‘Unshell’ – Rules to prevent the misuse of shell entities for tax purposes [EU Legislation in Progress]

Written by Pieter Baert (3rd edition, updated on 22.07.2024).

While shell companies – company entities that have no or minimal economic activity – can serve useful commercial and business functions, they are sometimes abused by companies or individuals for aggressive tax planning or tax evasion purposes. To ensure sustainable public finances under the exceptional circumstances imposed by the COVID-19 pandemic, in December 2021 the European Commission presented a directive on preventing shell companies from misusing their structure for tax purposes (‘Unshell’).

The proposal introduces a ‘filtering’ system for EU company entities, which will have to pass a series of gateways, relating to income, staff and premises, to ensure there is sufficient ‘substance’ to the entity. Those entities that are deemed to be lacking in substance are presumed to be ‘shell companies’ and, if they are unable to rebut this presumption through additional evidence regarding the commercial, non-tax rationale of the entity, they will lose any tax advantages granted through bilateral tax treaties or EU directives, thereby discouraging their use. The directive requires unanimity in the Council for its adoption, following consultation of the European Parliament. Parliament adopted its (non-binding) report in January 2023. Negotiations in the Council continue.

Versions

• July 2024: ‘Unshell’ – Rules to prevent the misuse of shell entities for tax purposes (3rd edition)