January 10, 2022

Unshell Directive Proposal: How to Navigate New Substance Requirements

On 22 December 2021, the European Commission presented a proposal for a new directive to fight against the misuses of shell entities for improper tax purposes. This proposal has been issued to ensure that entities in the European Union that have minimal or no economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers.

The proposed measure can be divided into three prongs: 1) the reporting of information on the substance of some entities to their local tax authorities; 2) the minimum substance to have access to tax benefits under tax treaties; 3) the automatic reporting between the tax authorities of the EU Member States of the information disclosed for the purposes of the first two prongs.

Below are summarized the proposed measures: Indicators of minimum substance for tax purposes

Reporting obligations

If an entity meets the following criteria, it should be subject to reporting obligations on its substance to its local tax authorities:

  • More than 75% of the revenues accruing to the entity in the preceding two tax years is passive income (e.g. interest, royalties and dividends);

  • The entity is mainly engaged in cross-border activity (majority of assets located outside the Member State of the entity or the majority of the passive income is earned or paid out via cross-border transactions); and

  • The entity outsourced the administration of day-to-day operations and the decision-making on significant functions.

However, some entities are specifically excluded from the scope of this provision because they are considered as commonly used for commercial reasons, especially the AIFs and the UCITS.

It is also possible for an entity to request an exemption from its reporting obligations if the existence of the entity does not reduce the tax liability of its beneficial owners or of the group, as a whole, of which the entity is a member.

Minimum substance indicators to be reported

If an entity meets the criteria described above, they shall be required to declare in their annual tax return for each tax year whether they meet the following indicators of minimum substance:

  • The entity has its own premises in the Member State or premises for its exclusive use;

  • The entity has at least one own and active bank account in the Union; and

  • An exclusive local director dedicated to the group, or full-time local employees.

This information to be declared should be accompanied with documentary evidence.

Presumption of minimum substance

If an entity fails to meet at least one of the indicators above or does not provide sufficient or satisfactory documentary evidence, it shall be presumed not to have minimum substance for the tax year and consequently to be a shell entity.

It is however possible to rebut this presumption by providing any additional supporting evidence of the business activities which they perform to generate relevant income.

Tax consequences

If an entity does not have sufficient substance, according to the above, it will be presumed not to have minimum substance and the following tax consequences shall apply (unless rebuttal of the presumption):

  • Member States other than the Member State of the entity shall disregard any agreements and conventions that provide for the elimination of double taxation of income as well as the Parent-Subsidiary Directive and the Interest and Royalties Directives; and

  • The Member State of the entity shall deny a request for a certificate of tax residence to the entity for use of outside the jurisdiction of this Member State or shall grant a certificate of tax residence which prescribes that the undertaking is not entitled to the benefits of agreements and conventions that provide for the elimination of double taxation of income as well as the Parent-Subsidiary Directive and the Interest and Royalties Directives.

Automatic exchange of information

All the information in relation to an entity, whether or not is considered being a shell entity, shall be automatically exchanged to the competent authorities of all other Member States. If a Member State certifies that the entity has rebutted the presumption or is exempt, as described above, this information shall also be shared to other Member States.


In case of violation of the reporting obligations, Member States shall set penalties that should include an administrative pecuniary sanction of at least 5% of the entity’s turnover in the relevant tax year.


Member States are required to adopt and publish by 30 June 2023 the necessary laws, regulations and administrative provisions to comply with this proposed directive which should come into force as of 1 January 2024.

Next steps

The proposed rules are expected to apply from 1 January 2024 but would need first to be unanimously agreed by the EU Member States and could be subject to some changes until then.

In addition to this proposed directive, other measures are expected within the coming months and years from the European Commission including the 8th directive on administrative cooperation covering crypto assets and the new framework for business taxation (BEFIT) in the EU.