ATAD3 – Who’s In & Who’s Out

In this blog, we provide insight into which companies will be most affected by the implementation of the European Commission's (proposed) Directive – ATAD3 (or the Third Anti Tax Avoidance Directive). The amended draft of the ATAD3 proposal has been approved by the European Parliament and published by the European Commission (“EC”) on 17 January 2023. The Member States aim to implement the proposed Directive w.e.f. 1 January 2024. However, some of the provisions of the ATAD3 proposal have a two-year look-back period (i.e., covering 2022 & 2023).

29 May. '23 Neha Mohan

For our take on preparing for ATAD3, reference is made to our blog 10 Quick Observations on the EC’s ATAD3 Proposal.

ATAD3 – Implementation & Consequences

In a nutshell, the objective of the proposed Directive is to prevent the misuse of "shell entities" within the European Union (“EU”). Once implemented by the EU Member States, ATAD3 will impose reporting obligations on EU entities that do not meet the “minimum substance requirements” stipulated in the proposed Directive. These entities will be required to provide evidence of actual economic activity (to the relevant tax authorities within the EU). Failing to do so will lead to (a.o.) denial of benefits provided for under double tax treaties and EU directives as well as denial of certificates of tax residence by the Member State where tax residency is claimed. An eventual consequence of this could be the re-allocation of income for taxation purposes, leading to litigation, Mutual Agreement Procedures, etc.

Another consequence of failing to meet the minimum substance requirements and failing to provide acceptable evidence of economic activity is that this information will be shared among all Member States. This will enable tax authorities in all Member States to identify entities within their jurisdictions related to the entities that lack substance and could potentially be used for tax avoidance. This may increase the likelihood of scrutiny and audits, even for entities that meet the ATAD3 substance requirements. This can substantially affect investment returns and may increase tax compliance work.

Neha Mohan

Neha Mohan is a Tax Adviser at NovioTax.

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