European Commission sets its sights on “Shell Companies”

The European Commission’s agenda of eliminating perceived harmful cross border tax practices continues with the introduction of a draft Directive that is intended to tackle the issue of so called “shell companies”. In December 2021, the European Commission published a draft directive (known as Anti-Tax Avoidance Directive III (ATAD III)) which sets out new rules that are intended to prevent the misuse of “shell entities” for tax purposes. In effect a “shell company” is an entity set up in a jurisdiction where it has minimal economic activity or substance.

ATAD III proposes the introduction of a "minimum substance test" and reporting requirements to identify shell companies, and could have significant implications for structures that do not perform "actual economic activity".

The measures set out in the draft Directive fall into two categories:

  1. a set of indicators for determining whether a given entity is or is not a shell and 
  2. a set of sanctions to be applied to companies deemed to be shells.

In broad terms, where a company fails to meet certain minimum standards it is required to report this in its corporate tax return. In addition the draft directive sets out the sanctions that can be applied where a company fails to satisfy the minimum substance requirements. Companies deemed to be shells may be denied tax relief under double tax treaties or EU directives and payments to third countries may be subject to withholding tax at source.

Indicators of shell companies

The proposed indicators take the form of three 'gateways', relating to:

  1. an entity's income-generating activities, 
  2. its cross-border involvement and 
  3. how much of its work is outsourced to others.

In short, the activities gateway is met if more than 75 per cent of an entity's total revenue is derived from “relevant income”. Relevant income includes non-trading income and royalties from patents. The cross-border gateway is met if the entity receives most of its relevant income through transactions linked to another jurisdiction or passes this income on to other companies located abroad. The third gateway applies if the majority of the company’s work is outsourced to other parties. Where all the gateways are present the entity will then be required to report information to the Revenue in its tax return annually. It is worth noting that when considering the gateway criteria (i.e. indicators to determine whether an undertaking is a risk or not), the draft Directive requires a review of the preceding two tax years.

The information that is required to be reported on the tax return is then intended to determine whether a “minimum substance” test is satisfied. The indicators for establishing minimum substance are:

  1. Does the company have a business premises in the jurisdiction of residence 
  2. Does the company have a bank account in the EU 
  3. Does it have either 
  • on its board at least one Director
    • resident for tax purposes in the Member State of the undertaking, or at no greater distance from that Member State insofar as such distance is compatible with the proper performance of their duties; 
    • qualified and authorised to take decisions in relation to the activities that generate relevant income for the undertaking or in relation to the undertaking’s assets; 
    • actively and independently use the authorisation referred to above on a regular basis; 
    • are not employees of an enterprise that is not an associated enterprise and do not perform the function of director or equivalent of other enterprises that are not associated enterprises; (Note this important and looks like it is targeted at non-executive/professional Directors who may provide Directorship services for other non-related entities); 
  • the majority of the full-time equivalent employees of the undertaking are resident for tax purposes in the Member State of the undertaking, or at no greater distance from that Member States insofar as such distance is compatible with the proper performance of their duties, and such employees are qualified to carry out the activities that generate relevant income for the undertaking

An entity that fails at least one of the above 'substance indicators' will be deemed to be a shell, and will be denied tax relief under any double tax treaty or EU directive. In addition, any payments it makes to third countries on behalf of another party will be subject to withholding tax at the level of the client party.

It is important to note that as currently drafted, the draft Directive exempts entities that employ at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income. This, therefore, provides an effective safe harbour from the application of the Directive.


The draft Directive is not as yet law and will require the unanimous agreement of all EU Member States (27 in total). If the Directive is implemented at EU level it would then be required to be enacted into Irish domestic legislation. The EU Commission’s intention is for the Directive to be introduced with effect from January 1, 2024. These proposed provisions should be carefully considered by international businesses, in particular the requirement to have regard to the preceding two tax years when considering the gateways should be borne in mind.

Contact Us

If you would like to know more about the measures proposed and the tax implications for companies effected, contact our Tax Team:

  • Richard McAufield, Senior Tax Manager, (01) 6440100
  • Ronan McGivern, International Tax Partner, (01) 6440100

Disclaimer: While every effort has been made to ensure the accuracy of information within this update is correct at the time of publication, RBK do not accept any responsibility for any errors, omissions or misinformation whatsoever in this update and shall have no liability whatsoever. The information contained in this update is not intended to be an advice on any particular matter. No reader should act on the basis of any matter contained in this update without appropriate professional advice.