Unshell Directive

| General

Unshell Directive

New Years’ Day in January 2024 will be an important day for people celebrating the New Year. However, 1st January 2024 will also be the day upon which the European Union plans to implement the ‘Shell Directive’.

What Is The Shell Directive And Why Is It Significant?

The Shell Directive is the term used to describe Council Directive 2021/0434 and will apply to EU Member States. Once enacted it will seek to stop shell companies being used inappropriately to secure tax advantages. By way of definition ‘shell companies’ are those companies ‘without economic substance’.

What Will European Union Member States Need To Do To Comply With the New Requirements?

The EU has sought to put affected Member States on notice that once the Unshell Directive is introduced, each individual Member State will have until 30th June 2023 to transpose the Directive into its domestic law. This will provide the affected Member State with ample opportunity to introduce domestic legislation to implement the Directive in time for New Years’ Day 2024 when the new legislation enters into force.

So What Are Companies Without Economic Substance?

Affected companies and organisations falling under the proposed definition of ‘a company lacking economic substance’ if it:

  • fails to reach the minimum standards laid down by certain ‘substance indicators’ under the Directive; and
  • cannot provide evidence that the company was set up legitimately. The company must not be established purely to achieve unfair tax advantages.

The Shell Directive has been drafted to capture any business entity based in a Member State for tax reasons which is participating in commercial activities.

How Will The ‘Economic Substance’ Of A Company Be Measured Under The New Directive?

Once in force the proposed Shell Directive will require companies to prove that they have been incorporated for legitimate business reasons. Presumably affected companies will need to provide company incorporation certificates, up-to-date financial information, property ownership evidence and having directors and employees located in a EU Member State for tax reasons. Such persons may also be required to submit evidence that they are qualified to perform the commercial pursuit.

What Will Companies Need To Do To Comply With The New Requirements?

‘Economic substance’ will be measured against new ‘gateway’ criteria designed to make it easier to spot companies susceptible to tax abuse and seemingly deficient in economic substance. To fall within the ‘shell company’ definition affected businesses will be required to comply with the following three criteria laid down by the Gateways. The first Gateway covers companies where three-quarters of its revenue from the previous two tax years are ‘passive income’. The Second Gateway covers businesses primarily involved with cross-border transactions. The Third Gateway covers businesses who outsource their daily management functions and decision-making because of a resource shortage. Under the new gateways lawyers should be advising affected companies if they fall short of the Directive’s requirements they will be obliged to:

  • report to the authorities and
  • insert extra information into their relevant annual tax returns regarding why they chose to incorporate a company
  • If such businesses are found to be lacking in economic substance, they will be barred from claiming tax privileges from the Double Taxation Conventions and European Directives. Such tax may be payable by the individual shareholder depending on the circumstances.

Lawyers also need to be advising their clients that they can escape liability by providing evidence that the respective company’s activities are sufficiently regulated in the Member State and the company assumes responsibility for its own risk. Lawyers also need to be exploring with affected clients any exemptions from reporting that might be available from the Member State. This is the case even if it falls below the minimum substance requirements.

The Legists Content Team


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[1] Council Directive 2021/0434 – The Unshell Directive – 22 December 2021

[2] Ramos, I et al. – The Unshell Directive proposes a specific arrangements to combat the use of companies for tax avoidance or tax evasion purposes – PLMJ – Informative Note – 21.03.2022 - The Unshell Directive – Shell companies - Informative Notes - Knowledge - PLMJ Transformative legal experts

[3] The Lawyer – The Unshell Directive – 31 March 2022 - The Unshell Directive – Shell companies (thelawyer.com)

[4] Council Directive 2011/96/EU – 30 June 2011

[5] Council Directive 2003/49/EC – 3 June 2003



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