- Origins: The 2021 proposal
- Evolution: From technical debate to legislative gridlock
- The final chapter: Withdrawal and strategic reorientation
- Implications for businesses
Origins: The 2021 proposal
On 22 December 2021, the European Commission unveiled a proposal for a Council Directive aimed at preventing the misuse of shell entities for tax purposes. This initiative, commonly referred to as the “Unshell Directive” or “ATAD 3”, was part of the EU’s broader strategy to enhance tax transparency and combat aggressive tax planning.
The directive proposed a “gateway” substance test to identify undertakings at risk of being considered shell entities. Entities meeting certain thresholds, such as deriving over 75% of income from passive sources or outsourcing key functions, would be subject to reporting obligations. If they failed to meet minimum substance indicators (e.g. having own premises, active bank accounts, and resident directors), they would be presumed to be shell entities and denied access to tax benefits under EU directives and bilateral treaties.
The scope was broad, covering also SMEs, partnerships, trusts, and other legal arrangements.
Evolution: From technical debate to legislative gridlock
Between 2022 and 2024, the Unshell Directive underwent intense scrutiny and revision:
- The European Parliament issued a draft opinion in May 2022, proposing key amendments:
- Delaying the effective date from 1 January 2024 to 1 January 2025.
- Expanding exemptions for regulated financial undertakings and their subsidiaries.
- Refining the outsourcing criteria to exclude intra-group outsourcing within the same jurisdiction.
- Member States raised concerns about:
- The administrative burden: The compliance costs for proving substance were seen as disproportionate, especially for smaller entities.
- Overlap with existing rules: Critics argued that ATAD 3 duplicated elements of DAC6, ATAD I & II, and OECD’s BEPS framework.
- Legal uncertainty: The rebuttal mechanism and exemption criteria were viewed as vague and potentially inconsistent across Member States.
Despite multiple compromise texts and technical-level discussions, consensus remained elusive.
The final chapter: Withdrawal and strategic reorientation
On 18 June 2025, the Economic and Financial Affairs Council (ECOFIN) formally withdrew the Unshell Directive from its legislative agenda. This decision marked the end of a three-year legislative journey and a strategic pivot in the EU’s approach to tackling shell entities.
Instead of pursuing ATAD 3, the EU Council opted to integrate substance-related principles into a future reform of DAC6, expected in early 2026. This approach aims to:
- Avoid duplication of reporting obligations.
- Reduce administrative burdens.
- Leverage existing hallmarks and the IT infrastructure under DAC6.
The shift aligns with the EU’s “tax simplification and decluttering agenda”, which seeks to streamline compliance while maintaining robust anti-abuse safeguards.
Implications for businesses
While ATAD 3 is no longer on the EU’s legislative horizon, its legacy lives on. The directive catalysed important conversations around economic substance, cross-border transparency, and tax governance.
Businesses should now turn their attention to:
DAC6 amendments: expected to incorporate substance-related hallmarks and reporting mechanisms.
Domestic anti-abuse rules: these remain critical in assessing substance and tax treaty eligibility.
Operational readiness: entities should continue to assess their substance profiles and documentation practices.
Conclusion
The Unshell Directive was ambitious in scope and intent but ultimately fell short of political consensus. Its withdrawal reflects the complexities of harmonising tax rules across diverse jurisdictions. Yet, the EU’s commitment to transparency and fairness remains strong, now channelled through more integrated and operationally viable instruments like DAC6.
The message is clear: substance matters, and the tools to measure it are evolving. Staying ahead means understanding not just the rules, but the direction of travel.
As the legislative process evolves, our team at PwC will continue to monitor developments and provide timely guidance. You are encouraged to consult with your tax advisors to evaluate exposure and prepare for future compliance obligations.
Contact us
