EU Commission presents proposals for directives against shell entities and ensuring a global minimum level of taxation

EU Law

On 22 December 2021 the European Commission (hereinafter: ‘EC’) presented two legislative proposals for EU directives, one to introduce a global minimum corporate tax rate and one to target EU shell entities. The key aspects of both proposals are discussed below.

Proposal for a Directive on a minimum effective tax rate of 15%

The proposal for a directive on ensuring a global minimum level of taxation for multinationals and large-scale domestic groups in the EU introduces a minimum effective tax rate of 15%. This proposal stems from the agreement reached by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The proposed directive is a result of one of the two work streams of the Inclusive Framework, known as Pillar 1 and Pillar 2. Both Pillars aim to tackle remaining BEPS issues and tax competition between jurisdictions. Pillar 2 consists the minimum effective taxation for large multinational groups and is implemented in this proposed directive. Pillar 1 proposes a partial re-allocation of taxation rights, which proposal will be presented by the EC in 2022.

Specifics of the proposed Directive

Under the scope of the proposed rules will fall large multinational enterprises and large-scale domestic groups, both with a consolidated group revenue of at least EUR 750 million. Compared to the OECD Model Rules, the scope of the proposed Directive is extended by the inclusion of large-scale domestic groups, in order to ensure compliance with EU freedoms (especially the freedom of establishment).

Based on Pillar 2, the proposed directive introduces certain technical rules to ensure the effective tax rate of 15%, the so-called ‘Income Inclusion Rule’ and the so-called ‘Undertaxed Payments Rule’. The Income Inclusion Rule imposes a top-up tax if the effective tax rate for entities in a certain jurisdiction does not meet the 15%-minimum. In short, the Income Inclusion Rule applies on a parent entity in the EU in respect of low-taxed group entities (‘constituent entities’) to bring the taxation in line with the minimum effective tax rate of 15%. The Undertaxed Payments Rule functions as a backstop rule, in addition to the Income Inclusion Rule. The Undertaxed Payments Rule applies in situations where, for example, a group is based in a non-EU country and that country does not impose the minimum rate. The calculation and allocation of the top-up tax under this rule is based on the number of employees and carrying value of tangible assets.

In other words, the basic mechanism of the proposed rules is that if the group which is in scope of the proposed directive is subject to an effective tax rate that does not meet the minimum standard in a country where the group carries out activities, Member States will collect a ‘top up’ tax by means of either the Income Inclusion Rule or the Undertaxed Payments Rule.

The EC presented some examples in their Q&A about the proposed directive.


The proposed directive provides for some exceptions. Certain entities will not be in scope, including government entities, international organisations, non-profit organisations, pension funds and investment funds that are the parent entity of a multinational group. Second, the proposed rules include an exception for minimal amounts of income (‘de minimis income exclusion’). This exception is provided in order to reduce the compliance burden. Further, there is an exclusion for a fixed amount of income relating to substantive activities such as buildings and people (a ‘substance carve-out’), based on which companies can exclude an amount of income that is at least 5% of the value of tangible assets and 5% of payroll.

Administrative provisions

The proposed directive introduces specific information filing obligations to the tax authorities in the participating jurisdictions. Moreover, penalty provisions are introduced with regard to failure of compliance with the obligations under the proposed directive.


Once the proposal is adopted by the Member States, the national implementation should be operational and applicable as of 1 January 2023. The rules for the application of the Undertaxed Payment Rule should apply one year later.

Proposal for a Directive against the misuse of shell entities (ATAD 3)

The proposal for a Council Directive consists of rules to prevent the misuse of shell entities for tax purposes (“ATAD 3”). If adopted, ATAD 3 should be transposed into national law by 30 June 2023 and come into effect as from 1 January 2024. This proposal introduces an information disclosure regime that may lead to the disallowance of any tax advantages to EU companies that are deemed to have no or minimal economic activity.

The EC had already announced the initiative in its communication on business taxation for the 21st century, setting out an agenda with a series of measures aimed at ensuring fair and effective taxation within the EU.

Entities concerned

ATAD 3 targets entities that are tax residents in an EU Member State and meet all of the following “gateways”:

  1. More than 75% of an entity's overall revenue in the previous two tax years is passive, i.e. it does not derive from the entity's business activity or more than 75% of its assets are real estate property or other private property with a book value of more than EUR 1 million;
  2. Over the course of the preceding two tax years, at least 60% of the entity’s relevant income is earned or paid out via cross-border transactions, or more than 60% of the book value of immovable property or movable property with a book value exceeding EUR 1 million is located outside the Member State of the entity; and
  3. The administration of day-to-day operations and the decision-making on significant functions was outsourced in the preceding two tax years.

If an entity crosses all three gateways, it will be required to meet certain information reporting requirements in its tax return in order to assess whether it will be presumed to be a ‘shell’ (discussed below under reporting regime).


It is proposed that certain entities benefit from a derogation and be exempt from reporting obligations. These entities include notably UCITS, AIFs, AIFMs and undertakings with at least five own full-time equivalent employees or members of staff exclusively carrying out the activities generating the relevant income.

Reporting regime applicable to entities crossing all gateways 

Entities crossing all gateways will have to report information in their annual tax return in relation to “substance indicators”, including whether:

  1. the entity has own premises in the Member State, or premises for its exclusive use;
  2. the entity has at least one own and active bank account in the EU;
  • at least a director is tax resident in the Member State of the entity, is adequately qualified and authorized, uses such authorization on a regular basis, and is not employee or director of another enterprise that is not an associated enterprise; or
  •  the majority of the full-time equivalent employees of the entity are resident for tax purposes in the Member State of the entity.

Should at least one indicator not be met, the entity will be presumed to be a shell entity.

Regardless of whether the entity qualifies as a shell, the information reported will be automatically exchanged.

Regime applicable to deemed shell companies

The consequences applicable to shell entities are twofold: (i) denial of benefits under tax treaties, the Parent-Subsidiary Directive and the Interest and Royalties Directives, and (ii) application of transparency, as the shell entity will be disregarded for tax purposes, i.e. shareholders of the shell will be deemed to hold the assets of the shell directly.

Available carve-outs

Entities that do not meet all substance indicators will still have the opportunity to rebut the presumption of being a shell by evidencing sufficient substance and the absence of misuse of the company for tax purposes.

Entities may also be exempt from the regime by evidencing the absence of tax benefit for the presumed shell company, the group of companies it belongs to, and its ultimate beneficial owner.


The next step for the proposed directives is to await agreement (unanimously) in Council. Since both proposed directives may have an impact on existing corporate structures it should be carefully checked on a case-by-case basis prior to the relevant date of entry into force. The tax team of Stibbe is available to help you in your assessment of the impact of these measures on your structures and operations. We will keep you informed of further developments.