Will the UNSHELL Directive proposals turn into DAC9?

Summary: Negotiations on the UNSHELL Directive, which establishes rules to prevent tax abuse by shell companies, are taking a new direction as Spain, holding the EU Council Presidency from July 1 until the end of 2023, proposed a two-stage approach for Member States to break the current deadlock. This approach entails creating a new minimum economic substance test, consisting of several stages, to help EU Member States identify companies that engage in no real economic activity and may be misused for tax avoidance or evasion purposes.

Timeline: Spain aims for this proposal to be at least discussed at the ECOFIN meeting on November 9 and adopted by the end of 2023 (subject to resolving disagreements). Therefore, the adoption/entry into force of the Directive is likely to be postponed until at least 2026 (the current draft plan envisaged implementation from January 2024).

Previous developments: According to the initial UNSHELL proposals, if a company is deemed to be a shell, relevant tax agreements and EU directives providing tax benefits to this company should be disregarded, thus denying tax advantages. However, after some deliberation, regarding fully abandoning tax measures, Member States discussed introducing limited tax measures but failed to reach an agreement.

Spain’s proposal: According to Spain’s proposed approach, UNSHELL could initially become an amendment to the Directive on Administrative Cooperation (DAC), adding a requirement for Member States to exchange information on shell companies; whether tax measures should be adopted at the EU level will be determined later. Thus, this approach in the first stage will give EU Member States the freedom to apply their local rules to combat abuses by shell companies. It is reported that the idea behind this proposal is that simple information exchange will already act as a deterrent to creating shell companies.

EU Member States’ views: During the Taxation Working Group meeting on October 4, most EU Member States expressed support for Spain’s two-stage approach. However, tax measures were not the only subject of disagreement on this issue, and discussions on criteria for determining a company’s economic presence (substance) will also need to continue.

European Commission’s perspective: The European Commission has already warned that turning the UNSHELL directive into simple information exchange will not achieve the original goal of the proposal. In this regard, if the European Commission decides that the nature of its proposal has been too heavily altered during the legislative process, theoretically, a decision could be made to withdraw this proposal.

What about the proposal for SAFE? The fate of the UNSHELL directive is also important regarding proposals similar to ATAD3 but already concerning structures outside the EU. News on this initiative was expected in June of this year, but it was subsequently postponed until an agreement is reached on the UNSHELL Directive.

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