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This draft Directive focuses specifically on substance and if defined conditions are not satisfied, the benefits of certain EU tax Directives and tax treaties could be denied. Entities within scope of the draft Directive could potentially suffer adverse tax consequences. Additional reporting requirements will also apply and penalties for non-compliance.
The European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) first issued a number of proposed draft amendments to ATAD III in May. Further draft amendments were published in September. The following table highlights the key proposed amendments.
Key Amendments |
Draft ATAD III Proposal |
ECON Proposed Amendments |
Implementation date |
January 1, 2024 | January 1, 2025 |
Scope |
This Directive applies to all undertakings that are considered tax resident and are eligible to receive a tax residency certificate in a Member State. | This Directive applies to all undertakings that are considered tax resident and are eligible to receive a tax residency certificate in a Member State including permanent establishments. |
Conditions to be regarded as a risk entity |
To qualify as a risk entity, three cumulative indicative conditions should be met:
*The entity is considered to be engaged in cross-border activity if a) more than 60% of the book value of the assets were located outside the Member State or b) more than 60% of the income is earned or paid out via cross-border transactions. |
To qualify as a risk entity, four indicative conditions, of which at least two, should be met:
*The cross border activity is criteria is broadly similar with the exception that the % thresholds are varied in the proposed amendments to between 50% - 60% of the book value of the assets and between 50% - 65% of the income. Numerous other amendments are also proposed to the reporting of minimum substance criteria on the annual tax return and it remains to be seen what the final reporting requirements will include. |
Exempted categories |
Certain categories are excluded from the reporting obligations, even if the conditions to be regarded as a so called 'risk' entity are met. | Given that the Directive aims to counter abuse of EU rules on intra EU capital flows, the ECON amendment proposes that undertakings that benefit from EU agreements on double taxation remain in the subject of ATAD III which may limit exempted categories. There is however, a proposed expansion of the exclusion for regulated financial undertakings to also include subsidiaries of regulated financial undertakings which have the objective of holding assets or investing funds. |
Exemption |
An exemption may apply if the undertaking is considered a risk entity but there is a lack of tax motives. After the end of the tax year for which the exemption was granted, the exemption may be extended for five years. | An exemption may apply if the undertaking is considered a risk entity but there is a lack of tax motives. After the end of the tax year for which the exemption was granted, the exemption may be extended for three years (and potentially only if the risk entity fails only one of the minimum substance criteria). |
Rebuttal |
After the end of the year for which the undertaking rebutted the presumption successfully, a Member State may consider for a period of five years that the undertaking has rebutted the presumption on the condition that the factual and legal circumstances remain unchanged. |
After the end of the year for which the undertaking rebutted the presumption successfully, a Member State may consider for a period of three years that the undertaking has rebutted the presumption on the condition that the factual and legal circumstances remain unchanged. |
Non compliance penalty |
5% of the annual turnover Possibility for a Member State to request another Member State tax authority to conduct a tax audit. |
2.5% of the annual revenue or perhaps a penalty based on the tax benefit obtained or a percentage of the undertakings assets where turnover is below a certain threshold. The amendment now includes the opportunity for Member States to conduct a joint tax audit. |
In a positive development, and acknowledging the challenge for taxpayers in preparing for the Directive, the ECON has proposed an extension to the timeline for implementation. This would see the new legislation apply from a later date of 1 January 2025 instead of 1 January 2024 and that the two-year-periods referred to in the conditions to be qualified as a risk entity will start from 1 January 2023 (or possibly later).
The amendments vary considerably and are not yet definite. It is expected that ECON will vote on 17 November 2022 with a subsequent vote to follow in the European Parliament. The European Commission can accept but also reject the amendments.
Given the proposed implementation dates, we recommend that entities begin assessing their current corporate structures to understand the potential consequences of ATAD III.
Grant Thornton’s international tax specialists can collaborate with you to review your company’s/companies’ current situation with regards 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.
