ATAD 3: The Shell Company Directive

On December 22, 2021, the European Union released a new Anti-Tax Avoidance Directive (ATAD). As this is the EU's third ATAD, industry insiders refer to it as ATAD 3. Titled "Laying down rules to prevent the misuse of shell entities for tax purposes," this directive once again declares war on shell companies. The EU has been at the forefront of global anti-tax avoidance efforts, and their steadfast support was instrumental in the OECD's successful promotion of the global BEPS action plan. While many countries cherry-picked from BEPS's 15 action plans, the EU went all in, implementing every single one.

In 2019, under pressure from the EU blacklist, tax havens like BVI and Cayman Islands implemented the Economic Substance Act in accordance with BEPS Action 5. This forced countless shell companies to either liquidate, relocate to non-tax havens, or establish economic substance. However, shell companies in tax havens didn't completely vanish because:

• Tax haven companies that only hold shares in other enterprises can remain shells as Pure holding companies
• Companies engaging in Non-relevant activities or generating Non-relevant income can maintain their shell status
• Shell companies can relocate their tax residency to shell-friendly non-tax havens (like Luxembourg, Netherlands, or Hong Kong)

The EU faced criticism over its Economic Substance Act: while demanding other countries implement it for shell companies, they turned a blind eye to their own tax havens (Ireland, Netherlands, Luxembourg, Cyprus, Malta, etc.). This merely resulted in non-EU shell companies relocating to the EU - talk about fighting shell companies while serving their own interests!

Nevertheless, the EU has indeed ramped up economic substance requirements for domestic companies in recent years, making it increasingly difficult for shell companies to enjoy tax treaty benefits and EU directive advantages. With ATAD 3, the EU is finally getting tough on its own member states - even tougher than the 2019 Economic Substance Act. It looks like they're going for the jugular when it comes to shell companies! ATAD 3 is set to be implemented within the EU in 2024. Will we see the end of shell companies on EU soil in two years? And will these regulations eventually go global?