Artificial active

Draft ATAD3 directive: additional restrictions on the use of artificial tax structures

On December 22, 2021, the European Commission published a draft directive known as ATAD3 which sets out the rules aimed at preventing the misuse of shell companies for tax purposes. As written, the rules implementing the directive are expected to come into force on January 1, 2024. The ATAD3 directive is a solution aimed at combating the misuse of shell companies for tax purposes. The basic premise of the ATAD3 directive is to introduce uniform criteria in order to identify companies that do not have a minimum substrate of assets and personality (the so-called “substance”). Consequently, companies that do not meet the criteria set out in the ATAD3 directive will not be able to benefit from the tax advantages provided for, among others, by the so-called interest directive or the parent-subsidiary directive and, consequently, any claim that is paid may be taxed at the basic tax rate (19% or 20%).

High risk entities

According to the draft directive, the identification of front companies will involve two stages. The objective of the first stage will be to identify companies that present a risk of non-substance and are used to abuse for tax purposes. Companies at risk of not having a substance will be considered to be:

  • those in which, during the two previous tax years, more than 75% of its income was so-called passive income, that is to say, among other things, income from interest, dividends, sale of shares, real estate, royalties, or services outsourced to affiliated entities;
  • those with cross-border activities, i.e.:
    • companies in which at least 60% of the aforementioned passive income is generated in cross-border transactions, or
    • companies of which more than 60% of the book value of its assets have been located outside the country of residence of the company during the two preceding tax years; Where
  • those who, during the two previous fiscal years, have outsourced the management of its day-to-day operations and decision-making regarding important functions.

Additional reporting obligations

In a second step, companies jointly meeting the above criteria will have to demonstrate that they have a minimum substrate of heritage personality sufficient to carry out the activities they carry out, namely:

  • that they have their own premises or premises in their country of establishment for their exclusive use;
  • that they have at least one own active bank account in the EU;
  • that they meet one of the following two criteria:
    • at least one director of the company:
      • is a tax resident of the country where the company is established, or does not reside further from this country than the distance would still allow him to perform his duties properly,
      • is qualified and authorized to make decisions on the activities generating the so-called passive income of the company, or on the assets of the company,
      • actively and independently exercises the power referred to in the previous point,
      • is not an employee of a company that is not a related company and does not hold a directorship or any equivalent position in other companies that are not related companies;
  • the majority of the company’s employees, in full-time equivalent, are domiciled for tax purposes in the company’s country of residence or do not reside further from this country than a distance allowing them to perform their duties properly, and that said employees are qualified to carry out these activities generating so-called passive income for the company.

The circumstances indicated above must be justified by supporting documents that the company must attach to its tax return.

Presumptions and tax implications

In principle, companies that demonstrate that they have a minimum substrate of asset personality will still be able to benefit from the tax advantages provided for, among others, by the so-called interest directive, the parent-subsidiary directive or the agreements and conventions in force. in the country of residence of the company concerned.

Companies that are unable to demonstrate that they have a minimum of substance will be subject to a rebuttable presumption of no minimum substance in the tax year concerned, which will result in the impossibility of obtain a certificate of tax residence in the State of their residence. Alternatively, the State of residence may issue a certificate of residence stating that the company concerned is not entitled to the benefits of the Interests Directive, the Parent-Subsidiary Directive or the agreements and conventions in force in the State of company residence. residence.

Consequently, payments made to fictitious companies may be taxed at the basic withholding tax rate depending on the type of payment made, for example:

  • in the case of a dividend payment, the tax rate will be 19%,
  • in the case of interest or royalty payments, the tax will amount to up to 20%.

How to prepare?

Please note that under the draft directive, the verification of the criteria concerning the minimum asset personality substrate will include the two previous tax years. Assuming that the implementing provisions of the Directive enter into force as planned (i.e. 1 January 2024), the above verification will cover the years 2022 – 2023.

The final wording of the provisions of the directive is not yet known. Furthermore, the provisions of the directive will have to be implemented in the Polish law on corporate income tax and the law on personal income tax and, at this stage, it is difficult to determine which will be the final wording of the new regulations. However, it is already necessary to analyze the functioning of groups of entities operating in different tax jurisdictions with regard to these proposed changes.