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

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   EUROPEAN COMMISSION  Brussels, 22.12.2021  COM(2021) 565 final 2021/0434 (CNS)  Proposal for a COUNCIL DIRECTIVE laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU {SEC(2021) 565 final} - {SWD(2021) 577 final} - {SWD(2021) 578 final} - {SWD(2021) 579 final}  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

On 18 May 2021, the European Commission adopted a Communication on Business Taxation 
for  the  21st  century1  to  promote  a  robust,  efficient  and  fair  business  tax  system  in  the 
European  Union.  It  sets  out  both  a  long-term  and  short-term  vision  to  support  Europe's 
recovery  from  the  COVID-19  pandemic  and  to  ensure  adequate  public  revenues  over  the 
coming years. It aims to create an equitable and stable business environment, which can boost 
sustainable and job-rich growth in the Union. This proposal is one of the short-term, targeted 
initiatives  which  were  announced  in  the  Communication  as  a  means  to  improve  the  current 
tax system with a focus on ensuring fair and effective taxation.   

While  important  progress  has  been  made  in  this  area  in  the  last  years,  especially  with  the 
adoption  of  the  anti-tax  avoidance  directive  (ATAD)2  and  the  expansion  of  scope  of  the 
directive on administrative cooperation (DAC)3, legal entities with no minimal substance and 
economic activity continue to pose a risk of being used for improper tax purposes, such as tax 
evasion  and avoidance,  as confirmed by recent  massive media revelations4. While there can 
be  valid  reasons  for  the  use  of  such  entities,  there  is  a  need  for  further  action  to  tackle 
situations  where  taxpayers  evade  their  obligations  under  tax  law  or  act  against  the  actual 
purpose  of  tax  law  by  misusing  undertakings  that  do  not  perform  any  actual  economic 
activity. The outcome of such situations is to lower the taxpayers’ overall tax liability. Such 
outcome  leads  to  a  shift  of  the  tax  burden  at  the  expense  of  honest  taxpayers  and  distorts 
business decisions in the internal market. Unless it is effectively tackled, this situation creates 
an  environment  of  unfair  tax  competition  and  unfair  tax  burden  distribution.  This  Directive 
applies  to  all  undertakings  that  are  considered  tax  resident  and  are  eligible  to  receive  a  tax 
residency certificate in a Member State.  

Having the aim of combating tax avoidance and  evasion  practices, which directly affect  the 
functioning  of  the  internal  market,  this  Directive  lays  down  anti-tax  avoidance  and  evasion 
rules in a specific area. It responds to a request from the European Parliament for EU action to 
counter  the  misuse  of  shell  entities  for  tax  purposes  and,  more  generally,  to  the  demand  of 
several  Member  States,  businesses  and  civil  society  for  a  stronger  and  more  coherent  EU 
approach against tax avoidance and evasion. 

• 

Consistency with existing policy provisions in the policy area 

This  Directive is  part of the central  EU strategy  on direct  corporate taxation  with  a view to 
ensuring  that  everybody  pays  their  fair  share.  The  Commission  has  been  consistent  in  the 
pursuit of policies to fight tax avoidance and tax evasion in the last decade.  

In  particular,  and  by  way  of  an  example,  in  2012,  the  Commission  published  a 
recommendation  on  Aggressive  Tax  Planning,  recommending  to  Member  States  specific 
measures  against  double  non-taxation  and  artificial  arrangements  for  tax  purposes.  In  2016, 
the anti-tax avoidance directive (ATAD) was adopted to ensure coordinated implementation 

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COM(2021) 251 final 
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, 19.7.2016, p. 1).  
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). 
See, for example, the OpenLux investigation and, more recently, the Pandora Papers 

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in  Member  States  of  key  measures  against  tax  avoidance  stemming  from  the  international 
Base  Erosion  and  Profit  Shifting  Project  actions.  In  parallel,  the  directive  on  administrative 
cooperation  (DAC)  has,  since  its  adoption  in  2011,  been  revised  and  expanded  on  several 
occasions to allow a large-scale and timely exchange of tax related information across the EU, 
including  on  tax  rulings  and  mandatory  reporting  of  arrangements  by  tax  intermediaries 
mandatory.  From  an  international  angle,  the  EU  list  of  non-cooperative  jurisdictions  in  tax 
matters  has  been launched since 2017, amongst  others, to  protect  Member States’ tax bases 
from third countries’ harmful tax practices.  

Existing  tax  instruments  at  EU  level  do  not  contain,  however,  explicit  provisions  targeting 
shell entities, i.e. entities  that do not  perform any actual economic activity, even if they  are 
presumably engaged with one, and that can be misused for tax avoidance or evasion purposes. 
The risk that such entities may pose for the Single Market and specifically for Member States’ 
tax bases has been highlighted by recent tax-related scandals. 

• 

Consistency with other Union policies (possible future initiatives of relevance to 
the policy area) 

This Directive follows up to the Commission’s Communication on Business Taxation for the 
21st century for a robust, efficient and fair business tax system in the EU and reflects one of 
the policy initiatives envisaged in such Communication. As such it complements a number of 
other policy initiatives promoted by the Commission in parallel, in the short- and long-term. 
These include a proposal for a Directive on ensuring a global minimum level of taxation for 
multinational groups in the Union. This Directive, which aims to discourage the use of shell 
entities established in the Union for tax purposes, has a broader scope than the Directive on a 
minimum level of taxation, as it encompasses all entities and legal arrangements resident for 
tax purposes in the Union, without any threshold based on revenues. On the other hand, the 
legal  framework  on  the  minimum  level  of  taxation  applies  only  to  MNE  groups  and  large-
scale  domestic  groups  with  combined  revenues  that  exceed  EUR  750  million.  Such  groups 
also fall within the ambit of this Directive. This is because the two initiatives have different 
purposes.  

The  legal  framework  on  the  minimum  level  of  taxation  exclusively  pertains  to  the  rate,  i.e. 
level of taxation. It does not touch upon potentially harmful features of the tax base. Neither 
does  it  involve  examining  whether  an  entity  possesses  sufficient  substance  to  carry  out  the 
activity that it is supposed to. It is true that the implementation of the rules on the minimum 
level of taxation may gradually discourage the creation of shell entities to some extent. Yet, 
this is yet an unknown outcome which cannot be guaranteed at this stage.  

In addition, an exclusion from the scope of this Directive of the groups within the scope of the 
Directive  on  a  minimum  level  of  taxation  would  create  unequal  treatment  against  ‘shell’ 
entities belonging to smaller-sized groups that do not meet the threshold of EUR 750 million. 
It  would  namely  be  mostly  large  MNE  groups  that  would  receive  a  waiver  from  the 
transparency requirements and the tax consequences under this Directive.  

Additional announced initiatives involve  proposals to require all EU entities to publish their 
effective tax rate on an annual basis and to tackle the tax bias in favour of debt financing by 
placing  equity  financing  in  the  single  market  on  an  equal  footing  to  debt.  In  addition,  this 
Directive is consistent with, and complementary to, Union policies in relation to transparency 
of beneficial ownership information. 

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2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Direct tax legislation falls within the ambit of Article 115 of the Treaty on the Functioning of 
the EU (TFEU). The clause stipulates that legal measures of approximation under that article 
shall be vested the legal form of a Directive. 

• 

Subsidiarity (for non-exclusive competence)  

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

The rules of this Directive aim to tackle cross-border tax avoidance and evasion practices and 
provide  a  common  framework  to  be  implemented  into  Member  States'  national  laws  in  a 
coordinated  manner.  Such  aims  cannot  be  achieved  in  a  satisfactory  manner  through  action 
undertaken by each Member State while acting on its own.  

The use of legal entities and arrangements without minimal substance for tax avoidance or tax 
evasion  purposes  is  usually  not  limited  to  the  territory  of  only  one  Member  State.  A  key 
feature  of  relevant  schemes  is  that  they  involve  the  tax  systems  of  more  than  one  Member 
State at a time. Several Member States could therefore be impacted by a scheme that would 
include the use of a shell entity located in another Member State.  

The  review  of  Member  States  anti-tax  avoidance  and  evasion  rules  indicates  fragmentation. 
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 they 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.  

The existing fragmentation could be replicated and possibly worsened, were Member States to 
take  action  individually.  Such  an  approach  would  perpetuate  the  present  inefficiencies  and 
distortions  in  the  interaction  of  distinct  measures.  If  the  objective  is  to  adopt  solutions  that 
function for the internal market as a whole and improve its (internal and external) resilience 
against tax evasion and tax avoidance practices that affect or can affect  equally all Member 
States, the appropriate way forward involves a coordinated initiative at the level of the EU. 

Furthermore, an EU initiative would add value, as compared to  what  a multitude of actions 
taken  at  national  level  can  attain.  Given  that  the  envisaged  rules  have  a  cross-border 
dimension and that shell entities are commonly used to erode the tax base of a Member State 
different from that where the shell entity is located, it is imperative that any proposals balance 
divergent  interests  within  the  internal  market  and  consider  the  full  picture,  to  identify 
common  objectives  and  solutions.  This  can  only  be  achieved  if  legislation  is  designed 
centrally. Moreover, a common approach towards shell entities would ensure legal  certainty 
and reduce compliance costs for businesses operating within the EU.  

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

• 

Proportionality 

The  envisaged  measures  do  not  go  beyond  ensuring  the  minimum  necessary  level  of 
protection  for  the  internal  market.  The  Directive  does  not  therefore  prescribe  full 
harmonization but only a minimum protection for Member States' tax systems.  

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In particular,  the Directive lays down a test  to  facilitate Member States  to  identify manifest 
cases  of  shell  entities  misused  for  tax  purposes  in  a  coordinated  manner  across  the  EU. 
National  rules,  including  rules  transposing  EU  law,  shall  continue  to  apply  to  identify  shell 
entities  not  captured  by  this  Directive.  The  application  of  these  latter  national  rules  should 
also  be  facilitated  by  virtue  of  the  measures  of  this  Directive,  as  Member  States  will  have 
access  to  new  information  concerning  shell  entities.  Furthermore,  the  Directive  lays  down 
consequences for shell entities taking into due account agreements and conventions in place 
between Member States and third countries for the elimination of double taxation of income, 
and where applicable, capital.  

Thus,  the  Directive  ensures  the  essential  degree  of  coordination  within  the  Union  for  the 
purpose  of  materializing  its  aims.  In  this  light,  the  proposal  does  not  go  beyond  what  is 
necessary  to  achieve  its  objectives  and  is  therefore  compliant  with  the  principle  of 
proportionality. 

• 

Choice of the instrument 

The proposal is for a Directive, which is the only available instrument under the legal base of 
Article 115 TFEU. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Ex-post evaluations/fitness checks of existing legislation 

Existing anti-tax avoidance legislation does not include measures targeted to undertakings that 
do not have minimum substance for tax purposes. Therefore, evaluation is not relevant. 

• 

Stakeholder consultations 

On 4 June 2021, TAXUD launched a public consultation on a potential initiative to fight the 
use of shell entities and arrangement for tax purposes. It contained 32 questions aimed, inter 
alia,  at  delineating  the  problem  and  its  drivers  and  identifying  the  appropriate  form  of  EU 
action and the key features of shell entities being at risk to be misused for tax purposes. The 
consultation closed on 27 August 2021 with a total of 50 replies.  

All respondents acknowledge that in spite of the recent EU anti-tax avoidance measures the 
problem of tax avoidance and evasion persists, including through the misuse of shell entities. 
While  some  respondents  welcome  new  targeted  measures  to  tackle  abuse  in  the  tax  area, 
others consider that they are potentially premature. 

Respondents point to the low capacity of Member States’ tax administrations and inadequate 
administrative cooperation as the main problem drivers.  

As regards the features common in shell entities that present a risk for being misused for tax 
purposes, there is broad agreement that absence of an own bank account is one of them and is 
indicative.  There  is  also  wide  convergence  that  another  common  feature  is  where  the 
directors, in their majority, do not reside in the country where the entity is located. However, 
there  is  no  wide  agreement  on  the  pertinence  of  other  factors,  such  as  the  number  of 
employees.  

Furthermore, respondents agree that shell entities at risk to be misused are more likely to be 
identified  amongst  those  engaged  with  the  activity  of  holding  and  managing  equity  or 
intellectual property or with financing and leasing activity. While respondents consider that a 
shell entity prone to misuse can be set up in any legal form, they seem to find trusts to be at 

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slightly higher risk. Whether an entity is a small or medium enterprise (SME) does not arise 
as a relevant feature to be taken into account.   

Notably  33  respondents,  in  particular  business  and  professional  associations,  provided 
extensive  input  which  goes  beyond  the  consultation  questions.  A  significant  part  of  these 
respondents,  differently  for  the  other  respondents,  has  concerns  that  new  EU  legislation 
targeted to tax avoidance and evasion through the misuse of shell entities might not be timely, 
also in light of the international discussions towards global minimum effective taxation.  

Moreover, these respondents stress that defining what is a shell entity is challenging and that 
assessing lack of substance depends on the facts and circumstances of each specific entity. In 
this regard, they highlight that taxpayers should have an effective right to provide evidence of 
their  specific  circumstances.  Usefully,  these  respondents  have  also  provided  specific 
examples of structures that could be considered not to have substance, i.e. to be shell, but are 
not put in place to obtain tax advantages but rather for valid commercial reasons.  

In addition to the public consultation, national experts in direct taxation have been consulted 
in a targeted manner. A meeting of Working Party IV on tax questions was held on 22 June 
2021 and bilateral consultations followed. Overall Member States expressed support for a new 
EU  initiative  targeting  the  misuse  of  shell  entities  to  obtain  tax  advantages.  Member  States 
welcomed  the  definition  of  common  rules  on  the  misuse  of  shell  entities  together  with  a 
framework  for  administrative  cooperation.  Member  States  also  argued  for  a  broad  scope  of 
the new measures and stressed that SMEs should be equally covered. Amongst the available 
policy options, Member States expressed support for regulatory action. 

In forming its proposal, the Commission took into account the results of the consultation. In 
particular,  amongst  the  various  policy  options,  the  Commission  decided  to  proceed  with  a 
proposal for regulatory and binding action, i.e. a directive under art. 115 TFEU. Furthermore, 
the  directive  proposed  distinguishes  entities  at  risk  to  be  shell  and  misused  to  obtain  tax 
advantages by reference to a set of features common in such entities. Specific shell entities are 
however  carved  out  upfront  as  they  are  commonly  used  for  good  commercial  reasons.  In 
designing the distinctive criteria that would single out entities at risk and in defining the cases 
that  should  be  excluded  because  they  do  not  present  tax  avoidance  or  evasion  risks,  the 
Commission relied on the input of the stakeholders. SMEs are not excluded from the proposal 
as there is wide agreement that they do present relevant risks. In recognition of the fact that 
substance is ultimately a matter of facts and circumstances the directive includes a mechanism 
allowing taxpayers to challenge the outcome of the test therein, including by evidencing the 
commercial, non-tax motives, underlying a certain structure. In the same vein, structures that 
are  not  put  in  place  with  the  main  purpose  to  obtain  a  tax  advantage  may  avail  of  a 
mechanism to request an upfront exemption.  

As  regards  the  question  whether  measures  targeted  to  the  misuse  of  shell  entities  for  tax 
purposes  would  be  timely  or  premature,  the  Commission  holds  that  there  is  indeed  a  clear 
need  for  such  measures.  The  need  for  such  measures  arises  clearly  in  the  aftermath  of 
continuous  scandals  on  the  misuse  of  shell  entities  worldwide  and  specifically  in  the  single 
market.  The future application of the rules on global minimum  effective  taxation would not 
fully  address  the  issue  of  shell  companies  as  those  rules  would  only  apply  to  multinational 
companies  that  meet  the  EUR  750  million  threshold,  thus  leaving  all  companies  below  this 
threshold out of the scope.  In the same vein, the Commission appreciates that the protection 
of  Member  States’  taxable  bases  is  all  the  more  important  to  ensure  a  sustainable  economy 
under the exceptional circumstances imposed by the health crisis. 

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• 

Collection and use of expertise 

In identifying appropriate measures to tackle the misuse of shell entities for tax purposes, the 
Commission  drew  on  an  extensive  study  conducted  by  the  International  Bureau  of  Fiscal 
Documentation  (IBFD).  The  study  was  submitted  to  the  Commission  in  the  context  of  the 
public consultation.  It  concludes that existing EU anti-avoidance measures do not  suffice to 
tackle tax related issues surrounding shell companies and coordinated action promoting cross-
border consistency in the applicable tax treatment to shell arrangements is to be welcomed. It 
also  observes  that  Member  States’  rules  targeting  specifically  shell  arrangements  are 
relatively uncommon. In addition, the Commission relied on a study on letterbox companies 
carried out by an external contractor and commissioned independently from this initiative.  

The  Commission  relied  on  the  results  of  these  studies  in  defining  the  specific  features  that 
should single out the entities at clear risk to be shell and be misused to obtain tax advantages. 

• 

Impact assessment 

An impact assessment was carried out to prepare this initiative. 

On  22  October  2021  the  Regulatory  Scrutiny  Board  (RSB)  issued  a  positive  opinion  with 
reservations  on  the  submitted  impact  assessment  regarding  the  present  proposal,  including 
several suggestions for improvement.5 The Impact Assessment report (IA) was further revised 
along these lines, as explained below.   

The  IA  examines  four  policy  options  in  addition  to  the  baseline  scenario,  i.e.  no  action. 
Option  1  was  the  pursuit  of  soft  law  action  by  expanding  the  mandate  of  an  existing  peer 
review  instrument,  the  Code  of  Conduct  (Business  Taxation).  As  an  alternative,  the  IA 
examined the possibility for the Commission to adopt a recommendation to Member States. 
However,  soft  law  instruments  may  be  expected  to  be  of  limited  effect  in  resolving  the 
problem  of  the  misuse  of  shell  entities  for  tax  purposes,  this  is  a  cross-border  issue  and 
requires a consistent approach across the EU, which cannot be ensured via soft law.  

Options 2, 3 and 4 are regulatory and prescribe a set of rules that should be put in place in all 
Member States. They differ on the extent to which coordination is sought. Option 2 envisaged 
coordination of the criteria and processes to identify shell entities as well as coordination on 
their  treatment.  Option  3  includes,  in  addition  to  Option  2,  a  mechanism  for  automatic 
exchange of information. Option 4 adds to Option 3 a prescription of sanctions against non-
compliant entities.  

The  various  Options  have  been  compared  against  the  following  criteria:  a)  effectiveness  in 
reducing the misuse of shell entities, b) tax gains for public finances, c) compliance costs for 
businesses,  d)  compliance  costs  for  tax  administrations,  e)  indirect  effects  on  the  single 
market,  f)  indirect  effects  on  competition  among  firms,  g)  indirect  effects  on  EU 
competitiveness,  h)  indirect  effects  –  social  impacts  and  i)  coherence.  The  comparison 
revealed that Options 2, 3 and 4 can be expected to be, despite their costs, effective in meeting 
the objectives of this initiative. Amongst them, Option 4 appears to perform best. Specifically, 
it is expected to be the one ensuring the highest level of compliance by the entities in scope, 
while  it  is  coherent  with  the  current  EU  agenda  on  fighting  tax  avoidance  and  evasion  and 
builds on existing systems for exchange of information.  

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[OP  please  insert  the  links  to  the  summary  sheet  and  the  positive  opinion  of  the  RSB  after  their 
publication.] 

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Economic impacts 

The assessment of the economic impacts was subject to data limitations, because the initiative 
concerns a type of entity for which there is severe lack of data and no commonly acceptable 
definition. 

Benefits 

Nevertheless, the preferred option (Option 4) is expected to have a positive economic impact. 
As  main  direct  benefit,  it  is  expected  that  there  will  be  an  increase  in  the  collection  of  tax 
revenues  by  reducing  the  misuse  of  shell  entities  in  the  EU.  Even  a  small  reduction  of  the 
current  estimated  tax  loss  (estimated  at  around  EUR  20  billion  in  the  EU)  will  represent 
significant  additional  public  resources.  Option  4  is  the  most  effective  as  the  outcome  of 
identifying  the  existence  of  a  shell  entity  is  reinforced  by  implications:  the  exchange  of 
information  between  Member  States  and  a  common  sanctions  regime  at  EU  level.  Some 
additional direct benefits could be obtained from the regulatory charges due to the sanctions. 
The  initiative  will  also  provide  significant  indirect  benefits.  Thanks  to  this  action,  valuable 
information  will  be  collected  to  better  understand  the  phenomenon  of  shell  entities  for  tax 
purposes.  It  will  also  signal  that  the  EU  is  committed  to  ending  tax  avoidance  and  evasion 
within its borders encouraging tax compliance.  

Costs 

The  main  costs  related  to  the  selected  option  are  the  increase  in  compliance  costs  for 
businesses  and  tax  administrations.  Tax  compliance  costs  for  business  are  expected  to 
increase in a limited manner. Overall, costs should be relatively limited because the number 
of  companies  in  scope  of  this  initiative  is  expected  to  be  low  (less  than  0.3%  of  all  EU 
companies), and the additional data to be reported by those in scope should be easy to retrieve 
and relatively simple to provide. For tax administrations, costs are also expected to increase 
modestly.  Tax  administrations  should  expand  their  capabilities  in  order  to  administer  the 
information that they will have access to, implement the systems supporting the exchange of 
information and enforce the proposed sanctions. This proposal aims, by design, to find a good 
balance  between  positive  impacts  and  additional  burden.  There  are  risks  in  the  capacity  of 
Member States to  deal  with  the new responsibilities, for example in  the management of tax 
rulings.  

Main changes implemented 

The RSB issued a positive opinion with reservations on the IA. In particular, the RSB noted 
that IA is not clear on why tax avoidance and evasion should be addressed together and what 
distinguishes  legitimate  shell  entities  from  those  misused  for  tax  purposes.  The  RSB  also 
noted  that  the  IA  does  not  provide  sufficient  overview  of  possible  alternative  and/or 
complementary  measures,  beyond  the  introduction  of  EU  legislation.  Furthermore,  the  RSB 
noted  that  the  IA  should  be  enhanced  as  regards  quantitative  estimates,  in  particular 
compliance  costs for businesses, and should better reflect  the different  stakeholder views in 
the main analysis. Annex I to the Impact Assessment explains how the RSB reservations were 
addressed. Several parts of the IA were revised and new parts were added in order to address 
the concerns raised by the RSB. First, a new section has been added in order to explain, also 
by way of examples, how shell entities can serve both tax avoidance and tax evasion practices 
in similar ways and why, therefore, there is room to address them together. In addition, the IA 
has been revised in order to clarify that the distinction between legitimate and non-legitimate 
shells  is  a  matter  of  how  they  are  used  rather  than  one  of  construction.  Second,  the  IA  has 
been expanded in order to reflect in detail the various alternatives considered at an early stage 
to  tackle  the  problematic  use  of  shell  entities  in  the  tax  area.  In  this  respect,  it  has  been 

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explained why the option of regulating trust and company service providers, as a standalone 
or  complementary  measure,  has  not  been  promoted.  The  reasons  why  the  introduction  of 
substance requirements has been considered the option fit for purpose have also been further 
analysed.  Third,  the  IA  has  been  revised  to  include  further  details  on  the  estimated 
compliance costs for business and administrations, and in particular, details on the reasoning 
behind the estimations, additional arguments and new evidences. Moreover, several sections 
of the main  part of the  IA have been revised in  order to include  relevant stakeholder input, 
gathered through public and specific consultations procedures.  

4. 

BUDGETARY IMPLICATIONS 

See Legislative Financial Statement. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

This  proposal,  once  adopted  as  a  Directive,  should  be  transposed  into  Member  States’ 
national law by 30 June 2023 and come into effect as of 1 January 2024. For the purpose of 
monitoring  and  evaluation  of  the  implementation  of  the  Directive,  Member  States  shall 
provide the Commission, on a yearly basis, with relevant information per tax year, including a 
list of statistical data. The relevant information is set out in Article 12 of the Directive.  

The  Commission  shall  submit  a  report  on  the  application  of  this  Directive  to  the  European 
Parliament and to the Council every five years, which should start counting after [1 January 
2024]. The results of this proposal will be included in the evaluation report to the European 
Parliament and to the Council that will be issued by [1 January 2029]. 

• 

Detailed explanation of the specific provisions of the proposal 

The Directive is broadly inclusive and aims to capture all undertakings that can be considered 
resident in a Member State for tax purposes, regardless of their legal form. In this vein, it also 
captures legal arrangements, such as partnerships, that are deemed residents for tax purposes 
in a Member State.    

The Directive targets a specific scheme used for tax avoidance or tax evasion purposes. The 
scheme targeted involves the setting up of undertakings within the EU which are presumably 
engaged with an economic activity but that, in reality, do not conduct any economic activities. 
Instead, the reason for which they are in place is to enable certain tax advantages to flow to 
their  beneficial  owner  or  to  the  group  to  which  they  belong,  as  a  whole.  For  example,  a 
financial  holding  undertaking  may  collect  all  payments  from  financial  activities  of 
undertakings  in  different  EU  Member  States,  taking  advantage  of  the  exemptions  from 
withholding taxes under the Interest and Royalty Directive6 and then pass on this income to 
an  associated  enterprise  in  a  low  tax  third  country  jurisdiction,  exploiting  favourable  tax 
treaties or even domestic tax law of a specific Member State. In order to tackle this scheme, 
this Directive lays down a test that will help Member States to identify undertakings that are 
engaged in an economic activity, but which do not have minimal substance and are misused 
for  the  purpose  of  obtaining  tax  advantages.  This  test  can  be  commonly  referred  to  as  a 

6 

Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest 
and  royalty  payments  made  between  associated  companies  of  different  Member  States  (OJ  L  157, 
26.6.2003, p. 49).  

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8 

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“substance test”.  In addition, the Directive attaches tax consequences to the undertakings that 
do not have minimal substance (shells). It also envisages automatic exchange of information 
as well as potential request by one Member State to another for tax audits for a broader group 
of undertakings that are treated as being at risk (as they fulfil certain conditions) but are not 
necessarily  deficient  in  substance  for  the  purposes  of  this  Directive.  The  definition  of  the 
appropriate  tax  treatment  and  the  information  exchange  should  discourage  the  targeted 
scheme by neutralising any tax advantages gained or that can be gained. 

In  light  of  the  above,  the  Directive  is  structured  so  as  to  essentially  reflect  the  logical 
sequence of each step of the aforementioned substance test. There are 7 steps:  undertakings 
that  should  report  (due  to  being  found  to  be  ‘at  risk’);  reporting;  possibility  of  gaining 
exemption from reporting for lack of tax motives; presumption of lack of minimal substance; 
possibility of  rebuttal;  tax  consequences;  exchange of information automatically  via making 
data available on a Central Directory as well as potential request for the performance of a tax 
audit.  

Undertakings that should report  

The first step divides the various types of undertakings in those at risk for lacking substance 
and  be  misused  for  tax  purposes  vs.  those  at  low  risk.  Risk  cases  are  those  that  present 
simultaneously  a  number  of  features  usually  identified  in  undertakings  that  lack  substance. 
These criteria  are  commonly referred to  as  ‘gateway’.  Low-risk cases are those that present 
none or only some of these criteria, i.e. those that do not pass the gateways. 

The relevant criteria that set up the gateways aim to distinguish as at risk those undertakings 
that  seemingly  engage  with  cross-border  activities  which  are  geographically  mobile  and  in 
addition  rely  on  other  undertakings  for  their  own  administration,  in  particular  professional 
third party service providers or equivalents.  

Low-risk cases that do not cross the gateway are irrelevant for the purposes of the Directive. 
Resources  can  therefore  focus  on  the  most  risky  cases,  i.e.  those  that  present  all  relevant 
features and hence cross the gateway.  

For tax certainty, undertakings performing certain activities are carved out explicitly and are 
therefore considered from the outset as being of low-risk and irrelevant for the purposes of the 
Directive. These include undertakings that would either not cross the gateway or, if they did, 
they  would  be  found  irrelevant  for  the  purposes  of  the  Directive  at  a  later  step  of  the  test. 
Undertakings that fall in the scope of any of the carve-outs do not need to consider whether or 
not they cross the gateway.  

Reporting 

Only the undertakings considered at risk at the first step proceed to the second step, which is 
the core of the substance test itself. Due to the fact that they are at risk, these undertakings are 
asked to report on their substance in their tax return.  

Reporting on substance means providing specific information, normally already arising from 
the undertaking’s tax return, in a way that facilitates the assessment of the activity performed 
by  the  undertaking.  The  focus  is  on  specific  circumstances  that  are  normally  present  in  an 
undertaking that performs substantial economic activity.  

Three elements are considered important: first, premises available for the exclusive use of the 
undertaking; second, at least one own and active bank account in the Union; and third at least 
one director resident close to the undertaking and dedicated to its activities or, alternatively, a 
sufficient  number  of  the  undertaking’s  employees  that  are  engaged  with  its  core  income 
generating  activities  being  resident  close  to  the  undertaking.  A  director’s  dedication  to  the 

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9 

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activities of the undertaking may be demonstrated in his qualifications, which should be such 
as  to  allow  the  director  to  have  an  active  role  in  the  decision-making  processes,  the  formal 
powers  that  he/she  is  vested  and  the  director’s  actual  participation  in  the  day-to-day 
management  of  the  undertaking.  Where  no  director  with  the  necessary  qualifications  is 
resident close to the undertaking, alternatively it would be expected that the undertaking has 
adequate  nexus  to  the  Member  State  of  claimed  tax  residence  if  most  of  its  employees  that 
perform  day-to-day  functions  are  resident  for  tax  purposes  close  to  that  Member  State. 
Decision-making should also  take place  within the Member State of the  undertaking.  These 
specific  elements  have  been  selected  drawing  on  the  international  standard  on  substantial 
economic activity for tax purposes.  

It  must  be  kept  in  mind  that  these  elements  are  set  with  regard  to  undertakings  with  cross-
border activities that are geographically mobile and which do not have own resources for their 
own administration. 

Furthermore,  the  reporting  must  be  accompanied  by  satisfactory  documentary  evidence, 
which  should  be  attached  to  the  tax  return  as  well,  if  not  already  included.  The  evidence 
required is aimed at allowing the tax administrations to verify directly the truth of the reported 
information as well as to form a general overview of the situation of the undertaking so as to 
consider whether to initiate a tax audit.   

Presumption of lack of minimal substance and tax abuse 

The  third  step  of  the  test  prescribes  the  appropriate  assessment  of  the  information  that  the 
undertaking reported in the second step in terms of substance. It sets out how the outcome of 
the reporting, i.e. the declaration of the undertaking that it has or does not have the relevant 
elements, should be qualified, at least at first sight.  

An undertaking that is a risk case, since it has crossed the gateway, and whose reporting also 
leads to the finding that it lacks at least one of the relevant elements on substance, should be 
presumed  to  be  a  ‘shell’  for  the  purposes  of  the  Directive,  i.e.  lacking  substance  and  being 
misused for tax purposes.  

An undertaking that is a risk case but whose reporting reveals that it has all  relevant elements 
of  substance,  should  be  presumed  not  to  be  a  ‘shell’  for  the  purposes  of  the  Directive. 
However,  this  presumption  does  not  exclude  that  the  tax  administrations  still  find  that  such 
undertaking: 

 

 

 

is  a  shell  for  the  purposes  of  the  Directive  because  the  documentary  evidence 
produced does not confirm the information reported; or 

is a shell or lacks substantial economic activity under domestic rules other than this 
Directive, taking into account the documentary evidence produced and/or additional 
elements; or 

is not the beneficial owner of any stream of income paid to it.  

Rebuttal 

The  fourth  step  involves  the  right  of  the  undertaking  which  is  presumed  to  be  shell  and 
misused for tax purposes, for the purposes of the Directive, to prove otherwise, i.e. to prove 
that it has substance or in any case it is not misused for tax purposes. This opportunity is very 
important because the substance test is based on indicators and as such, may fail to capture the 
specific  facts  and  circumstances  of  each  individual  case.  Taxpayers  will  therefore  have  an 
effective right to make the claim that they are not a shell in the sense of the Directive.  

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To claim a rebuttal of a presumption of shell the taxpayers should produce concrete evidence 
of  the  activities  they  perform  and  how.  The  evidence  produced  is  expected  to  include 
information  on  the  commercial  (i.e.  non-tax)  reasons  for  setting  up  and  maintaining  the 
undertaking  which  does  not  need  own  premises  and/or  bank  account  and/or  dedicated 
management  or  employees.  It  is  also  expected  to  include  information  on  the  resources  that 
such  undertaking  uses  to  actually  perform  its  activity.  It  is  also  expected  to  include 
information  allowing  to  verify  the  nexus  between  the  undertaking  and  the  Member  State 
where  it  claims  to  be  resident  for  tax  purposes,  i.e.  to  verify  that  the  key  decisions  on  the 
value generating activities of the undertaking are taken there. 

While  the  above  information  is  essential  and  required  to  be  produced  by  the  rebutting 
undertaking, the undertaking is free to produce additional information to make its case. This 
information should then be assessed by the tax administration of the undertaking’s State of tax 
residence. Where the tax administration is satisfied that an undertaking rebuts the presumption 
that it is a shell for the purposes of the Directive, it should be able to certify the outcome of 
the  rebuttal  process  for  the  relevant  tax  year.  As  the  rebuttal  process  is  likely  to  create  a 
burden  for  both  the  undertaking  and  the  tax  administration  while  leading  to  the  conclusion 
that there is minimum substance for tax purposes, it will be possible to extend the validity of 
the  rebuttal  for  another  5  years  (i.e.  for  a  total  maximum  of  6  years),  after  the  relevant  tax 
year, provided that the legal and factual circumstances evidenced by the undertaking do not 
change.  After  this  period,  the  undertaking  will  need  to  renew  the  process  of  rebuttal  if  it 
wishes to do so.   

Exemption for lack of tax motives 

An  undertaking  that  might  cross  the  gateway  and/or  does  not  fulfil  the  minimum  substance 
could be used for genuine business activities without creating a tax benefit for itself, the group 
of  companies  of  which  it  is  part  or  for  the  ultimate  beneficial  owner.  Such  an  undertaking 
should have an opportunity to  evidence this, at  any time, and to request  an exemption  from 
the obligations of this Directive.  

To  claim  such  an  exemption,  the  undertaking  is  expected  to  produce  elements  allowing  to 
compare the tax liability of the structure or the group to which it is part with and without its 
interposition. This is similar to the exercise recommended to be undertaken in order to assess 
any type of aggressive tax planning schemes (Commission Recommendation of 6 December 
2012 on aggressive tax planning7.  

As  is  the  case  with  the  rebuttal  of  the  presumption,  the  tax  administration  of  the  place  of 
claimed tax residence of the undertaking may be considered best placed to assess the relevant 
evidence  produced  by  the  undertaking.  Where  the  tax  administration  is  satisfied  that  the 
interposition of a specific undertaking within the group does not impact on the tax liability of 
the  group,  it  should  be  able  to  certify  that  the  undertaking  is  not  at  risk  of  being  found  a 
‘shell’  under  this  Directive  for  a  tax  year.  As  the  process  for  obtaining  an  exemption  could 
create  a  burden  for  both  the  undertaking  and  the  tax  administration  while  leading  to  the 
conclusion that there is no tax avoidance or evasion purpose, it will be possible to extend the 
validity of the exemption for another 5 years (i.e. for a total maximum of 6 years), provided 
that  the  legal  and  factual  circumstances  evidenced  by  the  undertaking  do  not  change.  After 
this period, the undertaking will need to repeat the process of requesting for an exemption if it 
wishes to continue being exempt and can substantiate that it remains entitled to. 

7 

OJ L 338, 12.12.2012, p. 41. 

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Consequences 

Once an undertaking is presumed to be a shell for the purposes of the Directive, and does not 
rebut  such  presumption,  tax  consequences  should  kick  in.  These  consequences  should  be 
proportionate and aim at neutralising its tax impact, i.e. disallowing any tax advantages which 
have  been  obtained,  or  could  be  obtained,  through  the  undertaking  in  accordance  with 
agreements  or  conventions  in  force  in  the  Member  State  of  the  undertaking  or  relevant  EU 
directives,  in  particular  Council  Directives  2011/96/EU  on  the  common  system  of  taxation 
applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member  States  and 
2003/49/EC  on  a  common  system  of  taxation  applicable  to  interest  and  royalty  payments 
made between associated companies of different Member States. These advantages would be 
in  effect  disallowed  if  the  relevant  agreements,  conventions  and  EU  directives  were 
disregarded  with  regard  to  the  undertaking  that  was  found  not  to  have  minimum  substance 
and did not prove the contrary. 

Given that to obtain these advantages, an undertaking normally needs to provide a certificate 
of residence for tax purposes, in order to accommodate for an efficient process, the Member 
State of tax residence of the shell will either not issue a tax residence certificate at all or will 
issue a certificate with a warning statement, i.e. including an explicit statement to prevent its 
use for the purposes of obtaining the above advantages. Not issuing a tax residence certificate 
or issuing a special certificate, including the warning described above, does not set aside the 
national  rules  of  the  Member  State  where  the  shell  is  tax  resident  with  regard  to  any  tax 
obligations linked to  the shell.  It will only serve as an  administrative practice to  inform  the 
source country that it should not grant the benefits of its tax treaty with the Member State of 
the shell (or of applicable EU directives) to payments towards the shell.  

If  tax  advantages  accorded  to  the  undertaking  are  disallowed,  it  should  be  determined  how 
income flows to  and from the undertaking, as well as any assets owned by the undertaking, 
should actually be taxed. In particular, it should be determined which jurisdiction should have 
a right to tax such income flows and/ or assets. Such determination should not affect any tax 
that may apply at the level of the shell itself; the Member State of the shell would thus remain 
free to continue to consider the shell as resident for tax purposes in its territory and apply tax 
on the relevant income flows and / or assets as per its national law. 

The allocation of taxing rights should take into account all jurisdictions that may be affected 
by  transactions  involving  the  shell.  Such  jurisdictions,  except  for  the  Member  State  of  the 
shell, are: 

(i) 

(ii) 

In the case of income flows: on the one hand, the source jurisdiction or jurisdiction 
where  the  payer  of  the  income  is  located  and  on  the  other,  the  jurisdiction  of  final 
destination of the flow, i.e. the jurisdiction of the shareholder of the undertaking; 

In case of real  estate assets: on the one hand,  the source  jurisdiction  or jurisdiction 
where  the  assets  are  situated  and  on  the  other,  the  jurisdiction  where  the  owner 
resides, i.e. the jurisdiction of the shareholder of the undertaking; 

(iii) 

In  case  of  valuable  movable  assets,  such  as  art  collections,  yachts  etc.:  the 
jurisdiction of the owner, i.e. of the shareholder of the undertaking. 

The allocation  of taxing  rights  necessarily  affects only  Member States,  which are bound by 
this Directive, i.e. it does not and cannot affect third countries. However, situations involving 
third countries are indeed likely to arise, e.g. where income from a third country flows to the 
shell or where the shareholder(s) of the shell are in a third country or where the shell owns 
assets  situated  in  a  third  country.  In  these  cases,  agreements  for  the  avoidance  of  double 
taxation  between  a  Member  State  and  a  third  country  should  be  duly  respected  as  regards 

EN 

12 

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allocation  of  taxing  rights.  In  absence  of  such  agreements,  the  Member  State  involved  will 
apply its national law.  

In detail, four scenarios can be envisaged: 

(1) 

Third  country  source  jurisdiction  of  the  payer  –    EU  shell  jurisdiction  –  EU 
shareholder(s) jurisdiction 

In  this  case  the  source  jurisdiction  is  not  bound  by  the  Directive,  while  the 
jurisdictions of the shell and of the shareholder fall in scope.  

o  Third country source / payer: may apply domestic tax on the outbound payment 
or may decide to apply the treaty in effect with EU shareholder jurisdiction  

o  EU  shell:  it  will  continue  to  be  resident  for  tax  purposes  in  the  respective 
Member  State  and  will  have  to  fulfil  relevant  obligations  as  per  national  law, 
including by reporting the payment received; it may be able to provide evidence 
of the tax applied on the payment  

o  EU shareholder(s): shall include the payment received by the shell undertaking in 
its taxable income, as per the national law and may be able to claim relief for any 
tax  paid  at  source,  in  accordance  with  the  applicable  treaty  with  third  country 
source jurisdiction. It will also take into account and deduct any tax paid by the 
shell. 

(2) 

EU  source  jurisdiction  of  the  payer–  EU  shell  jurisdiction  –  EU  shareholder(s) 
jurisdiction 

In this case, all jurisdictions fall in the scope of the Directive and are therefore bound 
by it.  

o  EU  source  /  payer:  it  will  not  have  a  right  to  tax  the  payment  but  may  apply 
domestic tax on the outbound payment to the extent it cannot identify whether the 
undertaking’s shareholder(s) are in the EU  

o  EU  shell:  it  will  continue  to  be  resident  for  tax  purposes  in  the  respective 
Member  State  and  will  have  to  fulfil  relevant  obligations  as  per  national  law, 
including by reporting the payment received; it may be able to provide evidence 
of the tax applied on the payment  

o  EU shareholder(s): will include the payment received by the shell undertaking in 
its taxable income, as per the national law and may be able to claim relief for any 
tax  paid  at  source,  including  by  virtue  of  EU  directives.  It  will  also  take  into 
account and deduct any tax paid by the shell. 

(3) 

EU  source  jurisdiction  of  the  payer  –  EU  shell  jurisdiction  –  third  country 
shareholder(s) jurisdiction  

In  this  case  only  the  source  and  the  shell  jurisdiction  are  bound  by  the  Directive 
while the shareholder jurisdiction is not.  

o  EU  source  /  payer:  will  tax  the  outbound  payment  according  to  treaty  in  effect 
with the third country jurisdiction of the shareholder(s) or in the absence of such 
a treaty in accordance with its national law. 

o  EU shell: will continue to be resident for tax purposes in a Member State and will 
have to fulfil relevant obligations as per national law, including by reporting the 
payment  received; it may  be able to  provide  evidence of the tax applied on the 
payment.  

EN 

13 

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o  Third  country  shareholder(s):  while  the  third  country  jurisdiction  of  the 
shareholder(s)  is  not  compelled  to  apply  any  consequences,  it  may  be  asked  to 
apply  a  tax  treaty  in  force  with  the  source  Member  State  in  order  to  provide 
relief.  

(4) 

Third country source jurisdiction of the payer – EU shell jurisdiction – third country 
shareholder(s) jurisdiction  

o  Third country source / payer: may apply domestic tax on the outbound payment 
or  may  decide  to  apply  tax  according  to  the  tax  treaty  in  effect  with  the  third 
country jurisdiction of the shareholder(s) if it wishes to look through the EU shell 
entity as well. 

o  EU  shell:  will  continue  to  be  resident  for  tax  purposes  in  a  Member  State  and 
fulfil relevant obligations as per national law, including by reporting the payment 
received; it may be able to provide evidence of the tax applied on the payment  

o  Third  country  shareholder(s):  while  the  third  country  shareholder  jurisdiction  is 
not  compelled  to  apply  any  consequences,  it  may  consider  applying  a  treaty  in 
force with the source jurisdiction in order to provide relief.  

Scenarios where shell undertakings are resident  outside the EU fall outside the scope of the 
Directive.  

Exchange of information  

All Member States will  have access to information on EU shells, at  any time and without a 
need  for  recourse  to  request  for  information.  To  this  effect,  information  will  be  exchanged 
among Member States from the first step, when an undertaking is classified as being at risk 
for the purposes of this Directive. Exchange will also apply where the tax administration of a 
Member State makes an assessment based on facts and circumstances of individual cases and 
decides  to  certify  that  a  certain  undertaking  has  rebutted  the  presumption  of  being  shell  or 
should be exempt from the obligations under the Directive. This will ensure that all Member 
States are in a position to become aware, in a timely manner, of the discretion exercised and 
the reasons behind each assessment. Member States will also be able to request the Member 
State  of  the  undertaking  to  perform  tax  audits  where  they  have  grounds  to  suspect  that  the 
undertaking might be lacking minimal substance for the purposes of the Directive. 

To achieve that the information is available to all Member States that may have an interest to 
it  in  a  timely  manner,  the  information  will  be  exchanged  automatically  through  a  central 
directory by deploying the existing mechanism of administrative cooperation in tax matters. 
Member States will exchange the information in all above scenarios without delay and in any 
case within 30 days from the time the administration has such information. This means within 
30 days from  receiving tax returns or within 30 days from when the administration issues a 
decision to certify that an undertaking rebutted a presumption or should be exempt. Automatic 
exchange  will  also  take  place  within  30  days  from  the  conclusion  of  an  audit  to  an 
undertaking  at  risk  for  the  purposes  of  the  Directive,  if  the  outcome  of  such  audit  has  an 
impact  on  the  information  already  exchanged  or  that  should  have  been  exchanged  for  this 
undertaking.    The information  to  be exchanged is  prescribed in  Article  13 of this Directive. 
The  principle  is  that  such  information  should  allow  all  Member  States  to  receive  the 
information reported by undertakings at  risk for the purposes of  this Directive. In addition, 
where  a  Member  State’s  administration  assesses  a  rebuttal  of  presumption  or  an  exemption 
from the obligations of the Directive, the information exchanged should allow other Member 
States to understand the reasons for this assessment. Other Member States should always be 
able  to  request  from  another  Member  State  a  tax  audit  on  any  undertaking  that  passes  the 

EN 

14 

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gateway of this Directive, if they have doubts on whether or not it has the minimal substance 
required.  The  requested  Member  State  should  perform  the  tax  audit  within  a  reasonable 
timeframe and share the outcome with the  requesting Member State.  If there is a finding of 
‘shell’ entity, the exchange of information should be automatic in accordance with Article 13 
of this Directive. 

Penalties 

The proposed legislation leaves it to Member States to lay down penalties applicable against 
the  violation  of  the  reporting  obligations  provided  by  this  Directive  as  transposed  into  the 
national  legal  order.  The  penalties  shall  be  effective,  proportionate  and  dissuasive.  A 
minimum level of coordination should be achieved amongst Member States through the set of 
a  minimum  monetary  penalty  as  per  existing  provisions  in  the  financial  sector.  Penalties 
should  include  an  administrative  pecuniary  sanction  of  at  least  5%  of  the  undertaking’s 
turnover. Such minimum  amount should take into account  the circumstances  of the specific 
reporting entity. 

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2021/0434 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

laying down rules to prevent the misuse of shell entities for tax purposes and amending 
Directive 2011/16/EU 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 115 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Parliament1,  
Having regard to the opinion of the European Economic and Social Committee2,  

Acting in accordance with a special legislative procedure, 

Whereas: 

(1) 

(2) 

1 
2 
3 

4 

Ensuring fair and effective taxation in the internal market and tackling tax avoidance 
and  evasion  remain  high  political  priorities  in  the  Union.  While  recent  years  saw 
important  progress  in  this  area,  especially  with  the  adoption  of  Council  Directive 
2016/11643  concerning  anti-tax  avoidance  and  the  expansion  of  scope  of  Council 
Directive 2011/16/EU4 on administrative cooperation, further measures are necessary 
to tackle specifically identified practices of tax avoidance and evasion, which are not 
fully  captured  by  the  existing  legal  framework  of  the  Union.  In  particular, 
multinational  groups  often  create  undertakings  with  no  minimal  substance,  to  lower 
their  overall  tax  liability,  including  by  shifting  profits  away  from  certain  high-tax 
Member  States  in  which  they  carry  out  economic  activity  and  create  value  for  their 
business. This proposal complements the progress achieved in corporate transparency 
through requirements concerning beneficial ownership information introduced by the 
anti-money  laundering  framework,  which  address  situations  where  undertakings  are 
created  to  conceal  true  ownership,  whether  of  the  undertakings  themselves  or  of  the 
assets they manage and own, such as real estate or property of high value.  

It  is  acknowledged  that  undertakings  with  no  minimal  substance  may  be  set  up  in  a 
Member  State  with  the  main  objective  of  obtaining  a  tax  advantage,  notably  by 
eroding  the  tax  base  of  another  Member  State.  While  some  Member  States  have 
developed a legislative or administrative framework to protect their tax base from such 
schemes,  the  relevant  rules  often  have  a  limited  effect,  as  they  only  apply  in  the 

OJ C , , p. .Not yet published in the Official Journal. 
OJ C , , p. .Not yet published in the Official Journal. 
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, 19.7.2016, p. 1). 
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). 

EN 

16 

  EN 

                                                 
(3) 

(4) 

(5) 

territory  of  a  single  Member  State  and  do  not  effectively  capture  situations  that 
involve more than one Member State. Furthermore, the national rules that apply in this 
field significantly differ across the Union while some Member States have no rules at 
all,  to  tackle  the  misuse  of  undertakings  with  no  or  minimal  substance  for  tax 
purposes.  

It  is  necessary  to  lay  down  a  common  framework,  in  order  to  strengthen  Member 
States’  resilience  against  practices  of  tax  avoidance  and  evasion  linked  to  the  use  of 
undertakings which do not perform an economic activity even if presumably they are 
engaged with economic activity and therefore do not have any or have only minimal 
substance for tax purposes.  This  is done in  order to  ensure that undertakings lacking 
minimal  substance  are  not  used  as  instruments  of  tax  evasion  or  tax  avoidance.  As 
those undertakings may be established in one Member State but may be used with the 
effect  of  eroding  the  tax  base  of  another  Member  State,  it  is  critical  to  agree  on  a 
common  set  of  rules  for  determining  what  should  be  considered  as  insufficient 
substance for tax purposes in the internal market as well as for delineating specific tax 
consequences  linked  to  such  insufficient  substance.  Where  an  undertaking  has  been 
found  to  have  sufficient  substance  under  this  Directive,  this  should  not  prevent  the 
Member  States  from  continuing  to  operate  anti-tax  avoidance  and  evasion  rules, 
provided that these are consistent with Union law.  

To ensure a comprehensive approach, the rules should apply to all undertakings in the 
Union which are taxable in a Member State, regardless of their legal form and status, 
as  long  as  they  have  their  residence  for  tax  purposes  in  a  Member  State  and  are 
eligible to obtain a certificate of tax residence in that Member State.  

To  ensure  the  proper  functioning  of  the  internal  market,  the  proportionality  and 
effectiveness  of  potential  rules,  it  would  be  desirable  to  limit  their  scope  to 
undertakings which are at risk of being found to lack minimal substance and used with 
the  main  objective  of  obtaining  a  tax  advantage.  It  would  therefore  be  important  to 
establish  a  gateway  criterion,  in  the  form  of  a  set  of  three  cumulative,  indicative 
conditions,  in  order  to  conclude  which  undertakings  are  sufficiently  at  risk  as 
aforementioned  to  justify  that  they  be  subjected  to  reporting  requirements.  A  first 
condition should enable the identification of undertakings presumably engaged mainly 
in  geographically  mobile  economic  activities,  as  the  place  where  such  activities  are 
actually  carried  out  is  usually  more  challenging  to  identify.  Such  activities  normally 
give  rise  to  important  passive  income  flows.  Hence,  undertakings,  which  income 
consists predominantly of passive income flows would meet this condition. It should 
also  be  taken  into  account  that  entities  holding  assets  for  private  use,  such  as  real 
estate, yachts, jets, artworks, or equity alone, may have no income for longer periods 
of  time,  but  still  enable  significant  tax  benefits  by  way  of  owning  those  assets.  As 
purely  domestic  situations  would  not  pose  a  risk  for  the  good  functioning  of  the 
internal  market  and  would  be  best  addressed  at  domestic  level,  a  second  condition 
should focus on undertakings engaged in cross-border activities. Engagement in cross-
border activities should be established having regard, on the one hand, to the nature of 
the  transactions  of  the  undertaking,  domestic  or  foreign,  and  on  the  other,  to  its 
property,  given  that  entities  that  only  hold  assets  for  private,  non-business,  use  may 
not  engage  in  transactions  for  a  considerable  time.  Additionally,  a  third  condition 
should point out to those undertakings which have no or inadequate own resources to 
perform  core  management  activities.  In  this  regard,  undertakings  that  do  not  have 
adequate  own  resources  tend  to  engage  third  party  providers  of  administration, 
management,  correspondence  and  legal  compliance  services  or  enter  into  relevant 

EN 

17 

  EN 

(6) 

(7) 

(8) 

agreements with associated enterprises for the supply of such services in order to set 
up  and  maintain  a  legal  and  tax  presence.  Outsourcing  of  certain  ancillary  services 
only,  such  as  bookkeeping  services  alone,  while  core  activities  remain  with  the 
undertaking,  would  not  suffice  in  itself  for  an  undertaking  to  meet  this  condition. 
While  such  service  providers  might  be  regulated  for  other,  non-tax  purposes,  their 
obligations for such other purposes cannot always mitigate the risk that they enable the 
set  up  and  maintenance  of  undertakings  misused  for  tax  avoidance  and  evasion 
practices.  

It would be fair to exclude from the envisaged rules undertakings whose activities are 
subject  to  an  adequate  level  of  transparency  and  therefore  do  not  present  a  risk  of 
lacking substance for tax purposes. Companies having a transferable security admitted 
to  trading  or  listed  on  a  regulated  market  or  multilateral  trading  facility  as  well  as 
certain  financial  undertakings  which  are  heavily  regulated  in  the  Union,  directly  or 
indirectly, and subject to increased transparency requirements and supervision, should 
equally be excluded from the scope of this Directive. Pure holding undertakings which 
are situated in the same jurisdiction as the operational subsidiary and their beneficial 
owner(s)  are  not  likely  to  serve  the  objective  of  obtaining  a  tax  advantage  either. 
Similar  is  the  case  of  sub-holding  undertakings  which  are  situated  in  the  same 
jurisdiction  as  their  shareholder  or  ultimate  parent  entity.  On  this  basis,  they  should 
also be excluded. Undertakings that engage an adequate number of persons, full-time 
and exclusively, in order to carry out their activities should equally not be considered 
to lack minimal substance. While they are not reasonably expected to pass the gateway 
criterion, they should be excluded explicitly for purposes of legal certainty.  

To  distinguish  amongst  undertakings  which  are  at    risk  of  being  found  to  lack 
substance  for  tax  purposes  and  ensure  that  the  rules  capture  only  undertakings  that 
lack  substance  for  tax  purposes,  undertakings  should  provide  information  on  their 
resources  in  the  Member  State  where  they  are  resident  for  tax  purposes.  Such 
information  is  necessary  to  verify  that  the  undertaking  has  resources  and  actually 
performs economic activity in the Member State of its tax residence and that there is 
sufficient nexus between the income or the assets of the undertaking and that Member 
State.  

To facilitate implementation  of this Directive, undertakings  at  risk of being found to 
lack substance and used with the main objective of obtaining a tax advantage  should 
declare, in their annual tax return, that they possess a minimum level of resources such 
as people and premises in the Member State of tax residence and provide documentary 
evidence if that is the case. While it is recognised that different activities may require a 
different level or type of resources, a common minimum level of resources would be 
expected under all circumstances. This assessment should solely aim at identifying the 
substance of undertakings for tax purposes and does not question the role that “trust or 
company service providers”,  as  defined in  Directive (EU) 2015/849 of the European 
Parliament  and  of  the  Council5,  have  in  the  identification  of  money  laundering,  its 
predicate offences and terrorist financing. Conversely, the absence of a minimum level 
of resources may be considered to indicate a lack of substance where an undertaking is 

5 

Directive  (EU)  2015/849  of  the  European  Parliament  and  of  the  Council  of  20  May  2015  on  the 
prevention  of  the  use  of  the  financial  system  for  the  purposes  of  money  laundering  or  terrorist 
financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and 
repealing  Directive  2005/60/EC  of  the  European  Parliament  and  of  the  Council  and  Commission 
Directive 2006/70/EC (OJ L 141, 5.6.2015, p. 73). 

EN 

18 

  EN 

                                                 
(9) 

(10) 

already  at  risk  of  being  found  to  lack  substance  for  tax  purposes.  To  ensure 
compatibility with relevant international standards, a common minimum level should 
draw  on  the  existing  Union  and  international  standards  on  substantial  economic 
activity  in  the  context  of  preferential  tax  regimes  or  in  the  absence  of  corporate 
taxation6,  as  developed  in  the  context  of  the  Forum  on  Harmful  Tax  Practices.  It  is 
necessary  to  provide  for  submission  of  documentary  evidence  with  the  tax  return  in 
support of the declaration of the undertaking that it disposes a minimum of resources. 
It  is  also  necessary in  order to  allow the administration to  form  a view based on the 
facts  and  circumstances  of  the  undertaking  and  decide  whether  to  initiate  an  audit 
procedure. 

To ensure tax certainty, it is imperative to lay down common rules on the content of 
undertakings’  declarations.  Undertakings  that  pass  the  gateway  criterion  and  are 
consequently  subject  to  reporting  requirements  should  be  presumed  not  to  have 
sufficient substance for tax purposes if they also declare not to possess one or more of 
the  elements  that  cumulatively  constitute  a  minimum  level  of  substance,  or  do  not 
provide the required supporting evidence. Undertakings that declare to possess all the 
elements  of  the  minimum  level  of  substance  and  provide  the  required  supporting 
documentation  should  instead  be  presumed  to  have  minimal  substance  for  tax 
purposes  and  should  incur  no  further  obligations  and  consequences  under  this 
Directive.  This,  however,  should  be  without  prejudice  to  any  applicable  law  and  the 
right of the administration to perform an audit, including on the basis of the supporting 
documentation, and possibly, arrive at a different conclusion. 

It is recognised that whether an undertaking is actually performing economic activities 
for  tax  purposes  or  serves  mainly  tax  avoidance  or  evasion  purposes  is  ultimately  a 
matter of facts and circumstances. This should be assessed on a case by case basis in 
respect  of  each  specific  undertaking.  Therefore,  undertakings  presumed  not  to  have 
minimal substance for tax purposes should be entitled to prove the contrary, including 
to prove that they do not serve primarily tax objectives, and rebut such presumption. 
After  fulfilling  their  reporting  obligations  under  this  Directive,  they  should  provide 
additional information to the administration of the Member State where they reside for 
tax  purposes.  While  they  may  provide  any  additional  information  that  they  deem 
appropriate,  it  is  essential  to  set  common  requirements  of  what  may  constitute 
appropriate  additional  evidence  and  should  thus  be  required  in  all  cases.  Where  the 
Member  State,  based  on  such  additional  evidence,  considers  that  an  undertaking  has 
rebutted a presumption of lack of substance in a satisfactory manner, it should be able 
to  issue  a  decision  to  certify  that  the  undertaking  has  minimal  substance  for  tax 
purposes  in  accordance  with  this  Directive.  Such  decision  may  remain  valid  for  the 
period  during  which  factual  and  legal  circumstances  of  the  undertaking  remain 
unchanged and up to 6 years from the time the decision is issued.  This will allow to 
limit the resources allocated to cases that have been evidenced not to be a shell for the 
purposes of the Directive. 

(11)  As  the  objective  of  this  Directive  is  to  prevent  tax  avoidance  and  evasion  that  are 
likely to  flourish  through actions by undertakings without  minimal  substance, and in 
order to ensure tax certainty and enhance the proper functioning of the internal market, 

6 

General  Secretariat  of  the  Council,  9637/18  FISC  241  ECOFIN  555,  Code  of  Conduct  (Business 
Taxation),  Guidance  on  the  interpretation  of  the  third  criterion;  OECD/G20  Base  Erosion  and  Profit 
Shifting  Project,  Countering  Harmful  Tax  Practices  More  Effectively,  Taking  into  Account 
Transparency and Substance, Action 5: Final Report 

EN 

19 

  EN 

                                                 
(12) 

it is paramount to provide for a possibility of exemptions for undertakings which meet 
the  gateway  criterion  but  yet  whose  interposition  has  no  actual  advantageous  impact 
on  the  overall  tax  position  of  the  undertaking’s  group  or  of  the  beneficial  owner(s). 
For that reason, such undertakings should be entitled to request the administration of 
the  Member  State,  where  they  reside  for  tax  purposes,  to  issue  a  decision  which 
exempts  them  from  complying  with  the  proposed  rules  altogether  and  upfront.  Such 
exemption  should  also  be  limited  in  time,  to  allow  the  administration  to  verify  on  a 
regular basis that the factual and legal circumstances justifying the exemption decision 
remain  valid.  At  the  same  time  a  potential  extended  duration  of  such  decision  will 
allow to limit the resources allocated to cases that should be exempt from the scope of 
the Directive. 

 To  ensure  tax  certainty  and  fair  taxation  in  the  internal  market,  it  would  be 
appropriate to explicitly lay down the rules that specify the treatment for tax purposes 
of income flowing to or from undertakings which have been found to lack minimum 
substance for tax purposes and have not provided evidence to the contrary or evidence 
that they do not serve the objective of obtaining a tax advantage. Such income should 
be taxable in the Member State where the undertaking’s shareholder(s) reside for tax 
purposes,  as  if  it  were  paid  directly  to  such  shareholder(s).  To  prevent  the  risk  of 
double taxation, tax paid  on such income in  the Member State of the undertaking, if 
any, should be taken into account and deducted from the tax payable at the Member 
State  of  the  undertaking’s  shareholder(s).  If  the  undertaking’s  shareholders  do  not 
reside  for  tax  purposes  in  a  Member  State,  such  income  should  be  taxable  in  the 
jurisdiction of residence for tax purposes of the payer, as if it were paid straight to the 
undertaking’s  shareholder(s).  Rules  of  equivalent  effect  should  apply  to  situations 
where there are no income flows. In particular, this could occur in the case of holding 
immovable or other property of very high value for private purposes alone or of pure 
equity  holdings.  Considering  that  there  is  a  risk  that  several  undertakings  without 
minimal substance are set up in a chain, it is also essential to exclude that the income 
is  deemed  taxable  in  the  jurisdiction  of  a  shareholder  that  is  itself  an  undertaking 
without  minimal  substance.  The  allocation  of  taxing  rights  in  accordance  with 
agreements  and  conventions  that  provide  for  the  elimination  of  double  taxation  of 
income, and where applicable, capital concluded between a Member State and a third 
country should not be affected by this Directive. 

(13)  To  ensure  effectiveness  of  the  proposed  framework,  it  is  necessary  to  establish 
appropriate tax consequences for undertakings that do not have minimal substance for 
tax purposes. Undertakings that have crossed the gateway criterion and are presumed 
to  be  lacking  substance  for  tax  purposes  while,  additionally,  have  not  provided 
evidence to the contrary or evidence that they do not serve the objective of obtaining a 
tax advantage, should not be allowed to benefit from the provisions of agreements and 
conventions that provide for the elimination of double taxation of income, and where 
applicable,  capital,  to  which  the  Member  State  of  their  tax  residence  is  a  party  and 
from  any  other  agreements,  including  provisions  in  international  agreements  for  the 
promotion  and  protection  of  investments,  with  equivalent  purpose  or  effect.  Such 
undertakings  should  not  be  allowed  to  benefit  from  Council  Directive  2011/96/EU7 

7 

Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in 
the case of parent companies and subsidiaries of different Member States (OJ L 345, 29.12.2011, p. 8). 

EN 

20 

  EN 

                                                 
and Council Directive 2003/49/EC8. To this effect,  those undertakings  should not  be 
entitled  to  a  certificate  of  tax  residence  to  the  extent  that  this  serves  to  obtain  those 
benefits. The Member State where the undertaking is resident for tax purposes should 
therefore deny to issue a certificate of tax residence. Alternatively, that Member State 
should be able to issue such certificate while indicating, by means of a warning, that it 
should not be used by the undertaking to obtain tax benefits as above. This denial of a 
certificate  of  tax  residence,  or  alternatively  the  issue  of  a  special  certificate  of  tax 
residence,  should  not  set  aside  the  national  rules  of  the  Member  State  of  the 
undertaking with regard to the tax residence and relevant obligations linked thereto. It 
would rather serve to communicate to other Member States, and third countries,  that 
no  relief  or  refund  should  be  granted  with  regard  to  transactions  involving  this 
undertaking based on any  treaty with  the Member State of the undertaking or Union 
directives, if applicable. 

(14)  Considering that undertakings without minimal substance may be used for the purpose 
of obtaining a tax advantage to the detriment of a Member State other than the one of 
their  residence  for  tax  purposes,  the  relevant  information  should  be  shared  with  the 
competent  authorities  of  other  Member  States.  To  ensure  that  all  interested  Member 
States  have  timely  access  to  such  information,  the  information  should  be  exchanged 
automatically through the common communication network (‘CCN’) developed by the 
Union. In this context, information should be recorded in a secure central directory on 
administrative  cooperation  in  the  field  of  taxation  available  to  all  Member  States. 
Member  States  should  be  required  to  implement  a  series  of  practical  arrangements, 
including  measures  to  standardise  the  communication  of  all  requisite  information 
through  the  creation  of  a  standard  form.  This  should  also  involve  specifying  the 
linguistic requirements  for the envisaged exchange of information and upgrading the 
CCN  accordingly.  Where  necessary,  following  the  stage  of  mandatory  automatic 
exchange of information under this Directive, a Member State should be able to rely 
on Article 5 of Council Directive 2011/16/EU as regards the exchange of information 
on  request  to  obtain  additional  information  on  reporting  undertakings  from  the 
Member  State  to  which  such  undertakings  would  be  liable  to  have  reported  this 
information.  Considering  that  the  sooner  replies  to  requests  for  information  are 
received, the more effective they are, it is appropriate to ensure that replies to requests 
for information are provided swiftly.  

(15)  Directive 2011/16/EU should therefore be amended accordingly. 

(16) 

In  order  to  improve  effectiveness,  Member  States  should  lay  down  penalties  against 
the violation of the national rules that transpose this Directive. Such penalties should 
be  effective,  proportionate  and  dissuasive.  To  ensure  tax  certainty  and  a  minimum 
level  of  coordination  across  all  Member  States,  it  is  necessary  to  fix  a  minimum 
monetary penalty, also taking into account the situation of each specific undertaking.  
The envisaged rules rely on self-assessment by the undertakings as regards whether or 
not  they  meet  the  gateway  criteria.  To  achieve  effectiveness  of  the  provisions, 
incentivising  adequate  compliance  across  the  Union,  and  taking  into  account  that  a 
shell undertaking in one Member State may be used to erode the tax base of another 
Member State, it is important that any Member State has the right to request another 
Member State to conduct tax audits of undertakings at risk for not fulfilling minimum 

8 

Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest 
and  royalty  payments  made  between  associated  companies  of  different  Member  States  (OJ  L  157, 
26.6.2003, p. 49). 

EN 

21 

  EN 

                                                 
substance  as  defined  in  this  Directive.  Accordingly,  to  reinforce  effectiveness,  it  is 
essential that the requested Member State has an obligation to carry out such audit and 
to share information on the outcome, even where there is no finding of ‘shell’ entity. 

(17)  As the proper implementation and enforcement of the proposed rules in each Member 
State  is  critical  for  the  protection  of  other  Member  States’  tax  base,  such 
implementation  and  enforcement  should  be  monitored  by  the  Commission.  Member 
States  should  therefore  communicate  to  the  Commission  on  a  regular  basis,  specific 
information,  including  statistics,  on  the  implementation  and  enforcement  in  their 
territory of national measures adopted pursuant to this Directive.  

(18) 

(19) 

In  order  to  evaluate  the  effectiveness  of  the  proposed  new  rules,  the  Commission 
should  prepare  an  evaluation  on  the  basis  of  the  information  provided  by  Member 
States and other available data. The Commission’s report should be published.  

In  order  to  ensure  uniform  conditions  for  the  implementation  of  this  Directive  and 
Directive  2011/16/EU,  in  particular  for  the  automatic  exchange  of  information 
between tax authorities, implementing powers should be conferred on the Commission 
to adopt a standard form with a limited number of components, including the linguistic 
arrangements, the necessary practical arrangements for upgrading the central directory 
on administrative cooperation in the field of taxation. Those powers, as provided in the 
Directive  2011/16/EU,  should  be  exercised  in  accordance  with  Regulation  (EU)  No 
182/2011 of the European Parliament and of the Council9.  

(20)  The European Data Protection Supervisor was consulted in accordance with Article 42 
of Regulation (EU) 2018/1725 of the European Parliament and of the Council10.  

(21)  Any  processing  of  personal  data  carried  out  within  the  framework  of  Directive 
2011/16/EU  should  comply  with  Regulation  (EU)  2016/679  of  the  European 
Parliament  and  of  the  Council11  and  Regulation  (EU)  2018/1725.  Data  processing  is 
set out in Directive 2011/16/EU solely with the objective of serving a general public 
interest, namely the matters of taxation and the purposes of combating tax fraud, tax 
evasion  and  tax  avoidance,  safeguarding  tax  revenues  and  promoting  fair  taxation, 
which strengthen opportunities for social, political and economic inclusion in Member 
States. 

(22)  Since  the  objective  of  this  Directive  cannot  sufficiently  be  achieved  by  the  Member 
States  but  can  rather,  by  reason  of  the  fact  that  such  undertakings  are  normally 
established in  one Member State but  are used in  a manner impacting the tax base of 
one or more other Member States, be better achieved at  Union level, the Union may 
adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 
of the Treaty on European Union. In accordance with the principle of proportionality 

9 

10 

11 

Regulation  (EU)  No  182/2011  of  the  European  Parliament  and  of  the  Council  of  16  February  2011 
laying down the rules and general principles concerning mechanisms for control by Member States of 
the Commission’s exercise of implementing powers (OJ L 55, 28.2.2011, p. 13) 
Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the 
protection of natural persons with regard to the  processing of personal data by the Union institutions, 
bodies, offices and agencies and on the free movement of such data, and repealing Regulation (EC) No 
45/2001 and Decision No 1247/2002/EC (OJ L 295, 21.11.2018, p. 39) 
Regulation  (EU)  2016/679  of  the  European  Parliament  and  of  the  Council  of  27  April  2016  on  the 
protection of natural persons with regard to the processing of personal data and on the free movement of 
such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (OJ L 119, 4.5.2016, 
p. 1) 

EN 

22 

  EN 

                                                 
as set out in that Article, this Directive does not go beyond what is necessary in order 
to achieve that objective. 

HAS ADOPTED THIS DIRECTIVE: 

CHAPTER I  
GENERAL PROVISIONS 

Article 1 
Subject matter 

This Directive lays down indicators of minimum substance for undertakings in Member States 
and rules regarding the treatment for tax purposes of those undertakings that do not meet the 
indicators.  

Article 2 
Scope 

This Directive applies to all undertakings that are considered tax resident and are eligible to 
receive a tax residency certificate in a Member State.  

This Directive is without prejudice to other legal acts of the Union. 

For the purposes of this Directive the following definitions shall apply: 

Article 3 
Definitions 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

12 

‘undertaking’ means any entity engaged in an economic activity, regardless of its legal 
form, that is a tax resident in a Member State; 

‘tax  year’  means  a  tax  year,  calendar  year  or  any  other  appropriate  period  for  tax 
purposes; 

‘revenues’  means  the  sum  of  the  net  turnover,  other  operating  income,  income  from 
participating  interests,  including  dividends  received  from  affiliated  undertakings, 
income  from  other  investments  and  loans  forming  part  of  the  fixed  assets,  other 
interest  receivable  and  similar  income  as  listed  in  Annexes  V  and  VI  to  Directive 
2013/34/EU of the European Parliament and of the Council12; 

‘Member State of the undertaking’ means the Member State where the undertaking is 
resident for tax purposes; 

‘beneficial  owner’  means  beneficial  owner  as  defined  in  Article  3,  point  (6),  of 
Directive (EU) 2015/849 of the European Parliament and of the Council; 

‘undertaking’s shareholders’ means the individuals or entities directly holding shares, 
interest,  stakes,  participations,  membership  rights,  entitlement  to  benefits  or  any 
equivalent  rights  or  entitlements  in  the  undertaking  and  in  the  case  of  indirect 
holdings, those individuals or entities holding interest in the undertaking through one 

Directive  2013/34/EU  of  the  European  Parliament  and  of  the  Council  of  26  June  2013 on  the  annual 
financial  statements,  consolidated  financial  statements  and  related  reports  of  certain  types  of 
undertakings,  amending  Directive  2006/43/EC  of  the  European  Parliament  and  of  the  Council  and 
repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19) 

EN 

23 

  EN 

                                                 
or a chain of undertakings none of which fulfils the indicators of minimum substance 
set out in Article 7(1) of this Directive.  

Article 4 
Relevant income 

For the purposes of Chapters II and III ‘relevant income’ shall mean income falling under any 
of the following categories:  

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

(h) 

interest or any other income generated from financial assets, including crypto assets, 
as defined in Article 3(1), point 2 of the proposal for a Regulation of the European 
Parliament and of the Council on Markets in Crypto-assets, and amending Directive 
(EU) 2019/193713; 

royalties  or  any  other  income  generated  from  intellectual  or  intangible  property  or 
tradable permits;  

dividends and income from the disposal of shares;  

income from financial leasing;  

income from immovable property; 

income from movable property, other than cash, shares or securities, held for private 
purposes and with a book value of more than one million euro. 

income from insurance, banking and other financial activities;  

income  from  services  which  the  undertaking  has  outsourced  to  other  associated 
enterprises. 

Article 5 
Associated enterprise 

1. 

For the purposes of Articles 4 and 7,‘associated enterprise’ shall mean a person who 
is related to another person in any of the following ways: 

(a) 

(b) 

(c) 

a  person  participates  in  the  management  of  another  person  by  being  in  a 
position to exercise a significant influence over the other person; 

a  person  participates  in  the  control  of  another  person  through  a  holding  that 
exceeds 25 % of the voting rights; 

a  person  participates  in  the  capital  of  another  person  through  a  right  of 
ownership that, directly or indirectly, exceeds 25 % of the capital; 

(d) 

a person is entitled to 25 % or more of the profits of another person. 

2. 

If more than one person participates in the management, control, capital or profits of 
the  same  person,  as  referred  to  in  paragraph  1,  all  persons  concerned  shall  be 
regarded as associated enterprises. 

If the same persons participate in the management, control, capital or profits of more 
than  one  person,  as  referred  to  in  paragraph  1,  all  persons  concerned  shall  be 
regarded as associated enterprises. 

13 

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3. 

4. 

For the purposes of paragraphs 1 and 2, a person shall mean both legal and natural 
persons.  A  person  who  acts  together  with  another  person  in  respect  of  the  voting 
rights or capital ownership of an entity shall be treated as holding a participation in 
all of the voting rights or capital ownership of that entity that are held by the other 
person. 

In  indirect  participations,  the  fulfilment  of  the  criteria  set  out  in  point  (c)  of 
paragraph  1  shall  be  determined  by  multiplying  the  rates  of  holding  through  the 
successive  tiers.  A  person  holding  more  than  50  %  of  the  voting  rights  shall  be 
deemed to hold 100 %. 

An individual, his or her spouse and his or her lineal ascendants or descendants shall 
be treated as a single person. 

CHAPTER II 
IDENTIFICATION OF UNDERTAKINGS THAT DO NOT 
MEET INDICATORS OF MINIMUM SUBSTANCE FOR TAX 
PURPOSES 

Article 6 
The reporting undertakings 

1. 

Member States shall require that undertakings meeting the following criteria to report 
to the competent authorities of Member States in accordance with Article 7: 

(a)  more  than  75%  of  the  revenues  accruing  to  the  undertaking  in  the  preceding 

two tax years is relevant income; 

(b) 

the  undertaking  is  engaged  in  cross-border  activity  on  any  of  the  following 
grounds: 

(i)  more  than  60%  of  the  book  value  of  the  undertaking’s  assets  that  fall 
within the scope of Article 4, points (e) and (f), was located outside the 
Member State of the undertaking in the preceding two tax years;  

(ii) 

at  least  60%  of  the  undertaking’s  relevant  income  is  earned  or  paid  out 
via cross-border transactions; 

(c) 

in the preceding two tax  years, the undertaking  outsourced the administration 
of day-to-day operations and the decision-making on significant functions.  

An undertaking which holds assets that can generate income falling within the 
scope of Article 4, points (e) and (f), shall also be deemed to meet the criterion 
set  out  in  point  (a)  of  the  first  subparagraph,  irrespective  of  whether  income 
from these assets has accrued to the undertaking in the preceding two tax years, 
if the book value of these assets is more than 75% of the total book value of the 
undertaking’s assets. 

An undertaking which holds assets that can generate income falling within the 
scope of Article 4, point (c), shall also be deemed to meet the criterion set out 
in  point  (a)  of  the  first  subparagraph,  irrespective  of  whether  income  from 
these  assets  has  accrued  to  the  undertaking  in  the  preceding  two  tax  years,  if 
the book value of these assets is more than 75% of the total book value of the 
assets of the undertaking. 

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2. 

By  derogation  from  paragraph  1,  Member  States  shall  ensure  that  the  undertakings 
falling  within  any  of  the  following  categories  are  not  subject  to  requirements  of 
Article 7: 

(a) 

companies which have a transferable security admitted to trading or listed on a 
regulated  market  or  multilateral  trading  facility  as  defined  under  Directive 
2014/65/EU of the European Parliament and of the Council14; 

(b) 

regulated financial undertakings; 

(c) 

undertakings  that  have  the  main  activity  of  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; 

(d)  undertakings  with  holding  activities  that  are  resident  for  tax  purposes  in  the 
same Member State as the undertaking’s shareholder(s) or the ultimate parent 
entity, as defined in Section I, point 7, of Annex III to Directive 2011/16/EU;  

(e) 

undertakings with at least five own full-time equivalent employees or members 
of staff exclusively carrying out the activities generating the relevant income;  

Point  (b)  of  the  first  subparagraph  shall  apply  to  the  following  ‘regulated  financial 
undertakings’:  

(a) 

(b) 

(c) 

a credit institution as defined in Article 4(1), point (1), of Regulation (EU) No 
575/2013 the European Parliament and of the Council15;  

an  investment  firm  as  defined  in  Article  4(1),  point  (1),  of  Directive 
2014/65/EU the European Parliament and of the Council16;  

an  alternative  investment  fund  manager  (AIFM)  as  defined  in  Article  4(1), 
point  (b),  of  Directive  2011/61/EU  of  the  European  Parliament  and  of  the 
Council  (2),  including  a  manager  of  Euveca  under  Regulation  (EU)  No 
345/2013 of the European Parliament and of the Council17, a manager of Eusef 
under  Regulation  (EU)  No  346/2013  of  the  European  Parliament  and  of  the 
Council18  and  a  manager  of  Eltif  under  Regulation  (EU)  2015/760  of  the 
European Parliament and of the Council19; 

14 

15 

16 

17 

18 

19 

Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15 May  2014  on  markets  in 
financial  instruments  and  amending  Directive  2002/92/EC  and  Directive  2011/61/EU  (OJ  L  173, 
12.6.2014, p. 349–496). 
Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012 (OJ L 176, 27.6.2013, p. 1). 
Directive  2014/65/EU  of  the European  Parliament  and  of  the  Council  of  15  May  2014 on  markets  in 
financial  instruments  and  amending  Directive  2002/92/EC  and  Directive  2011/61/EU  (OJ  L  173, 
12.6.2014, p. 349). 
Regulation  (EU)  No  345/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
European venture capital funds (OJ L 115, 25.4.2013, p. 1). 
Regulation  (EU)  No  346/2013  of  the  European  Parliament  and  of  the  Council  of  17  April  2013  on 
European social entrepreneurship funds (OJ L 115, 25.4.2013, p. 18). 
Regulation  (EU)  2015/760  of  the  European  Parliament  and  of  the  Council  of  29  April  2015  on 
European long-term investment funds (OJ L 123, 19.5.2015, p. 98). 

EN 

26 

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(d) 

(e) 

(f) 

(g) 

an  undertaking  for  collective  investment  in  transferable  securities  (UCITS) 
management  company  as  defined  Article  2(1),  point  (b),  of  Directive 
2009/65/EC of the European Parliament and of the Council20;  

an  insurance  undertaking  as  defined  in  Article  13,  point  (1),  of  Directive 
2009/138/EC of the European Parliament and of the Council21;  

a  reinsurance  undertaking  as  defined  in  Article  13,  point  (4),  of  Directive 
2009/138/EC;  

an  institution  for  occupational  retirement  provision  as  defined  in  Article  1, 
point  (6)  of  Directive  2016/2341  of  the  European  Parliament  and  of  the 
Council22;  

(h)  pension  institutions  operating  pension  schemes  which  are  considered  to  be 
social  security  schemes  covered  by  Regulation  (EC)  No  883/2004  of  the 
European Parliament and of the Council23 and Regulation (EC) No 987/2009 of 
the European Parliament and of the Council24 as well as any legal entity set up 
for the purpose of investment of such schemes;  

(i) 

an  alternative  investment  fund  (AIF)  managed  by  an  AIFM  as  defined  in 
Article 4(1), point (b), of Directive 2011/61/EU or an AIF supervised under the 
applicable national law;  

(j)  UCITS in the meaning of Article 1(2) of Directive 2009/65/EC;  

(k) 

(l) 

a central counterparty as defined in Article 2, point (1), of Regulation (EU) No 
648/2012 of the European Parliament and of the Council25;  

a  central  securities  depository  as  defined  in  Article  2(1),  point  (1),  of 
Regulation  (EU)  No  909/2014  of  the  European  Parliament  and  of  the 
Council26; 

(m)  an  insurance  or  reinsurance  special  purpose  vehicle  authorised  in  accordance 

with Article 211 of Directive 2009/138/EC; 

20 

21 

22 

23 

24 

25 

26 

Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination  of  laws,  regulations  and  administrative  provisions  relating  to  undertakings  for  collective 
investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32). 
Directive  2009/138/EC  of  the  European  Parliament  and  of  the  Council  of  25  November  2009  on  the 
taking-up  and  pursuit  of  the  business  of  Insurance  and  Reinsurance  (Solvency  II)  (OJ  L  335, 
17.12.2009, p. 1). 
Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the 
activities  and  supervision  of  institutions  for  occupational  retirement  provision  (IORPs)  (OJ  L  354, 
23.12.2016, p. 37). 
Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the 
coordination of social security systems (OJ L 166, 30.4.2004, p. 1). 
Regulation  (EC)  No  987/2009  of  the  European  Parliament  and  of  the  Council  of  16  September  2009 
laying  down  the  procedure  for  implementing  Regulation  (EC)  No  883/2004  on  the  coordination  of 
social security systems (OJ L 284, 30.10.2009, p. 1). 
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC 
derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1). 
Regulation  (EU)  No  909/2014  of  the  European  Parliament  and  of  the  Council  of  23  July  2014  on 
improving  securities  settlement  in  the  European  Union  and  on  central  securities  depositories  and 
amending  Directives  98/26/EC  and  2014/65/EU  and  Regulation  (EU)  No  236/2012  (OJ  L  257, 
28.8.2014, p. 1). 

EN 

27 

  EN 

                                                 
(n) 

(o) 

(p) 

(q) 

(r) 

(s) 

 ‘securitisation  special  purpose  entity’  as  defined  in  Article  2,  point  (2),  of 
Regulation  (EU)  No  2017/2402  of  the  European  Parliament  and  of  the 
Council27;  

an  insurance  holding  company  as  defined  in  Article  212(1),  point  (f),  of 
Directive  2009/138/EC  or  a  mixed  financial  holding  company  as  defined  in 
Article  212(1),  point  (h),  of  Directive  2009/138/EC,  which  is  part  of  an 
insurance group that is subject to supervision at the level of the group pursuant 
to  Article  213  of  that  Directive  and  which  is  not  exempted  from  group 
supervision pursuant to Article 214(2) of Directive 2009/138/EC; 

a payment institution as defined in point (d) of Article 1(1) of Directive (EU) 
2015/2366 of the European Parliament and of the Council28;  

an electronic money institution as defined in point (1) of Article 2 of Directive 
2009/110/EC of the European Parliament and of the Council29; 

a  crowdfunding  service  provider  as  defined  in  point  (e)  Article  2(1)  of 
Regulation (EU) 2020/1503 of the European Parliament and of the Council30; 

a  crypto-asset  service  provider  as  defined  in  Article  3(1),  point  (8),  of  [the 
proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on 
Markets  in  Crypto-assets,  and  amending  Directive  (EU)  2019/193731]  where 
performing one or more crypto-asset services as defined in Article 3(1), point 
(9),  of  [the  proposal  for  a  Regulation  of  the  European  Parliament  and  of  the 
Council  on  Markets 
in  Crypto-assets,  and  amending  Directive  (EU) 
2019/1937]. 

Article 7 
Indicators of minimum substance for tax purposes 

1. 

Member  States  shall  require  that  undertakings  meeting  the  criteria  laid  down  in 
Article 6(1) declare in their annual tax return, for each tax year, whether they meet 
the following indicators of minimum substance: 

(a) 

the  undertaking  has  own  premises  in  the  Member  State,  or  premises  for  its 
exclusive use;  

(b) 

the undertaking has at least one own and active bank account in the Union;  

27 

28 

29 

30 

31 

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying 
down a general framework for securitisation and creating a specific framework for simple, transparent 
and  standardised  securitisation,  and  amending  Directives  2009/65/EC,  2009/138/EC  and  2011/61/EU 
and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, p. 35). 
Directive  (EU)  2015/2366  of  the  European  Parliament  and  of  the  Council  of  25  November  2015  on 
payment  services  in  the  internal  market,  amending  Directives  2002/65/EC,  2009/110/EC  and 
2013/36/EU  and  Regulation  (EU)  No  1093/2010,  and  repealing  Directive  2007/64/EC  (OJ  L  337, 
23.12.2015, p. 35) 
Directive  2009/110/EC  of  the  European  Parliament  and  of  the  Council  of  16  September  2009  on  the 
taking up, pursuit and prudential supervision of the business of electronic money institutions amending 
Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ L 267, 10.10.2009, p. 
7) 
Regulation  (EU)  2020/1503  of  the  European  Parliament  and  of  the  Council  of  7  October  2020  on 
European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and 
Directive (EU) 2019/1937 (OJ L 347, 20.10.2020, p. 1) 
COM/2020/593 final 

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(c) 

one of the following indicators:  

(i)  One or more directors of the undertaking: 

(1) 

(2) 

(3) 

(4) 

(ii) 

are resident for tax purposes in the Member State of the undertaking, or 
at no greater distance from that Member State insofar as such distance is 
compatible with the proper performance of their duties;  

are qualified and authorised to take decisions in relation to the activities 
that  generate  relevant  income  for  the  undertaking  or  in  relation  to  the 
undertaking’s assets; 

actively and independently  use  the  authorisation  referred to  in  point (2) 
on a regular basis; 

are not employees of an enterprise that is not an associated enterprise and 
do not perform the function of director or equivalent of other enterprises 
that are not associated enterprises; 

the majority of the full-time equivalent employees of the undertaking are 
resident for tax purposes in the Member State of the undertaking, or at no 
greater  distance  from  that  Member  States  insofar  as  such  distance  is 
compatible  with  the  proper  performance  of  their  duties,  and  such 
employees are qualified to carry out the activities that generate relevant 
income for the undertaking. 

2. 

Undertakings referred to in paragraph 1 shall accompany their tax return declaration 
with documentary evidence. The documentary evidence  shall include the following 
information:  

(a) 

address and type of premises; 

(b) 

amount of gross revenue and type thereof; 

(c) 

amount of business expenses and type thereof; 

(d) 

type of business activities performed to generate the relevant income; 

(e) 

the  number  of  directors,  their  qualifications,  authorisations  and  place  of 
residence  for  tax  purposes  or  the  number  of  full-time  equivalent  employees 
performing  the  business  activities  that  generate  the  relevant  income  and  their 
qualifications, their place of residence for tax purposes; 

(f) 

outsourced business activities; 

(g)  bank account number, any mandates granted to access the bank account and to 
use or issue payment instructions and evidence of the account’s activity. 

Article 8 
Presumption of minimum substance for tax purposes  

1. 

2. 

An undertaking that declares to meet all the indicators of minimum substance set out 
in  Article  7(1)  and  provides  the  satisfactory  supporting  documentary  evidence  in 
accordance with Article 7(2) shall be presumed to have minimum substance for the 
tax year.  

An  undertaking  that  declares  not  to  meet  one  or  more  of  the  indicators  set  out  in 
Article  7(1)  or  does  not  provide  satisfactory  supporting  documentary  evidence  in 

EN 

29 

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1. 

2. 

3. 

4. 

1. 

2. 

accordance with Article 7(2) shall be presumed not to have minimum substance for 
the tax year.  

Article 9 
Rebuttal of the presumption 

Member  States  shall  take  the  appropriate  measures  to  allow  undertakings  that  are 
presumed  not  to  have  minimum  substance  under  Article  8(2)  to  rebut  this 
presumption  by  providing  any  additional  supporting  evidence  of  the  business 
activities which they perform to generate relevant income.  

For the purposes of paragraph 1, undertakings shall provide the following  additional 
evidence: 

(a) 

(b) 

a  document  allowing  to  ascertain  the  commercial  rationale  behind  the 
establishment of the undertaking;  

information  about  the  employee  profiles,  including  the  level  of  their 
experience,  their  decision-making  power  in  the  overall  organisation,  role  and 
position in the organisation chart, the type of their employment contract, their 
qualifications and duration of employment; 

(c) 

concrete evidence that decision-making concerning the activity generating the 
relevant income is taking place in the Member State of the undertaking.  

A Member State shall treat an undertaking as having rebutted the presumption if the 
evidence  that  the  undertaking  has  provided  under  paragraph  2  proves  that  the 
undertaking has performed and continuously had control over, and borne the risks of, 
the  business  activities  that  generated  the  relevant  income  or,  in  the  absence  of 
income, the undertaking’s assets.  

After  the  end  of  the  tax  year  for  which  the  undertaking  rebutted  the  presumption 
successfully,  inaccordance  with  paragraph  3,  a  Member  State  may  consider  for  a 
period  of  five  years  that  the  undertaking  has  rebutted  the  presumption  on  the 
condition  that  the  factual  and  legal  circumstances  of  the  undertaking  remain 
unchanged during this period. 

Article 10 
Exemption 

A  Member  State  shall  take  the  appropriate  measures  to  allow  an  undertaking  that 
meets  the  criteria  laid  down  in  Article  6(1)  to  request  an  exemption  from  its 
obligations  under this Directive if the existence of the undertaking does not  reduce 
the tax liability of its beneficial owner(s) or of the group, as a whole, of which the 
undertaking is a member.  

A  Member  State  may  grant  that  exemption  for  one  tax  year  if  the  undertaking 
provides sufficient and objective evidence that its interposition does not lead to a tax 
benefit for its beneficial owner(s) or the group as a whole, as the case may be. That 
evidence shall include information about the structure of the group and its activities. 
That evidence shall allow to compare the amount of overall tax due by the beneficial 
owner(s)  or  the  group  as  a  whole,  as  the  case  may  be,  having  regard  to  the 
interposition of the undertaking, with the amount that would be due under the same 
circumstances in the absence of the undertaking.  

EN 

30 

  EN 

3. 

After the end of the tax year for which an exemption was granted in accordance with 
paragraph 2, a Member State may extend the validity of the exemption for five years 
on  the  condition  that  the  factual  and  legal  circumstances  of  the  undertaking, 
including  of  the  beneficial  owner(s)  and  the  group,  as  the  case  may  be,  remain 
unchanged in the relevant period. 

CHAPTER III 
TAX TREATMENT OF UNDERTAKINGS THAT DO NOT 
HAVE MINIMUM SUBSTANCE FOR TAX PURPOSES 

Article 11 
Tax consequences of not having minimum substance for tax purposes in Member States 
other than the Member State of the undertaking 

1. 

2. 

Member States other than the Member State of the undertaking shall disregard  any 
agreements  and  conventions  that  provide  for  the  elimination  of  double  taxation  of 
income,  and  where  applicable,  capital,  in  force  with  the  Member  State  of  the 
undertaking as well as Articles 4, 5 and 6 of Directive 2011/96/EU and Article 1 of 
Directive  2003/49/EC,  to  the  extent  that  those  Directives  apply  due  to  the 
undertaking being deemed to be resident for tax purposes in a Member State, where 
the following conditions are met: 

(a) 

(b) 

an undertaking is presumed not to have minimum substance; 

an undertaking does not rebut the presumption referred to in point (a) for a tax 
year.  

The Member State of the undertaking’s shareholder(s) shall tax the relevant income 
of the undertaking in accordance with its national law as if it had directly accrued to 
the  undertaking’s  shareholder(s)  and  deduct  any  tax  paid  on  such  income  at  the 
Member State of the undertaking, where the following conditions are met: 

(a) 

the  relevant  income  accrues  to  an  undertaking  that  is  presumed  not  to  have 
minimum substance; 

(b) 

the undertaking does not rebut the presumption referred to in point (a); 

(c) 

both the undertaking’s shareholders and the payer are resident for tax purposes 
in a Member State. 

The first subparagraph shall apply notwithstanding any agreement or convention that 
provides  for  the  elimination  of  double  taxation  of  income,  and  where  applicable, 
capital, in force with another Member State. 

Where  the  payer  is  not  resident  for  tax  purposes  in  a  Member  State,  the  Member 
State of the undertaking’s shareholder(s) shall tax the relevant income accruing to the 
undertaking  in  accordance  with  its  national  law  as  if  it  had  directly  accrued  to  the 
undertaking’s shareholder(s), without prejudice to any agreement or convention that 
provides  for  the  elimination  of  double  taxation  of  income,  and  where  applicable, 
capital, in force between the Member State of the undertaking’s shareholders and the 
third country jurisdiction of the payer;  

Where the undertaking’s shareholder(s) is not resident for tax purposes in a Member 
State, the Member State of the payer of this income shall apply  withholding tax in 

EN 

31 

  EN 

 
accordance with its national law, without prejudice to any agreement or convention 
that provides for the elimination of double taxation of income, and where applicable, 
capital, 
the  undertaking’s 
shareholder(s).  

in  force  with 

jurisdiction  of 

third  country 

the 

3. 

Where property referred to in Article 4 is owned by an undertaking that is presumed 
not to have minimum substance and does not rebut this presumption: 

(a) 

(b) 

the Member State where property  referred to in Article 4, point (e) is situated 
shall  tax  such  property  according  to  its  national  law,  as  if  such  property  was 
owned  directly  by  the  undertaking’s  shareholder(s),  without  prejudice  to  any 
agreement or convention that provides for the elimination of double taxation of 
income,  and  where  applicable,  capital,  in  force  with  the  jurisdiction  of  the 
undertaking’s shareholder(s);  

the Member State of the undertaking’s shareholder(s) shall tax such property in 
accordance with its national law as if the undertaking’s shareholder(s) owned it 
directly, without prejudice to any agreement or convention that provides for the 
elimination  of  double  taxation  of  income,  and  where  applicable,  capital,  in 
force with the jurisdiction where the property is situated.  

Article 12 
Tax consequences of not having minimum substance for tax purposes in the Member State 
of the undertaking 

Where  an  undertaking  does  not  have  minimum  substance  for  tax  purposes  in  the  Member 
State where it is resident for tax purposes, that Member State shall take any of the following 
decisions:  

(a) 

(b) 

deny a request for a certificate of tax residence to the undertaking for use outside the 
jurisdiction of this Member State;  

grant  a  certificate  of  tax  residence  which  prescribes  that  the  undertaking  is  not 
entitled  to  the  benefits  of  agreements  and  conventions  that  provide  for  the 
elimination  of  double  taxation  of  income,  and  where  applicable,  capital,  and  of 
international agreements with a similar purpose or effect and of Articles 4, 5 and 6 of 
Directive 2011/96/EU and Article 1 of Directive 2003/49/EC. 

CHAPTER IV 
EXCHANGE OF INFORMATION 

Article 13 
Amendments to Directive 2011/16/EU 

Directive 2011/16/EU is amended as follows: 

(1) 

in Article 3, point 9 is amended as follows: 

(a) 

point (a) is replaced by the following: 

“(a)  for  the  purposes  of  Article  8(1)  and  Articles  8a  to  8ad,  the  systematic 
communication  of  predefined  information  to  another  Member  State, 
without  prior  request,  at  pre-established  regular  intervals;  for  the 

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purposes  of  Article  8(1),  reference  to  available  information  relates  to 
information  in  the  tax  files  of  the  Member  State  communicating  the 
information,  which  is  retrievable  in  accordance  with  the  procedures  for 
gathering and processing information in that Member State;” 

(b)  point (c) is replaced by the following: 

“(c) for the purposes of provisions of this Directive other than Article 8(1) and 
(3a) and Articles 8a to 8ad, the systematic communication of predefined 
information provided in points (a) and (b) of this point.” 

(2) 

In Section II of Chapter II, the following Article 8ad is added:  

“Article 8ad 
Scope and conditions of mandatory automatic exchange of information on undertakings 
required to report on indicators of minimum substance  

1. 

2. 

3. 

The  competent  authority  of  a  Member  State,  which  receives  information  from  an 
undertaking  established  in  its  territory  in  accordance  with  Article  7  of  Council 
Directive  [OP]  (insert  full  title  and  OJ  reference)*  shall,  by  means  of  automatic 
exchange,  and  within  30  days  from  receipt  of  that  information,  communicate  such 
information  to  the  competent  authorities  of  all  other  Member  States  in  accordance 
with paragraph 4 and  applicable practical  arrangements adopted pursuant to Article 
21. 

The competent authority of a Member State, which certifies that an undertaking has 
rebutted  the  presumption  in  accordance  with  Article  9  of  Directive  [OP] or  that  an 
undertaking is exempt in accordance with Article 10 of that Directive shall, by means 
of  automatic  exchange,  and  within  30  days  from  such  certification,  communicate 
such  information  to  the  competent  authorities  of  all  other  Member  States,  in 
accordance with applicable practical arrangements adopted pursuant to Article 21. 

The competent authority of a Member State, which concludes including by way of an 
audit,  under  the  national  law  of  such  Member  State,  that  an  undertaking  does  not 
meet the indicators of minimum substance laid down in Article 7 of Directive [OP] 
shall, by means of automatic exchange, and within 30 days from the date when the 
outcome  of  the  audit  becomes  definitive,  communicate  such  information  to  the 
competent  authorities  of  all  other  Member  States,  in  accordance  with  applicable 
practical arrangements adopted pursuant to Article 21. 

4. 

The  information  to  be  communicated  by  a  competent  authority  of  a  Member  State 
pursuant to paragraph 1 regarding each undertaking shall include the following: 

(a) 

(b) 

(c) 

(d) 

(e) 

the  tax  identification  number  (TIN)  of  the  undertaking  required  to  report 
pursuant to Article 6 of Directive [OP]; 

the  VAT  number,  where  available,  of  the  undertaking  required  to  report 
pursuant to Article 6 of Directive [OP]; 

the identification of the undertaking’s shareholders and the beneficial owner(s) 
of the undertaking, as defined in Article 3, points 5 and 6; 

the identification of the other Member States, if any, likely to be concerned by 
the reporting of the undertaking;  

the identification of any person in the other Member States likely to be affected 
by the reporting of the undertaking;  

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(f) 

(g) 

the declaration provided by the undertaking, in accordance with Article 7(1);  

summary  of  the  evidence  provided  by  the  undertaking  in  accordance  with 
Article 7(2). 

5. 

Without  prejudice  to  paragraph  4,  the  information  to  be  communicated  by  a 
competent authority of a Member State pursuant to paragraph 2 shall also include the 
following: 

(h) 

(i) 

the  certification  by  the  competent  authority  of  the  Member  State  that  the 
undertaking has rebutted the presumption under Article 9 of Directive [OP] or 
that the undertaking is exempt from reporting in accordance with Article 10 of 
that Directive;  

a  summary  of  the  additional  evidence  considered  relevant  by  the  competent 
authority  to  issuing  the  certification  that  the  presumption  has  been  rebutted 
under  Article  9  of  Directive  [OP]  or  that  the  undertaking  is  exempt  from 
reporting under Article 10 of that Directive.   

Without  prejudice  to  paragraph  4,  the  information  to  be  communicated  by  a 
competent authority of a Member State pursuant to paragraph 3 shall also include the 
audit report where such report is issued by the competent authority.  

To  facilitate  the  exchange  of  information  referred  to  in  paragraphs  4,  5  and  6,  the 
Commission shall, by means of implementing acts, adopt the practical arrangements 
necessary  for  the  implementation  of  paragraphs  1  to  6  of  this  Article,  including 
measures to standardise the communication of the information set out in paragraphs 
4, 5 and 6 of this  Article. Those implementing acts  shall be adopted in  accordance 
with the examination procedure referred to in Article 26(2). 

For  the  purposes  of  paragraphs  1  to  5  of  this  Article,  ‘undertaking’  shall  mean 
undertaking as defined in Article 3, point (1) of Directive [OP]. 

Information  processed  shall  be  retained  for  5  years  and  in  any  case  no  longer  than 
necessary to achieve the purposes of this Directive. 

Competent  authorities  of  each  Member  State  shall  be  considered  to  be  data 
controllers and the Commission shall be considered to be data processor.  

Member States in the event of an unauthorised disclosure of information referred to 
in points (a) – (f) of paragraph 4 may decide to suspend, as a mitigating measure, the 
exchanges  of  information  under  this  Directive  with  the  Member  State  where  the 
unauthorised disclosure occurred.” 

6. 

7. 

8. 

9. 

10. 

11. 

(3) 

in Article 20, paragraph 5 is replaced by the following: 

“5.  The Commission shall, by means of implementing acts, adopt standard forms, 

including the linguistic arrangements, in the following cases: 

(a) 

(b) 

(c) 

for  the  automatic  exchange  of  information  on  advance  cross-border 
rulings and advance pricing arrangements pursuant to Article 8a before 1 
January 2017;  

for  the  automatic  exchange  of  information  on  reportable  cross-border 
arrangements pursuant to Article 8ab before 30 June 2019; 

for  the  automatic  exchange  of  information  on  undertakings  required  to 
report on indicators of minimum substance pursuant to Article 8ad before 
1 January 2024. 

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Those implementing acts shall be adopted in accordance with the examination 
procedure referred to in Article 26(2). 

Those  standard  forms  shall  not  exceed  the  components  for  the  exchange  of 
information listed in Article 8a(6), Article 8ab(14) and Article 8ad(4), (5) and 
(6), and such other related fields which are linked to these components which 
are  necessary  to  achieve  the  objectives  of  Articles  8a,  8ab  and  8ac, 
respectively.  

The  linguistic  arrangements  referred  to  in  the  first  subparagraph  shall  not 
preclude  Member  States  from  communicating  the  information  referred  to  in 
Articles  8a,  8ab  and  8ad  in  any  of  the  official  languages  of  the  Union. 
However, those linguistic arrangements may provide that the key elements of 
such information shall also be sent in another official language of the Union.”; 

(4) 

in Article 21, paragraph 5 is replaced by the following: 

“5.  The  Commission  shall  by  31  December  2017  develop  and  provide  with 
technical  and  logistical  support  a  secure  Member  State  central  directory  on 
administrative  cooperation  in  the  field  of  taxation  where  information  to  be 
communicated in  the framework of Article 8a(1) and (2) shall be recorded in 
order to satisfy the automatic exchange provided for in those paragraphs.  

The  Commission  shall  by  31  December  2019  develop  and  provide  with 
technical  and  logistical  support  a  secure  Member  State  central  directory  on 
administrative  cooperation  in  the  field  of  taxation  where  information  to  be 
communicated  in  the  framework  of  Article  8ab(13),  (14)  and  (16)  shall  be 
recorded  in  order  to  satisfy  the  automatic  exchange  provided  for  in  those 
paragraphs.  

The Commission shall by 30 June 2024 develop and provide with technical and 
logistical  support  a  secure  Member  State  central  directory  on  administrative 
cooperation in the field  of taxation where information to be communicated in 
the  framework  of  Article  8ad(1),  (2)  and  (3)  shall  be  recorded  in  order  to 
satisfy the automatic exchange provided for in those paragraphs.  

The  competent  authorities  of  all  Member  States  shall  have  access  to  the 
information recorded in that directory. The Commission shall also have access 
to the information recorded in that directory, however within the limitations set 
out  in  Articles  8a(8)  and  8ab(17).  The  Commission  shall,  by  means  of 
implementing  acts,  adopt  the  necessary  practical  arrangements  for  the 
implementation  of  the  first,  second  and  third  subparagraph  of  this  paragraph. 
Those implementing acts shall be adopted in accordance with the examination 
procedure referred to in Article 26(2). 

Until  that  secure  central  directory  is  operational,  the  automatic  exchange 
provided for in Article 8a(1) and (2), Article 8ab(13), (14) and (16) and Article 
8ad(1), (2) and (3) shall be carried out in accordance with paragraph 1 of this 
Article and the applicable practical arrangements.”. 

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CHAPTER V 
ENFORCEMENT 

Article 14 
Penalties 

Member States shall lay down the rules on penalties applicable to infringements of national 
provisions adopted pursuant to this Directive, and shall take all measures necessary to ensure 
that  they  are  implemented.  The  penalties  provided  for  shall  be  effective,  proportionate  and 
dissuasive.  

Member States shall ensure that those penalties include an administrative pecuniary sanction 
of at least 5% of the undertaking’s turnover in the relevant tax year, if the undertaking that is 
required to report pursuant to Article 6 does not comply with such requirement for a tax year 
within the prescribed deadline or makes a false declaration in the tax return under Article 7. 

Article 15 
Request for tax audits 

Where the competent authority of one Member State has reason to believe that an undertaking 
which is resident for tax purposes in another Member State has not met its obligations under 
this Directive, the former Member State may request the competent authority of the latter to 
conduct a tax audit of the undertaking.  

The  competent  authority  of  the  requested  Member  State  shall  initiate  it  within  one  month 
from the date of receipt of the request and conduct the tax audit, in accordance with the rules 
governing tax audits in the requested Member State. 

The competent authority which conducted the tax audit shall provide feedback on the outcome 
of such audit to the competent authority of the requesting Member State as soon as possible 
and no later than one month after the outcome of the tax audit is known. 

Article 16 
Monitoring 

1. 

Member States shall communicate the following information to the Commission for 
each tax year:  

(a) 

number of undertakings that meet the conditions laid down in Article 6(1); 

(b)  number of undertakings that reported pursuant to Article 7; 

(c) 

penalties  imposed  pursuant  to  Article  14  for  non-compliance  with  the 
requirements of this Directive; 

(d)  number of undertakings presumed not have minimum substance in accordance 
with  Article  8  and  number  of  undertakings  that  rebutted  such  presumption  in 
accordance with Article 9; 

(e) 

(f) 

number of undertakings exempt from the requirements under this Directive in 
accordance with Article 10; 

number of audits to undertakings that meet the conditions laid down in Article 
6(1),  

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(g)  number of cases where an undertaking presumed to have minimum substance 
was found not to have substantial activity, in particular following an audit; 

(h)  number  of  requests  for  exchange  of  information  submitted  and  number  of 

requests received; 

(i) 

number of requests for tax audits submitted and number of requests received. 

Member  States  shall  communicate  to  the  Commission  any  other  information 
necessary  for  monitoring  and  evaluating  the  implementation  of  this  Directive  upon 
request by the Commission. 

Member  States  shall  communicate  the  information  listed  in  paragraph  1  on  a  bi-
annual  basis  by  31  December  of  the  tax  year  following  the  end  of  the  bi-annual 
period.  

Article 17 
Reports  

By  31  December  2028,  the  Commission  shall  present  a  report  to  the  European 
Parliament and the Council on the implementation of this Directive. 

When drawing up the report, the Commission shall take into account the information 
communicated by the Member States pursuant to Article 15.  

The Commission shall publish the report on its website.  

CHAPTER VI 
FINAL PROVISIONS 

Article 18 
Transposition 

Member  States  shall  adopt  and  publish,  by  [30  June  2023]  at  the  latest,  the  laws, 
regulations  and  administrative  provisions  necessary  to  comply  with  this  Directive. 
They shall forthwith communicate to the Commission the text of those provisions. 

They shall apply those provisions from [1 January 2024]. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

1. 

2. 

3. 

1. 

1. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

Article 19 
Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union.  

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This Directive is addressed to the Member States. 

Article 20 
Addressees 

Done at Brussels, 

For the Council 
The President 

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LEGISLATIVE FINANCIAL STATEMENT 

1. 

FRAMEWORK OF THE PROPOSAL/INITIATIVE  

1.1. 

Title of the proposal/initiative 

UNSHELL  

1.2. 

Policy area(s) concerned  

Tax policy.  

1.3. 

The proposal/initiative relates to:  

X  a new action  

 a new action following a pilot project/preparatory action1  

 the extension of an existing action  

 a merger or redirection of one or more actions towards another/a new action  

1.4. 

Objective(s) 

1.4.1.  General objective(s) 

The  Proposal  seeks  to  reduce  tax  revenue  loss  related  to  tax  avoidance  and  tax 
evasion  due  to  the  use  of  shell  entities  in  the  EU.  Furthermore,  the  Proposal  will 
allow Member States to accurately describe and quantify the extent of shell entity tax 
abuse in  the EU. Ultimately, the Proposal  should further  discourage the creation of 
shell entities in the EU.  

1.4.2. 

Specific objective(s) 

Specific objectives  

1) 
Identification of shell entities in the EU at risk of tax abuse through the use of 
objective  substance  criteria.  Once  a  shell  entity  has  been  identified  as  risk  of  tax 
abuse,  the  Proposal  will  set  out  clear,  pre-determined,  common  tax  consequences 
throughout the EU in order to prevent tax losses; 

2) 
Competent  Authorities  of  Members  States  should  have  information  available 
to be able to identify shell entities in resident/established in other Member States so 
that  they  can  prevent  cross-border  tax  abuse,  for  example,  by  denying  tax  treaty 
benefits on withholding taxes; 

The Proposal aims to discourage the use of TCSP’s from creating shell entities 
3) 
in the EU in the first place. The substance criteria identified in 1) above are designed 
to combat the very services that TCSP’s offer, like setting up postal addresses, that 
TCSP’s provide to shell entities.   

1.4.3.  Expected result(s) and impact  

Entities targeted will have to report to tax administrations whether or not they fulfil 
minimum  substance  indicators.  There  will  be  tax  consequences  for  entities  not 
fulfilling those indicators. 

1 

As referred to in Article 58(2)(a) or (b) of the Financial Regulation. 

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1.4.4. 

 Indicators of performance 

Specify the indicators for monitoring progress and achievements. 

Objectives 

Indicators 

Measurement tools/data sources 

The  use  of  common 
substance  criteria  to 
identify  shell  entities 
to 
tax 
prevent 
revenue  loss  due  to 
tax  evasion  and  tax 
avoidance. 

to 

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

Yearly  assessment  of  automatic  exchange 
of information (source: Member States’ tax 
administrations) 

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

Number  of  shell 
exchanges  made 
compliance 
and 
activities 
of 
Member States. 

Data to be submitted on an annual basis by 
Member  States  to  the  Commission  for 
monitoring  purposes 
(source:  Member 
States’ tax administrations)  

Yearly  assessment  of  automatic  exchange 
of information (source: Member States’ tax 
administrations) 

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

of 

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

1.5. 

Grounds for the proposal/initiative  

1.5.1.  Requirement(s) to be met in the short or long term including a detailed timeline for 

roll-out of the implementation of the initiative 

Legal entities and arrangements which are required to report under the Proposal will 
self-assess  using  the  substance  crtieria  to  determine  whether  they  are  at  risk  of  tax 
abuse. Information on entities and arrangements which are required to self-assess in a 
Member  States  will  be  automatically  with  the  Competent  Authorities  of  other 
Member States. In this context, the Competent Authorities will be required to submit 
the disclosed information to a Central Directory which all Member States will have 
access to. The Commission will be given limited access to the Directory in order to 
ensure that it can be sufficently informed to monitor the functioning of the Directive. 
The  Proposal  will  use  the  practical  arrangements  currently  under  the  Directive 
2011/16/EU on Administrative Cooperation in Direct Taxation (the 'DAC').  

In  terms  of  timing  from  setting  up  other  Central  Directories  for  tax  exchanges 
purpose, like DAC3 and DAC6, Member States and the Commission would require 
at least 18 months after the adoption of the Proposal to be able to put the systems in 
place  to  allow  the  exchange  of  information  to  occur  between  Member  States. 
Implementation with a start up period is expected from January, 2024.  

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1.5.2.  Added  value  of  Union  involvement  (it  may  result  from  different  factors,  e.g. 
coordination gains, legal certainty, greater effectiveness or complementarities). For 
the purposes of this point 'added value of Union involvement' is the value resulting 
from  Union  intervention  which  is  additional  to  the  value  that  would  have  been 
otherwise created by Member States alone. 

The  Proposal  does  not  seek  to  replace  existing  national  and  international  rules  to 
combat shell entity tax abuse in the EU. Instead, the Proposal aims to reinfroce and 
eomplement  existing  measures  by  provding  objective  substance  criteria  to  prevent 
tax abuse in a cross-border context. Having unifrom rules would ensure consistency 
of  substance  requirements  for  tax  purposes  in  the  EU  as  well  as  on  the 
countermeasures  to  be  applied  including  tax  consequences  and  sanctions  for  non-
compliance.  

For group companies across the EU there would be economies of scale as only one 
set  of  substance  rules  would  need  to  be  applied.  This  would  then  ensure  a  level 
playing field and fair competition for businesses in the EU.  

1.5.3.  Lessons learned from similar experiences in the past 

The  initiative  is  a  new  mechanism.  The  preferred  option  in  the  Impact  Assessment 
draws  on  the  approach  the  EU  follows  in  assessing    substance  in  relevant  third 
countries as part of the process leading to the establishment and update of the EU list 
of non-cooperative jurisdictions for tax purposes. It aims at replicating some of the 
features of this process.  

1.5.4.  Compatibility  with  the  Multiannual  Financial  Framework  and  possible  synergies 

with other appropriate instruments 

In  the  Commission  Communication  on  Business  Taxation  in  the  21st  Century,  the 
Commission  committed  to  table  a  legislative  proposal  setting  out  union  rules  to 
neutralise  the  misuse  of  shell  entities  for  tax  purposes  by  the  end  of  2021.  The 
Proposal  will  use  the  procedures,  arrangements  and  IT  tools  already  established  or 
under development under the DAC. 

1.5.5.  Assessment  of  the  different  available  financing  options,  including  scope  for 

redeployment 

Implementation costs for the initiative will be financed by the EU budget concerning 
only  the  central  components  for  the  system  of  automatic  exchange  of  information. 
Otherwise, it will be for Member States to implement the measures envisaged.  

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1.6. 

Duration and financial impact of the proposal/initiative 

 limited duration  

–    in effect from [DD/MM]YYYY to [DD/MM]YYYY  

–    Financial  impact  from  YYYY  to  YYYY  for  commitment  appropriations  and 

from YYYY to YYYY for payment appropriations.  

X unlimited duration 

–  Implementation with a start-up period from YYYY to YYYY, 

–  followed by full-scale operation. 

1.7.  Management mode(s) planned2  

X Direct management by the Commission 

–  X by its departments, including by its staff in the Union delegations;  

–    by the executive agencies  

 Shared management with the Member States  

 Indirect management by entrusting budget implementation tasks to: 

–   third countries or the bodies they have designated; 

–   international organisations and their agencies (to be specified); 

–   the EIB and the European Investment Fund; 

–   bodies referred to in Articles 70 and 71 of the Financial Regulation; 

–   public law bodies; 

–   bodies governed by private law with a public service mission to the extent that 

they are provided with adequate financial guarantees; 

–   bodies governed by the private law of a Member State that are entrusted with 
the  implementation  of  a  public-private  partnership  and  that  are  provided  with 
adequate financial guarantees; 

–    persons  entrusted  with  the  implementation  of  specific  actions  in  the  CFSP 

pursuant to Title V of the TEU, and identified in the relevant basic act. 

Comments  

This  proposal  builds  on  the  existing  framework  and  systems  for  the  automatic  exchange  of 
information  using  a  Central  Directory  for  advance  cross-border  rulings  (‘DAC3’)  and 
reportable cross-border tax arrangements (‘DAC6’) which were developed pursuant to Article 
21  of  Directive  2011/16/EU  in  the  context  of  these  previous  amendments  to  the  DAC.  The 
Commission,  in  conjunction  with  Member  States,  shall  develop  standardised  forms  and 
formats  for  information  exchange  through  implementing  measures.  As  regards  the  CCN 
network  which  will  permit  the  exchange  of  information  between  Member  States,  the 
Commission  is  responsible  for  the  development  of  such  a  network  and  Member  States  will 

2 

Details of management modes and references to the Financial Regulation may be found on the 
BudgWeb site: 
https://myintracomm.ec.europa.eu/budgweb/EN/man/budgmanag/Pages/budgmanag.aspx  

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undertake  to  create  the  appropriate  domestic  infrastructure  that  will  enable  the  exchange  of 
information via the CCN network. 

2. 

MANAGEMENT MEASURES  

2.1.  Monitoring and reporting rules  

The Commission will ensure that arrangements are in place to monitor and evaluate 
the functioning of the intervention and evaluate it against the main policy objectives. 
Given that “Unshell” involves a modification to the DAC, monitoring and evaluation 
could  be  carried  out  in  alignment  with  the  other  elements  of  administrative 
cooperation. 

Member  States  will  submit  data  on  an  annual  basis  to  the  Commission  for  the 
information outlined in the above Table on indicators of performance which will be 
used to monitor compliance with the Proposal.  

As  monitoring  data  is  available,  the  Commission  will  review  the  scope  of  the 
intervention  to  examine  the  possibility  of  extending  it  to  cover  additional  sectors 
and/or revising some its features.   

An  evaluation  will  take  place  five  years  after  the  implementation  of  the  Proposal 
which will allow the Commission to review the results of the policy with respect to 
its objectives as well as the overall impacts in terms of tax revenue, businesses and 
the internal market.  

2.2.  Management and control system(s)  

2.2.1. 

Justification of the management mode(s), the funding implementation mechanism(s), 
the payment modalities and the control strategy proposed 

The  implementation  of  the  initiative  will  rely  on  the  competent  authorities  (tax 
administrations)  of  the  Member  States.  They  will  be  responsible  for  fnancing  their 
own national systems and adapations necessary for the exchanges to take place with 
the Central Directory to be set up for the purposes of Proposal. 

The Commission will set up the infrastructure, including the Central Directory, that 
will  allow  exchanges  to  be  made  between  Member  States  on  the  identification  of 
shell entities. IT systems have been set up for the DAC which will be used for this 
initiative.  The  Commission  will  finance  the  systems  needed  to  allow  exchanges  to 
take place, including the Central Directory, which will undergo the main elements of 
control  being 
the 
procurement,  ex-ante  verification  of  commitments,  and  ex-ante  verification  of 
payments.  

that  for  procurement  contracts, 

techncial  verification  of 

2.2.2. 

Information concerning the risks identified and the internal control system(s) set up 
to mitigate them 

The  proposed  intervention  will  be  based  on  a  declarative  system,  which  entails  the 
risk of non-declaration or misdeclaration by legal entites and arrangements  that are 
required  to  self-assess  against  the  substance  criteria  under  the  Proposal.  Member 
States will be required to audit such self-assessments and report to the Commission 
on an annual basis statistics including the number of entities that have been audited 
and sanctions for non-compliance.  

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In order to address the risk of non-compliance of legal entities and arrangements, the 
Proposal  includes  a  sanctioining  framework.  National  tax  authorities  will  be  in 
charge  of  enforcing  sanctions  and  more  generally  of  ensuring  compliance  with 
“Unshell”.  Sanctions  are  set  up  at  a  sufficiently  high  level  to  serve  as  deterrent. 
Furthermore, national tax administrations will be able to perform audits to detect and 
deter non-compliance.  

To monitor the proper application of the Proposal, the Commission will have limited 
access to the Central Directory where Member States will exchange information on 
entities and arrangements reporting under the Proposal.  

The main elements of the control strategy are:  

Procurement contracts  

is  established  following 

The  control  procedures  for  procurement  defined  in  the  Financial  Regulation:  any 
procurement  contract 
the  established  procedure  of 
verification  by  the  services  of  the  Commission  for  payment,  taking  into  account 
contractual  obligations  and  sound  financial  and  general  management.  Anti-fraud 
measures (controls, reports, etc.) are foreseen in all contracts concluded between the 
Commission and the beneficiaries. Detailed terms of reference are drafted and form 
the  basis  of  each  specific  contract.  The  acceptance  process  follows  strictly  the 
TAXUD TEMPO methodology: deliverables are reviewed, amended if necessary and 
finally  explicitly  accepted  (or  rejected).  No  invoice  can  be  paid  without  an 
"acceptance letter".  

Technical verification of procurement  

DG  TAXUD  performs  controls  of  deliverables  and  supervises  operations  and 
services  carried  out  by  contractors.  It  also  conducts  quality  and  security  audits  of 
their  contractors  on  a  regular  basis.  Quality  audits  verify  the  compliance  of  the 
contractors' actual processes against the rules and procedures defined in their quality 
plans. Security audits focus on the specific processes, procedures and set-up.  

In  addition  to  the  above  controls,  DG  TAXUD  performs  the  traditional  financial 
controls:  

Ex-ante verification of commitments  

All  commitments  in DG TAXUD are verified by the Head of the Finances and the 
HR business correspondent Unit. Consequently, 100% of the committed amounts are 
covered by the ex-ante verification. This procedure gives a high level of assurance as 
to the legality and regularity of transactions.  

Ex-ante verification of payments  

100%  of  payments  are  verified  ex-ante.  Moreover,  at  least  one  payment  (from  all 
categories  of  expenditures)  per  week  is  randomly  selected  for  additional  ex-ante 
verification performed by  the head of the Finances and HR business correspondent 
Unit. There is no target concerning the coverage, as the purpose of this verification is 
to check payments "randomly" in order to verify that all payments were prepared in 
line with the requirements. The remaining payments are processed according to the 
rules in force on a daily basis.  

Declarations of the Authorising Officers by Sub-Delegations (AOSD)  

All the AOSD sign declarations supporting the Annual Activity Report for the year 
concerned.  These  declarations  cover  the  operations  under  the  programme.  The 

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AOSD declare that the operations connected with the implementation of the budget 
have  been  executed  in  accordance  with  the  principles  of  the  sound  financial 
management, that the management and control systems in place provided satisfactory 
assurance concerning the legality and regularity of the transactions and that the risks 
associated  to  these  operations  have  been  properly  identified,  reported  and  that 
mitigating actions have been implemented. 

2.2.3.  Estimation and justification of the cost-effectiveness of the controls (ratio of "control 
costs ÷ value of the related funds managed"), and assessment of the expected levels 
of risk of error (at payment & at closure)  

The  controls  established  enable  DG  TAXUD  to  have  sufficient  assurance  of  the 
quality and regularity of the expenditure  and to  reduce the  risk of non-compliance. 
The  above  control  strategy  measures  reduce  the  potential  risks  below  the  target  of 
2%  and  reach  all  beneficiaries.  Any  additional  measures  for  further  risk  reduction 
would  result  in  disproportionately  high  costs  and  are  therefore  not  envisaged.  The 
overall costs linked to implementing the above control strategy – for all expenditures 
under  Fiscalis  programme  –  are  limited  to  1.6%  of  the  total  payments  made.  It  is 
expected  to  remain  at  the  same  ratio  for  this  initiative.  The  programme  control 
strategy limits the risk of non-compliance to virtually zero and remains proportionate 
to the risks entailed. 

2.3.  Measures to prevent fraud and irregularities  

Specify existing or envisaged prevention and protection measures, e.g. from the Anti-Fraud Strategy. 

The European Anti-fraud Office (OLAF) may carry out investigations, including on-
the-spot  checks  and  inspections,  in  accordance  with  the  provisions  and  procedures 
laid down in Regulation (EC) No 1073/1999 of the European Parliament and of the 
Council3  and  Council  Regulation  (Euratom,  EC)  No  2185/964  with  a  view  to 
establishing  whether  there  has  been  fraud,  corruption  or  any  other  illegal  activity 
affecting the financial interests of the Union in connection with a grant agreement or 
grant decision or a contract funded under this Regulation. 

3 

4 

Regulation  (EC)  No  1073/1999  of  the  European  Parliament  and  of  the  Council  of  25  May  1999 
concerning  investigations  conducted  by  the  European  Anti-Fraud  Office  (OLAF),  OJ  L  136  p.  1, 
31.5.1999. 
Council  Regulation  (Euratom,  EC)  No  2185/96  of  11  November  1996  concerning  on-the-spot  checks 
and inspections carried out by the Commission in order to protect the European Communities' financial 
interests against fraud and other irregularities, OJ L 292 p. 2, 15.11.96. 

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3. 

3.1. 

ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE  

Heading(s)  of  the  multiannual  financial  framework  and  expenditure  budget 
line(s) affected  

  Existing budget lines  

In order of multiannual financial framework headings and budget lines. 

Heading of 
multiannual 
financial 
framework 

14.03.01 

Budget line 

Type of  
expenditure 

Contribution  

Diff./Non-
diff.1 

from 
EFTA 
countries2 

from 
candidate 
countries3 

from third 
countries 

within the 
meaning of 
Article 21(2)(b) of 
the Financial 
Regulation  

Improving  the  proper  functioning  of 
the tax systems  

Diff./Non
-diff. 

NO 

NO 

NO 

NO 

  New budget lines requested  

In order of multiannual financial framework headings and budget lines. 

Heading of 
multiannual 
financial 
framework 

Number  

N/A 

Budget line 

Type of 
expenditure 

Contribution  

Diff 

from 
EFTA 
countries 

from 
candidate 
countries 

from third 
countries 

within the 
meaning of 
Article 21(2)(b) of 
the Financial 
Regulation  

Diff.  

NO 

NO 

NO 

NO 

1 
2 
3 

Diff. = Differentiated appropriations / Non-diff. = Non-differentiated appropriations. 
EFTA: European Free Trade Association.  
Candidate countries and, where applicable, potential candidates from the Western Balkans. 

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3.2. 

Estimated financial impact of the proposal on appropriations  

3.2.1. 

Summary of estimated impact on operational appropriations  

–    The proposal/initiative does not require the use of operational appropriations  

–  X  The proposal/initiative requires the use of operational appropriations, as explained below: 

Heading of multiannual financial  
framework  

Number  14.03.01 

EUR million (to three decimal places) 

DG: TAXUD 

 Operational appropriations  

Budget line 14.03.01 

TOTAL appropriations 
for DG TAXUD 

2022 

2023 

2024 

2025 

2026 

2027 

TOTAL 

Commitments 

Payments 

Commitments 

Payments 

(1a) 

(2a) 

=1a+1b 
+3 

=2a+2b 

+3 

0.680 

0.680 

0.082 
0.680 

0.082 
0.082 

0.082 
0.082 

0.082 

0.082 

0.082 

0.680 

0.082 

0.082 

0.082 
0.082 

0.082 

0.082 

0.082 
0.082 

0.082 

0.082 

1.088 
1.008 

1.088 

1.008 

Heading of multiannual financial  
framework  

7 

‘Administrative expenditure’ 

This section should be filled in using the 'budget data of an administrative nature' to be firstly introduced in the Annex to the Legislative 
Financial Statement (Annex V to the internal rules), which is uploaded to DECIDE for interservice consultation purposes. 

EUR million (to three decimal places): Current Prices 

2023 

2024 

2025 

2026 

2027 

TOTAL 

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DG: TAXUD 

  Human resources 

 Other administrative expenditure – Missions 

TOTAL DG TAXUD 

Appropriations  

0.300 

0.020 

0.320 

0.036 

0.002 

0.036 

0.002 

0.036 

0.002 

0.036 

0..002 

0.038 

0.038 

0.038 

0.038 

0.444 

0.028 

0.472 

2021 -2027 MFF 

TOTAL appropriations 
under HEADING 7 
of the multiannual financial framework  

(Total  commitments  = 
Total payments) 

0.320 

0.038 

0.038 

0.038 

0.038 

0.472 

EUR million (to three decimal places): Current Prices 

2023 

2024 

2025 

2026 

2027 

TOTAL 

2021 – 2027 MFF 

TOTAL appropriations  
under HEADINGS 1 to 7 
of the multiannual financial framework  

Commitments 

1 

0.120 

0.120 

0.120 

0.120 

1.480 

Payments 

0.320 

0.718 

0.120 

0.120 

0.120 

1.398 

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3.2.2. 

Summary of estimated impact on administrative appropriations  

–    The  proposal/initiative  does  not  require  the  use  of  appropriations  of  an 

administrative nature  

–  X  The proposal/initiative requires the use of appropriations of an administrative 

nature, as explained below: 

EUR million (to three decimal places) 

Year 
2023 

Year 
2024 

Year 
2025 

Year 
2026 

Year 
2027 

Year 
2028 

Year 
2029 

TOTAL 

HEADING 7 
of the multiannual 
financial framework 

Human resources  

0.300 

0.036 

0.036 

0.036 

0.036 

0.036 

0.036 

0.516 

0.020 

0.002 

0.002 

0.002 

0.002 

0.002 

0.002 

0.032 

0.320 

0.038 

0.038 

0.038 

0.038 

0.038 

0.038 

0.548 

Other administrative 
expenditure  

Subtotal HEADING 7 
of the multiannual 
financial framework  

Outside HEADING 71  
of the multiannual 
financial framework  

Human resources  

Other expenditure  
of an administrative 
nature 

Subtotal  
outside HEADING 7 
of the multiannual 
financial framework  

TOTAL 

0.320 

0.038 

0.038 

0.038 

0.038 

0.038 

0.038 

0.548 

The  appropriations  required  for  human  resources  and  other  expenditure  of  an  administrative  nature  will  be  met  by 
appropriations from the DG that are already assigned to management of the action and/or have been redeployed within the 
DG,  together  if  necessary  with  any  additional  allocation  which  may  be  granted  to  the  managing  DG  under  the  annual 
allocation procedure and in the light of budgetary constraints. 

1 

Technical  and/or  administrative  assistance  and  expenditure  in  support  of  the  implementation  of  EU programmes 
and/or actions (former ‘BA’ lines), indirect research, direct research. 

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3.2.2.1.  Estimated requirements of human resources  

–    The proposal/initiative does not require the use of human resources.  

–  X  The  proposal/initiative  requires  the  use  of  human  resources,  as  explained 

below: 

 Establishment plan posts (officials and temporary staff) 

20 01 02 01 (Headquarters and Commission’s Representation 
Offices) 

20 01 02 03 (Delegations) 

01 01 01 01  (Indirect research) 

 01 01 01 11 (Direct research) 

Other budget lines (specify) 

 External staff (in Full Time Equivalent unit: FTE)1 

20 02 01 (AC, END, INT from the ‘global envelope’) 

20 02 03 (AC, AL, END, INT and JPD in the delegations) 

XX 01  xx yy zz  2 

- at Headquarters 

- in Delegations  

01 01 01 02 (AC, END, INT - Indirect research) 

 01 01 01 12 (AC, END, INT - Direct research) 

Other budget lines (specify) 

TOTAL 

Estimate to be expressed in full time equivalent units 

Year 
2023 

Year 
2024 

Year 
2025 

Year 
2026 

Year 
2027 

Year 
2028 

Total 

1 

1 

0.4 

0.2 

0.1 

0.1 

2.8 

1 

1 

0.4 

0.2 

0.1 

0.1 

2.8 

XX is the policy area or budget title concerned. 

The human resources required will be met by staff from the DG who are already assigned to management of the 
action  and/or  have  been  redeployed  within  the  DG,  together  if  necessary  with  any  additional  allocation  which 
may  be  granted  to  the  managing  DG  under  the  annual  allocation  procedure  and  in  the  light  of  budgetary 
constraints. 

Description of tasks to be carried out: 

Officials and temporary staff 

Preparation of meetings and correspondence  with Member States,  work on forms, IT 
formats and the Central Directory. 

External staff 

N/A 

1 

2 

AC=  Contract  Staff;  AL  =  Local  Staff;  END=  Seconded  National  Expert;  INT  =  agency  staff; 
JPD= Junior Professionals in Delegations.  
Sub-ceiling for external staff covered by operational appropriations (former ‘BA’ lines). 

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3.2.3.  Compatibility with the current multiannual financial framework  

The proposal/initiative: 

–  X  can be fully financed through redeployment within the relevant heading of the 

Multiannual Financial Framework (MFF). 

–    requires use of the unallocated margin under the relevant heading of the MFF 

and/or use of the special instruments as defined in the MFF Regulation. 

Explain  what  is  required,  specifying  the  headings  and  budget  lines  concerned,  the  corresponding 
amounts, and the instruments proposed to be used. 

–    requires a revision of the MFF. 

Explain what is required, specifying the headings and budget lines concerned and the corresponding 
amounts. 

3.2.4.  Third-party contributions  

The proposal/initiative: 

–    does not provide for co-financing by third parties 

–    provides for the co-financing by third parties estimated below: 

Appropriations in EUR million (to three decimal places) 

Year 
N1 

Year 
N+1 

Year 
N+2 

Year 
N+3 

Enter as many years as necessary 
to show the duration of the 
impact (see point 1.6) 

Total 

Specify  the  co-financing 
body  

TOTAL appropriations 
co-financed  

1 

Year N is the year in which implementation of the proposal/initiative starts. Please replace "N" by the 
expected first year of implementation (for instance: 2021). The same for the following years. 

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3.3. 

Estimated impact on revenue  

–  X  The proposal/initiative has no financial impact on revenue. 

–    The proposal/initiative has the following financial impact: 

– 

– 

– 

 

 

on own resources  

on other revenue 

please indicate, if the revenue is assigned to expenditure lines  

Appropriations 
available for 
the current 
financial year 

Budget revenue line: 

Article …………. 

     EUR million (to three decimal places) 

Impact of the proposal/initiative2 

Year 
N 

Year 
N+1 

Year 
N+2 

Year 
N+3 

Enter as many years as necessary to show 
the duration of the impact (see point 1.6) 

For assigned revenue, specify the budget expenditure line(s) affected. 

Other  remarks  (e.g.  method/formula  used  for  calculating  the  impact  on  revenue  or  any  other 
information). 

2 

As regards traditional own resources (customs duties, sugar levies), the amounts indicated must be net 
amounts, i.e. gross amounts after deduction of 20 % for collection costs. 

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