When will this all be introduced?
It is anticipated that the new Directive should be adopted in early 2022 by the Council and implemented by member states, at the latest, by 30 June 2023.
The provisions should subsequently be effective in all member states from 1 January 2024.
What are we looking at?
The key elements of the new proposals are as follows:
- All entities (described as “undertakings”) will be in the scope of the new Directive: The Directive will apply to all entities that are resident for tax purposes in an EU member state. Any entity of any legal form that is engaged in economic activity is in the scope. There is no de minimis applied.
- Gateway conditions: The Directive will introduce a set of conditions that enable the taxpayer and tax authorities to determine whether the relevant entity is considered a ‘risk case’ with a reporting obligation. The gateway consists of three conditions, that must all be satisfied. Where the entity does not satisfy this trio of conditions then it will be considered a ‘low-risk’ undertaking.
- “Risk cases”: Reporting requirements will only apply to undertakings that are deemed to be so-called “risk cases”. These will be entities “that present simultaneously a number of features usually identified in undertakings that lack substance”
- Substance requirements: Risk cases with reporting obligations are required to include information on ‘substance indicators’ on its tax return. ‘Substance indicators’ are, for example, the availability of premises for the exclusive use of the undertaking, bank accounts, tax residency of its directors, and (if applicable) its employees. The undertaking will be considered to be a shell company in case the at-risk undertaking does not meet all substance indicators (i.e., fails at least one of the substance indicators).
- What are the implications for ‘shell’ companies: In such a case, the entity will be denied the benefits of treaty freedoms – albeit it is limited to the specific shell entity and not the wider group. Further, a certificate of tax residency will be unavailable to the shell company.