Unmasking The World Of Corporate Shell Companies

• Published date: 27 October 2023
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Tax Treaties, Income Tax, Tax Authorities
• Law Firm: Eurofast
• Author: Mr Pantelis Papadopoulos

Shell companies have always held a mystique for entrepreneurs, offering a legitimate cover for various financial and business maneuvers. The European Union has been diligently working on regulatory measures to monitor the operations of these enigmatic entities.

ATAD 3 and the Dawn of Transparency

The European Union has taken a significant step towards regulating shell companies through the Third Anti-Tax Avoidance Directive (ATAD 3). This directive imposes "minimum substance requirements" on these elusive legal structures.

The implications are profound, potentially jeopardizing the advantages shell companies once enjoyed under double tax treaties and EU directives. Member States will now have the authority to tax shareholders based on a transparent evaluation of the entity's operational activities.

It's essential to note that this directive exclusively targets entities resident in the EU. Non-compliance with ATAD 3 substance reporting requirements or submitting inaccurate substance declarations could result in penalties of at least 2% to 4% of the entity's annual revenue.

Exemptions and Scrutiny Criteria

Certain entities are exempted from the purview of the EU Directive, including regulated financial institutions, companies with transferable securities listed on regulated markets, and domestically domiciled holding corporations. Scrutiny is based on three specific criteria: passive income, cross-border activities, and outsourced management and administration.

1. Passive Income Criterion

This criterion is applicable when an entity's financial operations reveal that over 65% of its revenue in the previous two fiscal years comes from income sources categorized as relevant. These sources include interest, earnings from financial assets (including cryptocurrencies), royalties, dividends, income from the sale of shares, financial leasing, immovable property, and select movable assets. Furthermore, this criterion is met if more than 75% of the entity's asset value consists of real estate or if more than 75% of its assets are in the form of shares.

2. Cross-Border Involvement

When over 55% of the entity's income is derived from international transactions or if more than 55% of its real estate assets are located outside its jurisdiction in the preceding two...