The potential impact of the Shell Company Directive (ATAD3)

23rd February 2022 • Articles & PRs

On 22 December 2021 the European Commission published a proposal for a Directive to prevent the misuse of shell entities in cross-border situations. Here we explore the rationale behind the Directive to discover: What is its scope and consequences? And what could be its impact on Malta’s financial services industry?


The rationale behind the Shell Company Directive is to prevent what is considered to be a misuse of shell entities across the EU that are perceived to have no or minimal substance to justify their economic activity. It is one of the short-term targeted initiatives of the European Commission to improve the tax system to ensure fair and effective taxation to support Europe’s recovery from the COVID-19 pandemic and to safeguard adequate public revenues over the coming years.


Many entities are likely to find themselves within the scope of this proposal. There is no size exemption, and the proposal is intentionally very broad. The draft Directive lays down a substance test that will enable Member States to identify undertakings that are engaged in an economic activity, but which do not have minimal substance as defined by the proposal. These are likely to be denied tax residence certificates or be issued amended certificates and be subject to the automatic exchange of information concerning their purported activities. Shareholders of shell entities located within the EU will also be subject to corrective measures.


Broadly, any unlisted undertaking that earns relevant income as defined in the proposal (more than 75 percent of revenues over the last two years) would assess itself against certain ‘gateway’ criteria. Minimum substance indicators include premises, EU bank accounts and directors resident in that Member State (MS). The directors must be appropriately qualified and authorised to take decisions in relation to the activities that generate relevant income. In addition, however, one or more of the directors must not perform the function of a director of other enterprises that are not associated enterprises. Thus, considering the typical composition of boards of international structures set up in Malta for various financing, IP and holding companies, this could have far-reaching consequences; although certain exemptions and rebuttals are also proposed.


The proposal, once adopted as a Directive, should be transposed into MS’ national law by 30 June 2023 and come into effect as of 1 January 2024, potentially coinciding with the introduction of transfer pricing in Malta. Certain tests require a look-back period of two years, therefore fact patterns in 2022 could already be relevant. While it seems clear that the EU is more focused on Pillar 1 / 2 proposals, its impact on secondary financial centres such as Malta is evidently important. Either way, 2024 already seems like a significant year of change in Malta’s tax environment and a recalibration of Malta’s approach to substance tests is likely to be required.


The MIA, together with the IFSP and the Malta Institute of Taxation, is holding a half-day webinar on this draft proposal for accountants, advisors and directors on Friday 4 March. It will include a panel discussion on the potential impact for Malta. To register visit [].