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Taxation and Customs Union

Unshell Proposal

A proposal to fight against the misuse of shell entities

Unshell

Proposal

On 22 December 2021, the European Commission presented a key initiative to fight against the misuse of shell entities for tax purposes. The Unshell proposal aims to ensure that entities in the European Union that have minimal to no economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers. 

Shell entities are often used for aggressive tax planning or tax evasion purposes. Through shells, businesses can direct financial flows towards jurisdictions that have no or very low taxes, or where taxes can easily be circumvented. Individuals can also use shells to shield assets – particularly real estate – from taxes, in their country of residence or in the country where the property is located. 

The proposed new measures will establish transparency standards around the use of shell entities, so that abuse can be more easily detected by tax authorities. This will facilitate national tax authorities in detecting entities that exist merely on paper through several objective criteria related to income, staff and premises.

How will it work?

The proposal introduces a filtering system for the entities in scope, which consists of a series of tests that look at: 

  • the type of income the entities receive 
  • whether the majority of income is received through another jurisdiction 
  • whether their management and administration are outsourced to a large extent 

Entities need to test against these criteria yearly, as part of filing their annual tax return. 

The entities that fail the test will be required to report to tax authorities ‘substance information’ through their tax return. This will include, for example, information on the entity’s premises, bank accounts and the tax residency of its directors and employees. 

If substance is found not to be sufficient, tax authorities will have to exchange information and the entities may face tax consequences. 

The role of national tax authorities

Given the cross-border nature of aggressive tax planning, tax avoidance and tax evasion, the competent authorities of EU countries will automatically exchange information on entities within the scope of the Directive. The proposal will amend the Directive on Administrative Cooperation in the field of taxation (or DAC) to enable this. 

Consequences for shell entities

Entities that are found to be a shell will be subject to several consequences laid down in the proposal. They will be receiving an annotated tax residency certificate if they apply for the more generous treatment of a bilateral tax treaty. This means that the tax authorities in the EU country of the payer or of the beneficial owner of an interposed entity will know that the entity is a shell and can effectively refuse the benefits of a tax treaty. 

Documents and legal texts