Latest ATAD III Developments

Background

The Amendments introduced by the ECON provide various clarifications to the ATAD III. Even though the scope of the draft directive remained the same (covering any undertaking eligible to receive a tax residence certificate in an EU Member State), more entities may potentially meet the widened gateway tests. Furthermore, the Amendments address, among other, procedures for rebuttal and exemption, excluded undertakings, and the consequences of non-compliance.   

For more information about previous ATAD III developments, you may refer to our newsletter, available here.

Amendments

Gateway tests

The Amendments clarify that the below three gateway tests,  referring to the preceding two tax years, are cumulative:

• more than 65% (previously 75%) of the revenues accruing to the undertaking is relevant passive income;
• more than 55% (previously 60%) of the book value of the undertaking’s cross-border assets was located outside the Member State of the undertaking, or more than 55% (previously 60%) of the undertaking’s relevant income is earned or paid out via cross-border transactions;
• the undertaking outsourced the administration of day-to-day operations and the decision-making on significant functions to a third party (outsourcing to an associated enterprise no longer fulfills this gateway).

By adopting the above Amendments, the number of entities potentially having an obligation to report on substance in their tax return would increase.

Undertakings out of the scope of ATAD III

Under the current ATAD III proposal, undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income are excluded from the scope of ATAD III. The amendment proposed by the ECON is to delete this carve out.

Substance indicators

The substance indicators proposed by the ATAD III are the undertaking’s premises, bank account and the directors. As a reminder, entities meeting the gateway tests should report whether they meet these minimum substance requirements in their tax return.

Based on the Amendments, the premises do not necessarily have to be for exclusive use of the undertaking, but may also be shared with entities of the same group.

The Amendments are further proposing to expand the reference to an active bank account also to an e-money account. The relevant income must be received through such bank / e-money account.

While the ATAD III proposal requires directors to be both qualified and authorized to take decisions in relation to the activities that generate relevant income, the qualification requirement does not appear in the Amendments. Moreover, they do not require that the directors actively and independently use the authorisation to take decisions in relation to income-generating activities on a regular basis.

Finally, the Amendments do not prohibit the directors from being employees of an enterprise that is not an associated enterprise and performing the function of a director or equivalent in other enterprises that are not associated enterprises.

Rebuttal of the presumption

An undertaking that fails to meet one or more substance indicators, as described above, is presumed to be a shell entity for the purposes of ATAD III. This presumption is rebuttable and the concerned undertaking may provide any additional evidence supporting the business activities which it performs to generate relevant income.

Under the Amendments, it is proposed to introduce the obligation of the Member States to consider the request for the rebuttal of the presumption within a period of nine months after the introduction of the request. Moreover, the request shall be considered to be accepted in the absence of an answer from the Member State after the expiry of the nine-month period.

Exemption

ATAD III provides a general exemption where an entity meets the gateway tests but does not create a tax benefit. Such an entity can request an exemption from its reporting obligation if it can provide evidence that its existence does not reduce the tax liability of the beneficial owner(s) or of its group.

The Amendments introduce the obligation for Member States to consider the exemption request within a period of nine months after the introduction of the request. It shall be considered to be accepted in the absence of an answer from the Member State after the expiry of the nine-month period.

Tax consequences of not having minimum substance

Under the Amendments, the sole consequence of not having minimum substance is denying any request for a certificate of tax residence to the undertaking for use outside the jurisdiction of its Member State.

Granting a certificate of tax residence which prescribes that the undertaking is not entitled to the benefits of the double tax treaties has been removed as an option.

Penalties

In line with the Amendments, Member States will be free to impose penalties which shall include an administrative pecuniary sanction of at least 2% (previously 5%) of the undertaking’s revenue in case of failure to comply with its reporting obligations and a pecuniary sanction of at least 4% of the undertaking’s revenue in case of false declaration in its tax return. If the undertaking has zero or low revenue, the penalty should be based on its total assets.

Our observations

ATAD III will be considered before the Council of the EU, which must unanimously approve it before it can finally be adopted at the EU level. It is possible that further changes will take place before the adoption. It is planned for the Member States to transpose ATAD III into domestic law by 30 June 2023.

ATAD III is expected to increase the compliance burden for the taxpayers, as well as the administrative burden for the tax administrations across the EU. As the discussed Amendments are not final, we would recommend monitoring the developments at the EU and Luxembourg level.

For more information, you may contact:

• Jean-Nicolas Bourtembourg - Partner, Head of Tax & Transfer Pricing
• Mélina Rondeux - Partner, Tax Compliance