Is the Unshell Directive Proposal really necessary?

By Irma Johanna Mosquera Valderrama

The Unshell Directive Proposal presented in December 2021 by the European Commission aims to tackle cross-border tax avoidance by preventing the misuse of shell entities and by enhancing transparency requirements of these entities. This Proposal also aims to develop a common framework to be implemented into Member States’ national laws in a coordinated manner (COM 2021) 565 final). Once enacted this Proposal should come into force on 1 January 2024.

Despite the validity of this aim, in our view, there are several questions that also need to be raised when addressing this Proposal:

Is this Unshell Proposal really necessary? What can this Proposal do that other EU Directives (DAC 6 for reporting requirements, and ATAD 1 for tax avoidance) are not doing? What political developments took place in the EU that resulted in the Unshell Proposal? How can the provisions of the Unshell Proposal contribute to enhance mutual trust among tax administrations and taxpayer and tax administration?

This blogpost aims to address these questions and to provide some reflections on the work carried out by the EU Commission in light of the standard of fiscal transparency which requires drafting of rules that are clear for the tax administration and on which the taxpayer may rely (see Mosquera et al, 2019 at 142).

Is the Unshell Directive Proposal really necessary? And what can this proposal do that other Directives (ATAD 1 and DAC 6) are not doing?

In a nutshell, the Unshell Proposal aims to introduce reporting requirements for undertakings that are at risk for lacking substance and that may be misused for tax purposes. This Proposal provides some gateway criteria which, if met, will require these entities to report on their substance in their tax return. If one of the elements of substance is lacking, this undertaking will be presumed to be a “shell” for the purposes of the Directive. This presumption can be rebutted by the undertaking. If rebuttal is not successful, the presumed “shell’ entity will not receive a certificate of residence, and payments made through the “shell” will be subject to withholding tax.

The Unshell Directive Proposal has raised  several questions in the public consultations regarding its complexity, lack of definitions, and additional burden for taxpayers. In addition to these issues, we could also argue based on the work carried out by the EU Commission and the text of the proposal that it is not yet clear what the contribution of the Unshell Directive to the EU Commission’s work on transparency and tax avoidance is. Another question that should be asked is whether the Unshell Proposal is necessary? and what the Unshell Proposal can do that DAC 6 or ATAD 1 are not doing?

By combining reporting of substance requirements as well as by introducing a (rebuttable) presumption, the Unshell Proposal has some elements of Abuse (dealt with ATAD 1) and of Transparency and Administrative Cooperation (dealt by DAC Directives). In my view, by combining these elements, the Unshell proposal does not meet the requirement of proportionality, since the measures go beyond ensuring the minimum necessary level. The reason is that Member States are already dealing with the abuse element (i.e. lack of economic substance) by shell entities through the application of the Member States GAARs and the EU GAAR.[i]

The combination of the above-mentioned goals (i.e., transparency and tax avoidance) makes unclear whether we are referring to an ATAD or a DAC Directive or both. Based on the wording of the EU Commission, it seems that it will be ATAD 3 and DAC 8, but if there are different goals in both Directives (one is tackling tax avoidance and another introducing transparency requirements), why did the EU Commission decide to introduce this in one single Directive?

In my view, one of the reasons is of a political nature, mainly the need to show to other EU institutions (EU Parliament) that measures are being taken to address the tax avoidance schemes leaked in the Pandora Papers, Paradise papers, etc. This political nature might be also the result of the current work of the EU FISC Subcommittee that has highlighted the need to tackle tax avoidance including the use of shell entities in Europe.[ii]

What political developments took place at EU level that may have resulted in the Unshell Proposal?

In 2015, the EU Commission introduced the Action Plan to achieve a fair and efficient corporate tax system (COM (2015) 302 final). This Action Plan focused on the CCCTB, tax transparency, and EU Coordination among Member States. In addition, this Action Plan aimed to introduce measures to ensure effective taxation where profits are generated, and to reform the Code of Business Taxation and the EU Platform on Tax Good Governance.

Later on, in 2021, the EU Commission introduced the Communication Business Taxation for the 21st Century (COM (2021) 251 final). This Communication focused on enabling fair and sustainable growth and to ensure effective taxation. For Business Taxation, the EU Commission stated that “Business taxation should ensure the tax burden is fairly shared across businesses and that taxable revenue is fairly shared between different jurisdictions. The overall system should be simple, in order to reduce compliance costs, and should facilitate investment and growth, thus reinforcing the Single Market” (COM (2021) 251 final at 5).

In order to achieve effective taxation, the EU Commission decided to go further than the targeted solutions provided by the OECD (i.e. Pillar One and Pillar Two discussions), and to focus on (i) transparency (i.e. annual publication of the effective corporate tax rate of certain large companies with operations in the EU, using the methodology agreed for the Pillar Two calculations), prevent abuse of shell companies, and ensure payment of fair share of tax including enforcement of state aid rules.

However, it is not clear how these solutions can provide effective taxation, and also whether this will still achieve a fair and simple tax system that tax administrations can implement and taxpayer can comply with. In my view, the pressure from political actors has also affected how the EU Commission is reacting by implementing more measures to tackle tax avoidance and the use of shell entities. Therefore, it is interesting to look at the political developments that have taken place between 2015 and 2021 that resulted in the EU Unshell Directive Proposal.

At OECD level, in addition to the introduction of the BEPS Project and the implementation of the 4 BEPS Minimum Standards by countries participating in the BEPS Inclusive Framework, the OECD and (most) of the countries of the BEPS Inclusive Framework have also agreed in October 2021 to a Statement on the introduction of Pillar One and Pillar Two rules. These rules are at the time of writing still being discussed with some ongoing public consultations, but it is expected that these rules could be entering into force in the coming years. The EU has also introduced a Proposal of Directive to introduce Pillar Two, which is being discussed by Member States at the time of writing.

In addition, the EU Parliament and the FISC Subcommittee on Tax Matters have also addressed among others the need to have more strict rules to tackle tax fraud, tax avoidance, and to enhance transparency. Since 2020, the FISC Subcommittee has held (18) public hearings with very critical views on the work done by the EU Commission to deal with tax avoidance in the EU and vis-à-vis non- EU Countries.

This is also based on the willingness of the EU Parliament and the FISC Subcommittee to have a more predominant role in the discussion regarding EU direct taxation by inviting stakeholders from civil society, international organizations, EU Commission, businesses, and academia to these hearings. If one example can illustrate this, is the Public Hearing (30 November 2021) that took place in light of the Pandora Papers where Benjamin Angel, EU Commission Director for Direct taxation, when answering the questions from EU Parliament members stated “the very existence of the Commission initiative on shell companies answers repeated calls of the Parliament for such an initiative”. He also addressed the cooperation with the EU Parliament in identifying measures to improve exchange information (reply to Lidia Pereira EPP).

How will the provisions of ATAD 3 contribute to enhance mutual trust among tax administrations and taxpayer and tax administration?

In Direct Taxation, the use of Directives instead of Regulations leaves room for Member States to do more than necessary to achieve the goals. Member States can do more but not less. The result is then that the use of rebuttable presumptions, gateway criteria, and substance elements may be increased by Member States which would create more complexity in the tax system. In addition, the lack of definitions (e.g., “what constitutes a shell”) leaves room for Member States to fill in these definitions which could result in a fragmentation of rules, also vis-à-vis countries that have already introduced substance requirements. This may create more complexity for taxpayers. See also IBFD Response to Public Consultation (at 7-8). Another issue that has been highlighted by the IBFD is the  use of other non-tax rules (e.g. beneficial ownership by reference to anti-money laundering rather than the reference to the EU Tax Directives (at 9)

One of the elements of this Directive is that even if for a Member State the substance requirements of an undertaking are being met and therefore, a certificate of residence and tax benefits can be granted, another Member State may ask for an audit of that undertaking. The fact that there is no recognition of the assessment of the Member State by another Member State may have an influence on the relationship between the tax administrations which may reduce the mutual trust that should exist in the actions of tax administrations within the EU.

One could ask whether the tax administration that has carried out the evaluation will have the resources (time and personnel) to provide all information to other tax administrations. For the taxpayer, the fact that the decision of the Member State where the undertaking is located may be subject to review by another tax administration also has an effect on the mutual trust from the taxpayer towards the tax administration. Furthermore, the possibility to review retroactively (back two years) may also create an excessive burden for taxpayer, and is this what the EU Commission wants to achieve?

Finally, some of the elements mentioned in the substance requirement are not in accordance to the reality of current business models. For instance, for substance it is required that the premises should be made available for the exclusive use of the undertaking, at least one own and active bank account in the Union and 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.

The use of sole premises for exclusive use, and that either director/employees are resident close to the undertaking do not consider the modern business reality (mobile workers, e-workers, and also use of shared offices). Business models are not fixed on location, and as also mentioned by the EU Commission they continue to become ever more international, complex and digital, so then, using these criteria would have been valid 30 years ago but not in today’s business reality. This is even more true during the Pandemic which has shown that no premises are needed to carry out business and that it is possible to carry out economic activities from home, office, or anywhere else in the world.

To conclude, the Unshell Directive has the purpose to tackle tax avoidance by shell entities. If the Unshell Directive Proposal is passed in its current stage, it will create uncertainty for business due to the lack of definitions, use of other non-tax laws as well as the proposal not being in accordance to current business models/reality. Therefore, in my view, the current Unshell Directive proposal should be adapted to current business models/realities. In addition, in order to enhance mutual trust between tax administrations and between taxpayer and tax administration, definitions and use of tax law rules is recommended. Otherwise, the quest for fair and efficient or simple taxation may be reduced to political considerations which is not what the EU Commission should be aiming at but instead having a proper “functional” internal market, with rules that work for everyone and that ensure compliance based on trust.

We have argued in the past in an article analyzing the tools to counteract aggressive tax planning that tax rules to counteract aggressive tax planning should be evaluated in “its consistency with the standard of fiscal transparency including availability, clarity, simplicity and reliability of the anti-avoidance rules and the development of enhanced relationships between the tax administrations and taxpayers” (see Mosquera et al, 2019 at 142). This is also true and applicable to the Unshell Directives, and it should be also made applicable to the past and future directives by the EU Commission to tackle tax avoidance.


[i] The analysis of GAARs has been done in the EATLP 2016 Conference: Tax Avoidance Revisited in the EU BEPS Context.  General Reporter A. P. Dourado. More recently, the implementation of ATAD and the interaction with Member States GAARs has been addressed  in several articles published in Intertax in 2021-2022 for the Netherlands, the United Kingdom (consequences before and after Brexit), Spain, Luxembourg, Austria, and  Italy

[ii] This Subcommittee has been set up to assist the ECON Committee on Tax Related Matters and particular the fight against tax fraud, tax evasion, and tax avoidance as well as financial transparency for taxation purposes.

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