ATAD III Update: European Parliament publishes further proposed amendments

Monique Pisters
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On January 17th, 2023, the European Parliament published its approval of the European Commission’s draft proposal for Anti-Tax-Avoidance Directive III (ATAD 3) under the condition that a few amendments will be made.

Most of these amendments are based on the suggested amendments of the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”). It is now up to the European Council to decide whether to accept the EP’s suggested amendments or to amend the EP’s position and return the proposal to the EP for a second reading.

It’s important to mention that the EP follows the tight implementation deadline of the EC of January 1st, 2024. Therefore, the company’s position as of January 1st, 2022 seems to be the relevant reference point. For a complete overview of the draft legislation of the EC, we refer to our previous article.  

The proposal of the EP seems to be stricter than the EC as; 

  1. The first two gateways to qualify as a risk entity are lowered; 
  2. Having five full-time employees (or equivalents) no longer exempts companies to be subject to this legislation.

On the other hand, we see that the third gateway is adjusted in a way that internal outsourcing of day-to-day operations no longer results in the application of ATAD, resulting in less companies to fall within the proposed legislation. 

Below you can find the proposed key amendments of the EP, compared to the original proposal of the EC in more detail. 

Exempted categories 

In line with the suggestions of the ECON, the EP removed the exemption for – in short – entities with five full-time employees carrying out the activities generating the relevant income. It seems that the EP removed this exempted category as it would have been relatively easy for large companies to avoid the application of ATAD 3. Furthermore, the ECON suggested that entities owned by regulated financial undertakings with the objective of holding assets or investment of funds would also be exempted. That would have excluded certain holding companies, but the EP has not included this exemption in their last version approval document. 

Conditions to be regarded a risk entity 

The gateway test – as suggested by the EC –  is slightly adjusted by the EP. 

. To qualify as a so-called “risk entity”, the following three conditions have to be met: 

  1. More than 65% (EC proposal: 75%) of the revenue of the company is passive or mobile income (e.g. interest, royalties, and dividends) in the previous two years;  
  2. More than 55% (EC proposal: 60%) of the book value of the company is located in another country or more than 55% (EC proposal: 60%) of the relevant income is earned / paid out via cross-border transactions in the previous two years; 
  3. The company outsources the corporate management and administration services on significant functions to a third party instead of performing them in-house in the previous two years. 

Indicators of minimum substance 

If the entity is regarded as a 'risk' entity, it should declare in its annual tax return whether certain substance requirements are met. The EP amended the penalties in case a risk entity fails to report or files incorrect reports.  Member States shall ensure a fine of 2% of the annual revenue (before 5%) and a sanction (new) of at least 4% if a company makes a false declaration in its tax return. In case there is zero or low revenue, the penalty should be based on the total assets.  

Based on the EP proposal, a risk entity is required to meet the following three criteria in order to not be presumed as a shell: 

  • The entity should have an office space or exclusive use of office space. The EP added that premises shared with entities of the same group would also be regarded as an indicator of minimum substance; 
  • The company should have at least one active bank account in the EU. The EP added that an e-money account would also suffice and that the relevant income should be received through this bank or e-money account and; 
  • The directors should be authorized (the EC’s proposal also required that they are qualified) to take decisions in relation to the activities that generate the relevant income. Furthermore, the requirements that (i) the directors must actively and independently use the authorization to take decisions and (ii) that they may not be employees of an unassociated enterprise or perform the function of director of other unassociated enterprises have been removed by the EP.  

Exemption from reporting / rebuttal 

The EP agrees with the EC that a company is allowed to rebut the presumption of being a shell, by providing evidence that the business activities they perform generate the relevant income. Furthermore, an exemption could be applicable in case there is a lack of tax motive. The EP added that a Member State should consider the request within a period of nine months after the request. If no answer is provided, the request should be considered to be accepted.   

Current status of ATAD III 

After suggestions from the ECON to extend the timeline for implementation, it is remarkable that the EP has decided to not include a suggestion for this. As such, the implementation date is still set at January 1, 2024, with the two-year periods referred to in the conditions to be qualified as a risk entity still set to apply as of 1 January 2022.  

Based on EU legislation, it is now up to the European Council to decide whether to accept the EP’s position or to amend the EP’s position and return the proposal to the EP for a second reading. The European Council (including the heads of state or government of all Member States) has to approve the Directive unanimously for it to be adopted.  

How can we help? 

Given the proposed implementation date, we recommend that entities assess their current corporate structures to understand the potential consequences of ATAD III.  

Grant Thornton’s international tax specialists are happy to collaborate with you to review your company's current situation with regard to substance and possible exemptions, provide you with the latest information and insights on the detail in the Directive and offer sensible guidance to be ready if the proposed Directive is passed and implemented.