coverage  and  consistency  across  countries  in  particular  EU 
countries, which would be difficult to achieve using different national datasets.  

There  are  also  several  important  limitations  in  the  choice  of  the  ORBIS.  First,  the 
coverage  in  ORBIS  is  incomplete  since  it  is  not  an  administrative  dataset.  While  the 
coverage  for  European  companies  has  improved  over  the  last  years,  the  coverage  of 
companies  in  the  target  sectors  could  be  lower.  The  financial  data  reported  for  these 
companies usually are incomplete and unequally distributed among countries.  

ORBIS  utilises  information  from  various  domestic  sources  and  there  are  differences 
between  countries  concerning  the  availability  of  information.  However,  a  study 
compared  data  from  commercial  registers  and  previous  research  to  the  data  in  ORBIS 

101 

 
 
 
 
 
 
 
and  found  that  the  coverage  of  the  companies  included  in  ORBIS  was  good164. 
Nevertheless, there are some exceptions, and it is important to keep in mind that not all 
companies  are  included  in  the  database.  In  addition,  as  larger  firms  often  have  stricter 
data  reporting  requirements,  they  are  typically  better  covered  in  the  database.165. 
Companies included in ORBIS are generally larger, older and more productive.166 

to  Companies.  Publications  Office  of 

164  Gerner-Beuerele,  C.,  Mucciarelli,  F.  M.,  Schuster,  E.  P., &  Siems,  M.  M.  (2016).  Study  on  the  Law 
Applicable 
at: 
https://publications.europa.eu/en/publication-detail/-/publication/259a1dae-1a8c-11e7-808e-
01aa75ed71a1/language-en. Accessed on 28 June 2019. 
165  Johansson,  A.,  Bieltvedt  Skeie,  O.,  Sorbe,  S.,  and  Menon,  C.  (2017).  Tax  planning  by  multinational 
firms: firm-level evidence from a cross-country database. OECD Economics Department Working Papers, 
No. 1355, OECD Publishing, Paris, https://doi.org/10.1787/9ea89b4d-en. 
166  Bajgar,  M.,  Berlingieri,  G.,  Calligaris,  S.,  Criscuolo,  C.,  &  Timmis,  J.  (2020).  Coverage  and 
representativeness  of  ORBIS  data.  OECD  Science,  Technology  and  Industry  Working  Papers  2020/06. 
https://doi.org/10.1787/18151965 

the  European  Union.  Available 

102 

 
 
 
 
 
 
 
                                                 
ANNEX  5:  NATIONAL  MEASURES  TO  TACKLE  SHELL  ENTITY  ABUSE  AND  RELATED 

SUBSTANCE REQUIREMENTS 

a 

provided 

summary 

This  Annex 
States 
(AT/BE/BG/DE/DK/ES/IT/NL/PL/SE) regarding national provisions related to substance 
requirements  for  shell  entities.  Sources  used  for  the  analysis  are  the  IBFD  database, 
consultations  with  Member  States,  including  WP  IV  meeting  of  22  June  2021167,  and 
other  relevant  information.  The  aforementioned  information  sources  are  not  exhaustive 
and Member States not listed may well have relevant substance rules for shell entities. 

in  Member 

practices 

of 

Summary 

There are significant differences between Member States regarding provisions designed 
to counter abuse by shell entities and related substance requirements, which reflect their 
national  taxation  systems  and  national  priorities.  These  differences  in  themselves  may 
lead to tax and regulatory arbitrage and may undermine efforts of the EU to counter tax 
avoidance and tax evasion by shell entities in the Internal Market. 

The  substance  rules  in  relation  to  shell  entities  can  be  mainly  categorised  into  the 
following: 

  Substance  rules  relating  to  non-financial  characteristics  of  the  shell  entity,  for 
example  qualifications  of  the  personnel  and  where  management  decisions  take 
place; 

  Substance rules relating to economic or financial criteria, for example whether the 
shell entity would have set up as an independent economic entity in its own right, 
or has sufficient capital to bear the default risk of financing transactions.  
Often  substance  rules  when  they  are  applicable  are  defined  at  a  high  level  and  would 
need  to  be  applied  to  the  individual  taxpayer  at  the  later  stage  of  the  audit  to  assess 
whether  abuse  has  taken  place.  This  is  understandable  given  that  tax  authorities  may 
refrain from being over prescriptive in their anti-abuse rules as this may lead to abusive 
transactions not being caught by the specific provisions. However, this may also have the 
effect that abuse is not detected at an earlier stage when the tax benefit is obtained. 

As  outlined  below,  apart  from  objective  substance  requirements  used  for  BE 
administrative practices and for NL Advance Pricing Agreements (APA), Member States 
lack  objective  substance  criteria  in  their  anti-abuse  provisions  to  assess  the  risk  of 
possible  abuse  of  shell  entities  at  the  time  a  tax  benefit  is  provided.  The  lack  of 
information available to assess substance, especially in a cross-border context, makes an 
ex-ante assessment of substance prior to a tax benefit being granted. Member States can 
avail of the ATAD GAAR, and have specific anti-abuse rules in their national legislation, 

167https://ec.europa.eu/transparency/expert-groups-
register/screen/expergroups/consult?lang=en&groupID=953 

103 

 
 
 
 
 
                                                 
however, these would have to be applied to the individual taxpayer at the time of an audit 
in order to assess the facts and circumstances. Any appeal lodged by the taxpayer would 
further delay any rectification of possible abuse.  

National Rules 

Austria 

Austria  had  developed  jurisprudence  on  tax  treaty  abuse  through  the  use  of  entities 
without economic activity, for example, premises and personnel, and abuse of beneficial 
ownership rules under the relevant tax treaty.  

Belgium 

Belgian  (tax)  law  does  not  provide  for  explicit  requirements  regarding  substance,  and 
must be analysed on a case-by-case basis. In general, under Belgian tax law, a transaction 
can  be  challenged  on  four  grounds  when  not  enough  substance  is  deemed  present, 
namely  (i)  taxable  presence,  (ii)  beneficial  ownership,  (iii)  (general)  anti-abuse 
legislation and (iv) transfer pricing. 

Despite no explicit requirements on substance, the Belgian administrative practice takes 
into account the following criteria regarding substance:  

(i) 
(ii) 
(iii) 
(iv) 

active senior decision making location (preferable directors’ residence); 
taking of strategic decisions;  
qualifications and authority of director;  
       day-to-day  operations  (e.g.  management  participation,  negotiation  and 
signature of   contracts, business risk management, decision making on capital 
investments and  funding) are managed by local qualified personnel (entity’s 
daily  management  has  the  expertise  and  is  empowered  to  oversee  the  actual 
entrepreneurial risk);  
experienced and qualified personnel; 
entity’s administrative management location;  
entity’s (main) bank accounts, along with administration and bookkeeping;  

(v) 
(vi) 
(vii) 
(viii)  all  correspondence  is  addressed  to,  and  sent  from,  the  entity’s  e-mail 

correspondence.  

Bulgaria 

Bulgaria  applies  a  substance  test  as  a  precondition  to  the  grant  of  a  benefit  under  an 
agreement  for  the  avoidance  of  double  taxation.  The  test  includes  an  assessment  of 
whether the capital, assets and people of the entity requesting the benefit are adequate for 
the  performance  of  its  activity.  Absence  of  adequate  capital,  assets  and  people  may  be 
considered  to  imply  abuse.  Benefits  from  agreements  for  the  avoidance  of  double 
taxation are not granted to entities that have no substance.  

Denmark 

As from 1 May 2015, Denmark has introduced a General Anti-Abuse Rule that includes 
the  following:  (i)  an  anti-abuse  provision  for  EU  Directives;  and  (ii)  a  tax  treaty  anti-
abuse provision. 

104 

 
 
 
 
 
As  discussed  in  section  3.2.  of  the  Impact  Assessment,  there  have  been  a  number  of 
important  ECJ  rulings  relating  to  Danish  conduit  companies  with  regard  to    abuse  of 
beneficial ownership requirements under a tax treaty. If a Danish company is used as a 
conduit  company  facilitating  the  reduction  of  the  foreign  dividend  withholding  tax  on 
dividends  paid  to  the  Danish  company,  Denmark  imposes  dividend  withholding  tax  on 
the otherwise tax-exempt dividend distributions from the Danish company to the foreign 
parent.  The  dividend  withholding  tax  imposed  will  be  equivalent  to  the  dividend 
withholding tax that Denmark is entitled to impose under the applicable tax treaty. The 
anti-abuse rule does not apply if the distribution of dividends from the Danish company 
is permitted by the EU Parent-Subsidiary Directive (2011/96). 

Germany 

The GAAR of Germany has the following three indicators:  

(i) 

(ii) 

(iii) 

a  third  party,  considering  the  economic  facts  and  effects  of  the  structure, 
would have chosen the same legal structure without the generated tax benefit; 
or 
interposition of relatives or other closely related persons or companies solely 
for tax purposes; or  
transfer or shifting of income or capital assets to other legal entities solely for 
tax purposes. 

If there is an  abuse of law, the structure is  disregarded for tax  purposes, and the tax is 
assessed in the same way as if a normal structure had been used. Furthermore, Germany 
has a specific anti-abuse Treaty Shopping provision which denies treaty benefits (mainly 
reduction  of  withholding  tax)  to  a  non-resident  (intermediate)  company  under  certain 
conditions,  if  such  a  company  is  not  the  beneficial  owner  of  the  income  and  its 
shareholders  (the  beneficial  owners)  would  not  be  entitled  to  the  treaty  benefit  if  they 
would have invested directly. 

Germany has a Treaty override provision/ exemption (and hence grant of treaty benefits 
if certain “substance requirements” are met), if the following conditions are satisfied: 

 a)  there  are  economic  or  other  important  reasons  for  the  use  of  the  intermediary 
company in view of the respective income; and 

 b)  it  is  adequately  equipped  for  carrying  out  its  own  business  activities  and  for 
participation in general commerce. 

Italy 

Italy has the following provisions to counter entities used for abusive purposes: 

  A  26%  withholding  tax  is  levied  on  interest  paid  by  resident  taxpayers  to  the 
foreign permanent establishment of another resident person. The withholding tax 
is  final  if  the  interest  is  then  paid  to  a  non-resident  person  through  the  foreign 
permanent  establishment  (i.e.  conduit  financing  where  the  true  lender  is  a  non-
resident person). The withholding is only an advance payment of the taxes due in 

105 

 
 
 
 
 
any  other  case  (e.g.  conduit  financing  where  the  true  lender  is  another  resident 
person). 

  “non-operative entity” refers to non-resident entity that has less than 5 employees 

and turnover less than EUR 800 million.  

Netherlands 

The  Netherlands  has  the  following  anti-abuse  provisions  related  to  the  use  of  conduit 
entities: 

EU  Parent-Subsidiary  Directive:  With  effect  from  1  January  2016,  the  corporate 
income  tax  rules  for  non-residents  and  the  dividend  withholding  tax  rules  for  Dutch 
resident  cooperatives  are  amended  to  implement  EU  Directive  2015/121  (which 
introduced  a  general  anti-abuse  rule  into  the  EU  Parent-Subsidiary  Directive  2011/96). 
As a consequence, non-resident entities that hold a substantial shareholding (5% or more) 
in a Dutch resident company are subject to corporate income tax if the substantial interest 
is held with the main purpose of avoiding taxation and if an artificial structure is put in 
place (i.e. a structure that does not have sufficient substance). In addition, Dutch resident 
cooperatives  are  also  obliged  to  withhold  dividend  withholding  tax  on  dividends 
distributed  to  their  members,  if  tax  avoidance  is  one  of  the  main  purposes  and  an 
artificial structure is put in place. 

Interest  and  Royalty  Conduit  Companies:  The  law  contains  a  specific  provision168 
regarding the transactions of interest and royalty conduit companies if the company does 
not economically bear the real risk of default of the loan, for example, the company has 
insufficient capital. 

Obtaining  an  APA  in  the  Netherlands:  An  intermediate  financial  service  company 
must comply with the following substance requirements: 

  at least half of the statutory board members with decision-making authority live 

 

or are resident in the Netherlands; 
the  board  members  living  or  resident  in  the  Netherlands  possess  the  required 
professional expertise to properly perform their tasks; 
the taxpayer employs qualified staff; 

 
  management decisions are taken in the Netherlands; 
 
 
 
 
 

the taxpayer’s most important bank accounts are held in the Netherlands; 
the financial records are kept in the Netherlands; 
the taxpayer’s registered office is located in the Netherlands; 
the taxpayer is not treated as a tax resident in and by another country; 
the taxpayer runs a real risk within the meaning of the law; and 

168 Article 8c of the NL Company Tax Law (‘VpB’) 

106 

 
 
 
 
 
 
                                                 
 

the amount of equity held by the taxpayer is at least appropriate for the required 
actual risk. 

Whether  or  not  the  substance  requirements  are  met  depends  on  the  facts  and 
circumstances.  If  the  taxpayer  does  not  meet  the  minimum  substance  requirements,  the 
tax  authorities  automatically  exchange  information  with  the  relevant  foreign  tax 
authorities. 

Intermediate  financial  services  companies  are  explicitly  required  to  indicate  in  their 
corporate  income  tax  return  whether  the  substance  requirements  were  met  or  not  and 
whether the company bears sufficient risk. If the intermediate financial services company 
did not comply with the substance requirements, it had to provide to the tax authorities 
the  information  necessary  to  assess  whether  the  substance  requirements  are  met. 
Furthermore, if the intermediate financial services company applied a tax treaty provision 
or a provision of the EU Interest and Royalties Directive (2003/49), and it does not meet 
the  minimum  substance  requirements,  the  Netherlands  also  automatically  exchanges 
information with the relevant foreign tax administration. 

With  effect  from  1  April  2018,  the  following  additional  substance  requirements  are 
required to be met: 

 

 

the  holding  company  incurred  employment  costs  of  at  least  EUR  100,000  in 
relation to its intermediary holding functions; and 
the holding company had (for at least 24 months) own office space at its disposal 
used for carrying out the intermediary holding functions. 

With effect from 1 July 2019, Advance Tax Ruling can only be granted if the economic 
nexus criterion is met, among other requirements. Under the new regime, the rulings can 
only be granted if: 

 

 

the  entity  requesting  the  ruling  is  part  of  a  group  of  companies  that  undertakes 
sufficient  commercial  operational  activities  in  the  Netherlands  (i.e.  has  an 
economic nexus there); and 
the requesting entity carries on such operational activities for its own account and 
at its own risk, with sufficient personnel, at the level of the group, present in the 
Netherlands; and 
such activities are commensurate with the function of the entity within the group. 
The  substance  requirements  which  now  apply  to  an  Advance  Pricing  Agreement  no 
longer apply for obtaining an Advance Tax Ruling. 

 

Poland 

In  Poland,  in  order  to  benefit  from  preferential   withholding  tax  treatment,  the  Polish 
corporate  income  tax  provisions requires  withholding  tax  agents  to  prove  that  the 
recipient of a given cross border payment is a beneficial owner of this payment.  

Since January 2019, the test of beneficial ownership includes a verification of whether a 
given entity expected to benefit from a preferential withholding tax treatment carries out 
“real  economic  activity”  in  its  country  of  tax  residence.  This  is  done  by  taking  into 
account  certain  criteria  namely  premises,  sufficient  local  staff,  broad  business  rationale 

107 

 
 
 
 
 
and  local  board  members,  among  others,  so  as  to  check  that  the  entity  is  not  a  non-
genuine, or artificial, structure lacking economic rationale.  

Spain 

Spain has several provisions dealing with substance related to shell entities: 

-  Article  16  of  the  General  Tax  Law169:  regulates  simulation,  stating  that  the 

taxable event taxed will be the one actually carried out. 

-  Article  18  of  the  Corporate  Income  Tax  Law170:  regulates  transfer  pricing  and, 
according  to  the  OECD  Transfer  Pricing  Guidelines,  allows  taking  into  account 
functions, assets and risks to analyze the substance of an entity.  

-  Article  100  of  the  Corporate  Income  Tax  Law171:  regulates  Controlled  Foreign 
Companies  (‘CFC’s’).  Paragraph  2  mandates  the  application  of  the  regime  to 
entities lacking substance when certain requirements are met.  

-  Article  91(2)  of  the  Income  Tax  on  Individuals172:  regulates  CFC  (Controlled 
Foreign Companies) for individuals with the same wording as provision 100.2 in 
CITL. 

Sweden 

A company is treated as a shell company if its liquid assets, i.e. cash and similar assets, at 
the moment the company is sold, exceed 50% of the consideration received for the shares 
in that company (chapter 25, section 9(2) of the IL). The disposal of a shell company or 
the  repurchase  of  the  assets  of  a  shell  company  may  give  rise  to  capital  gains  taxation 
under certain conditions. Exemption may be granted if a special shell company tax return 
is submitted. 

169 Article 16 of Ley 58/2003, de 17 de diciembre, General Tributaria  
170 Article 18 of Ley 27/2014, de 27 de noviembre, del Impuesto sobre Sociedades 
171 Article 100 of Ley 27/2014, de 27 de noviembre, del Impuesto sobre Sociedades 
172 Article 91 of Ley 35/2006, de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas 

108 

 
 
 
 
 
 
 
                                                 
ANNEX 6: THIRD COUNTRY MEASURES 

1.  Context 

Substance requirements of general nature, i.e. not in relation to specific preferential tax 
regimes,  for  tax  purposes  do  not  apply  in  EU  Member  States  at  the  current  stage. 
However, since 2019, they apply in third country jurisdictions with no or only nominal 
corporate  taxation,  namely  Anguilla,  Bahamas,  Bahrain,  Barbados,  Bermuda,  British 
Virgin Islands, Cayman Islands, Guernsey, Jersey, Isle of Man, Marshall Islands, Turks 
and  Caicos  Island  and  the  United  Arab  Emirates.  The  above  jurisdictions  have  been 
requested  to  introduce  substance  requirements  in  the  context  of  the  EU  list  of  non-
cooperative  jurisdictions  (EU  list)  as  a  safeguard,  to  ensure  that  such  feature  does  not 
function to facilitate base erosion and profit shifting (BEPS) from high tax jurisdictions.  

Substance  requirements  for  third  countries  have  been  defined  by  the  Code  of  Conduct 
Group  (Business  Taxation)  in  the  scoping  paper  on  criterion  2.2  of  the  EU  listing 
exercise  (Scoping  Paper)173.  The  EU  criterion  has  also  provided  the  basis  for  the 
subsequent  international  standard  endorsed  by  the  Forum  on  Harmful  Tax  Practices 
(FHTP)174. All aforementioned third countries have introduced legislation reflecting the 
requirements set in the scoping paper and have therefore been considered compliant with 
the requirements of the EU list.  

2.  Summary of the requirements 

The scoping paper requires the introduction of  substance requirements for undertakings 
established  in  no  or  nominal  tax  jurisdiction  that  are  engaged  in  specific  business 
activities, which generate geographically mobile income. Such activities include banking, 
insurance, fund management, financing, leasing, headquarters, shipping and exploitation 
of intellectual property.  

Relevant undertakings must report on whether or not they meet a set of requirements on 
an  annual  basis.  Specifically,  they  must  demonstrate  that  they  undertake  in  the 
jurisdiction core income generating activities justifying the income that accrued to them 
in  the  relevant  tax  year.  In  this  regard,  they  must  demonstrate  that  they  have  in  the 
specific  jurisdiction  adequate  premises,  adequate  qualified  employees  and  adequate 
expenditure  to  perform  such  activities.  For  any  part  of  the  core  income  generating 
activities that is outsourced, the undertakings must demonstrate that the service provider 
is  performing  the  activities  in  the  jurisdiction  under  the  undertaking’s  supervision.  In 

173  Code  of  Conduct  (Business  Taxation)  −  Scoping  paper  on  criterion  2.2  of  the  EU  listing 
exercise9637/18 FISC 241 ECOFIN 555 
174 Inclusive Framework on BEPS: Action 5, Resumption of Application of Substantial Activities Factor to 
No  or  only  Nominal  Tax  Jurisdictions  (https://www.oecd.org/tax/beps/resumption-of-application-of-
substantial-activities-factor.pdf) 

109 

 
 
 
 
 
                                                 
addition,  they  must  demonstrate  that  the  relevant  activities  are  actually  directed  and 
managed in the jurisdiction through strategic decisions taken there.  

A  distinction  is  made  for  intellectual  property  activities,  where,  under  specific 
circumstances, a higher BEPS risk can be identified. This is the case in particular if the 
undertaking  has  not  been  involved  in  the  development  of  the  asset  and  is  exploiting  it 
through associated enterprises. In such scenarios, undertakings are presumed not to meet 
substance requirements and must provide detailed evidence on their business plans, their 
staff and decision-making processes to rebut such presumption.  

A distinction is also made for purely equity holding undertakings, which only hold equity 
participations and only earn dividends, as well as for collective investment funds (CIVs). 
First,  pure equity holdings have been  considered to  require a very  low level  of income 
generating activity and to raise a lower BEPS risk. As a result, such undertakings must 
only  evidence compliance with  corporate law requirements as well as that they dispose 
the  premises  and  people  necessary  to  hold  and  manage  the  equity.  Second,  CIVs  are 
pools  of  money  and  as  a  result  cannot  be  directly  subject  to  substance  requirements. 
Instead, the Code of Conduct Group developed an indirect approach focusing on whether 
the legislative and administrative framework of the jurisdiction can be considered robust 
enough to justify the location of a significant CIVs business sector.  

In  terms  of  procedure,  the  assessment  of  relevant  undertakings’  reporting  lies,  in 
principle, with the administration of the third country jurisdiction. However, the margin 
of  discretion  is  limited  in  two  ways.  First,  there  is  a  stringent  requirement  for 
spontaneous exchange of information with the jurisdictions of residence of shareholders 
and  beneficial  owners.  Second,  third  country  jurisdictions  are  monitored  on  an  annual 
basis on how they implement in  practice the  substance legislation.  In this context,  they 
must provide specific information on the data they have received from undertakings and 
their enforcement action, to be assessed by the Code of Conduct Group in coordination 
with the Forum on Harmful Tax Practices. 

110 

 
 
 
 
 
 
 
ANNEX 7: THE OPENLUX INVESTIGATION, SOME KEY FINDINGS  

OpenLux is the name of a large media investigation led by a consortium of journalists, 
the  Organized  Crime  and  Corruption  Reporting  Project  (OCCRP)  associating  17 
international medias – including Süddeutsche Zeitung, Le Soir, Le Monde and Woxx. 

Unlike  the  “Panama  Papers”  or  “LuxLeaks”,  OpenLux  did  not  stem  from  a  leak  of 
private documents. This new type of reporting is based solely on the collection of public 
data gradually put in online accessible registers by Luxembourg.  

After one year of investigations, approx. 3,3 million documents have been obtained from 
the  two  national  registries  (RCS  and  RBE)  of  Luxembourg,  including  627 000 
accounting documents, covering 260 000 companies (half of which no longer exist) over 
the period 2010-2020.  

OpenLux sheds light on shell companies located in Luxembourg. Among other findings, 
OpenLux revealed that:  

  45%  of  the  140  000  companies  currently  registered  in  Luxembourg  are  pure 
holding  companies  with  no  other  activity;  they  own  6,5  trillion  EUR  of  assets, 
representing 85% of all the assets owned by companies in the country; 

  87% of businesses are owned by non-Luxembourgers (offshore); 
  many of the companies do not have any employees or any physical office space at 

their registered address in Luxembourg; 

  more  than  25  000  firms  are  listed  in  just  40  addresses,  while  a  total  of  1 804 

companies are registered to the same address.  

Another  key  finding  relates  to  transparency  and  availability  of  Beneficial  Ownership 
(BO) information. OpenLux has shown that Luxembourg had not ensured availability of 
accurate and up-to-date information of beneficial owners of all of these companies.  

Following  the  OpenLux  revelations,  Luxembourg  rejected  the  claims  made  by 
investigative journalists. The government issued a statement pointing out, among others, 
that: “Luxembourg provides no favourable tax regime for multinational firms, nor digital 
companies, which have to abide by the same rules and legislation as any other company 
in  Luxembourg.”  Moreover,  the  statement  said  that:  “Luxembourg  is  fully  compliant 
with  and has implemented all  applicable EU  and international  rules and standards with 
regards to tax transparency, the fight against tax abuse as well as AML – and even gone 
beyond these requirements”.175 

The 

175 
https://gouvernement.lu/en/actualites/toutes_actualites/communiques/2021/02-fevrier/08-declaration-
openlux.html 

Luxembourg 

statement 

online 

by 

is 

at: 

111 

 
 
 
 
 
                                                 
  
ANNEX 8: HOW DO THE OPTIONS COMPARE? AN OVERVIEW TABLE  

Options are compared against the following criteria:  

1.  Effectiveness in reducing the misuse of shell entities for tax purposes  
2.  Tax gains for public finances 
3.  Compliance costs: 

a.  Cost of implementation for businesses  
b.  Enforcement costs for tax authorities  

4.  Indirect benefits: 

a.  Effect on the Single Market 
b.  Effect on firm competition 
c.  Effect on EU competitiveness 
d.  Social impact 

5.  Coherence with other anti-tax avoidance and evasion initiatives 

The symbol ‘0’ represents no change compared to the baseline, the ‘+’ symbol points to a 
better performance of the option compared to the baseline, and ‘++++’ indicates the best 
performing  among  the  options,  whereas  ‘-‘indicates  an  additional  cost  and  ‘----‘the 
highest level of costs. 

Table 12 Comparison of options 

Compliance 
costs 

Indirect effects 

Coherence 

Tax 
gains 
for 
public 
finances 

Effective-
ness 
in 
reducing 
the 
misuse  of 
shell 
entities 

C
o
s
t
s

f
o
r
b
u
s
i
n
e
s
s
e
s

a
d
m
i
n
i
s
t
r
a
t
i
o
n
s

C
o
s
t
s

f
o
r

t
a
x

O
n
t
h
e
S
i
n
g
l
e

M

a
r
k
e
t

a
m
o
n
g
f
i
r

m
s

O
n

c
o
m
p
e
t
i
t
i
o
n

O
n

c
o
m
p
e
t
i
t
i
v
e
n
e
s
s

E
U

S
o
c
i
a
l

i

m
p
a
c
t
s

(0)  Baseline 
scenario 
– 
no action 

0 

0 

0 

0 

0 

0 

0 

0 

0 

(1) Soft law 

0/+ 

0/+ 

0/- 

0/- 

0/- 

0/+ 

0 

-/+ 

0 

112 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2) Common 
substance 
requirements 

(3) Common 
substance 
requirements 
with AEOI 

(4) Common 
substance 
requirements 
with  AEOI 
and 
sanctions 

++ 

+ 

-- 

-- 

++ 

+ 

0/- 

+ 

++ 

++++ 

+++ 

-- 

--- 

+++  ++ 

- 

++ 

++++ 

+++++ 

++++ 

-- 

---- 

+++  +++ 

- 

++ 

+++++ 

113 

 
 
 
 
 
 
 
 
 
ANNEX 9: ADDITIONAL INFORMATION ON THE NECESSITY OF EU ACTION 

It  is  basic  principle  of  public  policy  intervention  to  steer  away  from  introducing 
unnecessary measures. When putting forward a new initiative to tackle tax avoidance and 
tax  evasion,  an  area  where  the  Commission  (as  well  as  Member  States)  has  been 
particularly  active  during  the  past  decade,  it  is  relevant  to  ask  the  question:  why  are  
existing  measures  not  sufficient  to  tackle  the  problem?  An  answer  to  this  question  is 
provided in the main part of this impact assessment, in particular when the necessity of 
EU  action  is  described  in  section  3.  With  this  annex,  the  intention  is  to  provide  more 
details on the arguments supporting the case for intervention.  

As  mentioned  in  section  3,  both  jurisprudence  by  the  European  Court  of  Justice  and 
current  practice  by  the  EU  Code  of  Conduct  Group  are  of  relevance  for  this  initiative, 
meant to tackle the use of shell entities for tax avoidance or tax evasion. Why are these 
measures deemed not enough to tackle the problem?  

The  Court  has  developed  the  notion  of  “wholly  artificial  arrangement”  in  order  to 
evaluate if national anti-tax avoidance measures constitute a proportionate, and therefore 
legitimate,  restriction  to  the  fundamental  freedoms.  A  wholly  artificial  arrangement  is 
defined  as  an  arrangement  that  “does  not  reflect  economic  reality”,  where  there  are 
“objective factors ascertainable by third parties with regard (…) to the extent to which (a 
company)  exists  in  terms  of  premises,  staff  and  equipment”.  The  absence  of  actual 
economic activity must,  in  the light  of the specific features of the  economic activity in 
question, be inferred from an analysis of all the relevant factors relating, in particular, to 
the management of the company, to its balance sheet, to the structure of its costs and to 
expenditure  actually  incurred,  to  the  staff  that  it  employs  and  to  the  premises  and 
equipment that it has. 176 

The jurisprudence provides key guidance on how to construe substance requirements in 
the  tax  area  but  they  do  not  exclude  fragmentation  in  the  internal  market.  On  the  one 
hand,  jurisprudence  has  been  developed  on  a  case  by  case  basis,  allowing  thus  a 
significant  margin  of  appreciation,  where  the  circumstances  differ.  In  addition,  the 
substance test is construed within a limited framework, i.e. what can be proportionate and 
therefore, legitimate justification of a discriminatory treatment of a specific taxpayer in 
relation to specific domestic tax provision. This cannot be used as a self-standing rule of 
general  application. As put by a Member State:  “In order to fight harmful tax practices 
efficiently a certain degree of generality is needed.” 

176  C-196/04  Cadburry  Schweppes  plc,  and  Cadburry  Schweppes  Overseas  Ltd  v.  Commissioners  of 
Inland  Revenue  [2006]  ECHR  I-7995,  C-201/05  The  Test  Claimants  in  the  CFC  and  Divided  Group 
Litigation v Commissioners of Inland Revenue [2008] ECR I-2875.  

114 

 
 
 
 
 
                                                 
Let’s  now  turn  to  the  Code  of  Conduct.  According  to  the  Group’s  guidance177,  a 
substantial  economic  presence  should  be  assessed  considering  whether  there  is  “an 
adequate number of employees with necessary qualifications and an adequate amount of 
operating expenditure with regard to the core income generating activities” of the entity. 
The  character  of  the  premises  necessary  for  the  specific  activity  should  also  be 
considered. However, the Code of Conduct criteria have a limited scope of application in 
the  EU  in  relation  to  specific  tax  regimes.  Equally,  the  instrument  (as  does  the 
application  of  case-law)  do  not  ensure  timely  identification  of  the  cases  of  lack  of 
substance and prompt communication of the information to all Member States that may 
be affected.  

Overall, case law and implementation of the Code of Conduct do not appear sufficient to 
tackle the problem of the use of shell entities for tax avoidance or tax evasion. The same 
can  be  argued  for  existing  EU  measures  in  the  area  of  administrative  cooperation  of 
against tax avoidance.  

Namely, administrative cooperation through the DAC can only be of limited assistance in 
the  absence  of  a  common  definition  of  what  should  be  regarded  as  a  shell  entity  or 
arrangement for tax purposes. The DAC allows Member States to exchange information 
spontaneously  if  they  identify  situations  that  can  entail  risk  for  the  tax  base  of  other 
Member States or automatically in pre-defined cases. At this stage there is no agreement 
to  exchange  information  on  shell  entities  and  therefore  automatic  exchanges  are 
precluded. While spontaneous exchange could take place, this would be ex post, i.e. after 
a tax audit, and subject to the discretion of the tax authorities.  

Under  ATAD,  Member  States  can  avail  of  the  General  anti  avoidance  rule  (GAAR)  in 
order  to  deny  tax  advantages  obtained  through  abusive  practices,  including  the  use  of 
shell entities. Yet, the GAAR should not be considered as a rule of primary application 
but rather as residual. It applies only in the absence of a specific anti-tax avoidance rule 
and aims to tackle abusive schemes that were not identified as yet, i.e. when the GAAR 
was  construed.  Once  the  legislator  knows  of  a  scheme  that  leads  to  tax  avoidance  and 
evasion, it is expected that the legislator acts to curb such scheme via targeted legislation 
and does not rely on the GAAR.   

Finally,  it  is  relevant  to  ask  also  whether  existing  instruments  at  an  international  level 
may  be  enough  to  tackle  the  problem.  The  OECD  Base  Erosion  and  Profit  Shifting 
(BEPS)  project  has  introduced  substance  criteria  in  the  case  of  BEPS  Actions  5  and  6. 
BEPS Action 5 seeks to ensure that Member States have significant economic activities 
linked  to  preferential  tax  regimes  and  their  incentives,  and  substantial  activities 
requirements  for  no  or  only  nominal  tax  jurisdictions  and  provide  guidance  on  the 
application of the requirement. BEPS Action 6 on Treaty Shopping seeks to prevent the 

177 Code  of Conduct (Business taxation), Guidance on the interpretation of the third criterion, 10419/18, 
Brussels 22 June 2018. 

115 

 
 
 
 
 
                                                 
abuse of double taxation conventions by interposed shell entities including, for example, 
limitation-on-benefits rules or a principle purposes test (PPT). BEPS Actions 8-10 aim to 
align  transfer  pricing  guidelines  with  value  creation  (intangibles)  and  risk  allocation, 
including  the  use  of  DEMPE178,  to  ensure  that  value  creation  is  linked  to  substance 
requirements.  Locating  the  intellectual  property  rights  linked  to  intangibles  in  low  tax 
jurisdictions  while  the  value  creation  took  place  elsewhere  is  considered  a  major  tax 
avoidance vehicle.  

While  these  measures  have  been  widely  adopted  and  are  considered  essential  tools  in 
combatting  abuse  by  shell  entities,  they  do  not  contain  specific  objective  criteria  for 
determining whether an entity is missing substance. In addition, the OECD BEPS project 
addresses a series of recommendations to its members but these are not legally binding 
instruments and as such, the rules are not enforceable.    

178  Allocation  of  returns  on  intangibles  depend  on  the  functions,  assets  and  risks  related  to  the 
development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE). 

116 

 
 
 
 
 
 
 
 
 
                                                 
ANNEX 10: ADDITIONAL  INFORMATION  ON  HANDLING  OF  PERSONAL  DATA  UNDER  THE 

PREFERRED OPTION  

This annex is meant to provide additional information on the processing of personal data 
under  the  preferred  option.  It  shall  clarify  how  the  flow  of  information  will  function, 
which categories of personal data will be processed and why, how the information will be 
exchanged  from  an  operational/technical  perspective  and,  finally,  to  provide  clarity 
concerning roles of the parties involved (data controllers and data processors).  

This annex complements and expands section 5.2.3.3 Information exchange and personal 
data.  

Overview of the preferred option 

As explained in Chapter 8, the preferred option is a regulatory intervention, a Directive, 
which includes: common substance requirements that lead to the application of common 
tax  consequences  to  entities  that  qualify  as  ‘shell’,  automatic  exchange  of  information 
provisions and a common sanctioning framework.  

Automatic exchange of information: an amendment to the DAC 

Automatic exchange of information (AEOI) will build upon the existing provisions of the 
Directive  on  Administrative  Cooperation  (DAC).179  In  practice,  it  means  that  the 
preferred option will include provisions to amend the DAC to introduce the mechanism 
for AEOI needed for the intervention to function effectively. The new AEOI mechanism 
introduced  following  the  implementation  of  the  preferred  option  will  have  to  fully 
comply with the GDPR.  

A closer look at the flows of information  

In  more  details,  under  the  preferred  option,  there  would  be  two  basic  flows  of 
information:  a  business  to  government  flow,  with  a  transmission  of  information  from 
entities  (referred  to  as  “reporting  entities”)  to  the  tax  administration  where  they  are 
resident  for  tax  purposes;  a  government  to  government  flow,  with  a  transmission  of 
information between tax administrations. This second flow will take the form of what is 
the  systematic 
technically  defined  as  an  automatic  exchange  of 
communication  of  predefined  information  to  another  Member  State,  without  prior 
request, at pre-established regular intervals.180  

information: 

179 Directive 2011/16/EU on Administrative Cooperation in Direct Taxation (DAC).  
180 DAC, article 3(9)a.  

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The picture is meant to illustrate the flows of information. The example shows only two 
fictional  Member  States  but  the  same  approach  applies  in  all  cases:  a  reporting  entity 
provides  information  to  the  tax  authority  where  the  entity  is  resident  for  tax  purposes. 
This is shown with a thick red arrow directed from the entity to the tax authority. This is 
a  business  to  government  flow  of  information  which  should  comply  with  the  GDPR. 
Then, there is a government to government flow of information, the AEOI between tax 
authorities. This is shown in the upper half of the picture. The arrows are not as thick as 
in  the  case  of  the  previous  flow.  This  shows  that  the  amount  of  information  to  be 
automatically  exchanged  will  be  less  than  the  information  that  tax  authorities  receive 
from  reporting  entity.  In  line  with  the  principle  of  data  minimisation  and  to  ensure  the 
efficiency of the system, only the most relevant information will be subject to automatic 
exchange of information. The information needs of tax administrations where entities are 
resident for tax purposes are different than those of other tax administrations potentially 
affected.  This data flow shall also comply with the GDPR. 

The central directory is a secure database where Member States can upload information. 
Once  a  Member  State  uploads  information  on  the  central  directory,  all  other  Member 
States can read this information. In practice, it works like a common, shared folder in a 
computer network. The computer network behind the central directory is called Common 
Communication Network (CCN), the secure network used by tax and customs authorities 
to exchange information.  

Personal  data  concerned  by  the  information  exchange  and  rationale  for  their 
processing  

The  information  exchange  will  be  mainly  about  data  and  information  concerning  legal 
persons,  i.e.  the  reporting  entities.  Personal  data  of  natural  persons  that  may  be 
exchanged  is the following:  

 
 

the identification of the entity’s shareholder(s) and the beneficial owner(s)  
the identification of any person in the other Member States likely to be affected 
by the reporting of the entity  

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In practice, personal data exchanged will consist of names, surnames and dates of birth 
natural  persons, assuming natural  persons (and not  legal  entities) are the  shareholder(s) 
and/or  beneficial  owner(s)  of  the  reporting  entity  to  ensure  that  data  exchanged  can  be 
used for ensuring compliance with the intervention and for tax verification.   

The requirement to exchange this personal data is due to the cross-border structures used 
for tax abuse purposes, in particular tax evasion. There is evidence of the use of complex 
cross-border structures to hide the identity of the beneficial owner of certain entities.181 
Such  structures  use  techniques  like  layering  or  chaining  to  obscure  the  identity  of  the 
beneficial  owner  of  an  asset  or  funds.  Layering  or  chaining  involves  interposing  shell 
entities in multiple jurisdictions between the individual beneficial owners and the entity 
that holds legal title to certain assets or funds.182 

Information on the legal and beneficial owners  would ensure that the relevant  Member 
State  could  ensure  that  its  own  tax  laws  can  be  enforced  in  relation  to  their  own  tax 
residents. Furthermore, Member States other than the Member State of residence should 
also be aware of the legal and beneficial owners of such entities.  

The  identification  of  any  person  in  another  Member  States  likely  to  be  affected  by  the 
reporting of the entity relates to natural persons who would be considered as having the 
same role as an associated company of the entity. For example, when the natural person 
is not the legal or beneficial owner of the entity but has significant financial transactions 
with  it,  based  on  criteria  laid  down  in  tis  Directive,  then  such  information  may  be 
relevant to another Member State in calculating the tax liability of this natural person. 

Technical means for automatic exchange of information  

This  information  to  be  exchanged  will  be  recorded  by  Member  States  in  a  Central 
Directory (CD). All Member States will be able to “read and write” on the CD. They will 
upload and retrieve information.  

The  CD  will  be  developed  and  operated  by  the  Commission.  Information  will  be 
exchanged via the EU Common Communication Network (CCN), the secure IT network 
used  by  tax  and  customs  administrations.  The  CD  is  hosted  in  the  Commission  Data 
Centre. 

181 Commission study on Monitoring the amount of wealth hidden by individuals in international financial 
centres and the impact of recent internationally (Ecorys); ICF Consulting Services Ltd (2021), Commission 
Study on Letterbox Companies; Furthermore, data leaks including the recent Pandora leaks has confirmed 
the use of such complex structures for possible tax abuse purposes. 
182  Marquette  Law  Review:  How  Shell  Entities  and  Lack  of  Ownership  Transparency  Facilitate  Tax 
Evasion and Modern Policy Responses to These Problem.  

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The CD is already in used today for automatic exchange of information of tax rulings and 
of cross-border tax arrangements. Under the preferred option, the CD will be developed 
further, “expanded” to use a generic term, to be able to process the additional data to be 
exchanged under the intervention.  

Data controllership  

As  with  other  systems  for  exchange  of  information  based  on  the  Directive  on 
Administrative  Cooperation  (DAC),  Member  States  will  decide  on  the  purpose  and 
essential  elements  of  the  processing  operation.  The  will  keep  control  of  the  processing 
operation.  

As assessed for all other DAC related information systems, the competent authorities of 
each Member State will be considered to be the data controllers for the purposes of the 
GDPR. Member States will maintain and keep the data up-to-date.  

In  line  with  what  happens  for  all  other  DAC  related  information  systems,  the 
Commission  will  be  a  data  processor.  Member  States  decided  that  only  their  national 
competent  authorities  can  have  access  to  the  system.  The  Commission  will  not  have 
access  to  personal  data.  Its  role  will  be  limited  to  facilitate  data  processing.  The 
Commission  will  support  Member  States  by  developing  and  operating  the  central 
directory  for  the  automatic  exchange  of  information.  In  other  words,  the  Commission 
will ensure that information “flows” as expected.  

Information processed will be retained in the CD and in Member States’ databases for 5 
years  and  in  any  case  for  no  longer  than  necessary  to  achieve  the  purposes  of  the 
intervention.   

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