The EU Commission has published a proposal for a new directive to “prevent the misuse of shell companies for tax purposes”. The purpose of the initiative is to discourage the use and creation of shell companies within the EU and shall complement the existing anti-tax-avoidance set of rules that are considered ineffective by the EU Commission with respect to shell entities. Therefore, the proposal shall also amend the existing Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC1).

The new directive would require undertakings to report information that would enable the respective competent authority to assess in the respective jurisdiction whether the undertaking has a real and substantial presence and an economic activity. In case of absence of a real and substantial presence and an economic activity, benefits to which companies are entitled under EU law – especially benefits provided by the four EU fundamental freedoms – shall then be denied, including the issuance of a tax residency certificate.

According to the press release of the EU Commission, the new regulation shall ensure that entities in the EU, which have no or minimal economic activity, are unable to benefit from any tax advantages and do not place any financial burden on taxpayers. This shall also protect the level playing field for the European businesses. As only the Council would act a law-making body, the European Parliament will not be involved in the legislation process, making it leaner and faster. According to the EU Commission, the new regulation might enter into force as of 1 January 2024.