Preparing for ATAD3

In this blog, we highlight the urgency for E.U. companies to examine whether they meet certain “minimum substance requirements” in preparation for ATAD3 – the proposed E.U. Directive aimed at preventing the misuse of “shell entities” in the E.U. Once implemented by the E.U. Member States, the proposed Directive will require E.U. companies that do not meet the specified substance requirements to prove that they perform actual economic activity. The proposed Directive that is set to take effect on 1 January 2024 will apply to all E.U. companies (as in, without any monetary threshold). Consequences proposed under ATAD3 include the denial of TRCs, which will impact the dealings of the affected companies within the E.U. and in third-countries. Since some of the substance requirements proposed under ATAD3 have a two-year “look back” provision (i.e., potentially covering 2022 and 2023), it is prudent for E.U. companies to start assessing how they measure up against these requirements ASAP.

04 May. '23 Neha Mohan

In recent years, we have seen an increase in the number of domestic court cases as well as judgements from the European Court of Justice centred around “substance”. These cases typically involve determining whether the taxpayer has sufficient “substance” in a particular jurisdiction to avail the tax benefits thereof and of its treaty network and applicable E.U. Directives by reason of being a tax resident of that jurisdiction.

In the tax law context, “substance” can be understood to mean a group or company’s presence in a particular jurisdiction or its connection thereto. Tax authorities around the world have various (and sometimes, diverging but overlapping) parameters for determining whether a particular group or company has “sufficient substance” or “relevant nexus” to their particular jurisdictions. However, there are some commonalities of substance indicators (or if formally mandated, substance requirements) within the E.U.

Neha Mohan

Neha Mohan is a Tax Adviser at NovioTax.

More about Neha Mohan

Back Download as PDF