Readers will recall that in December 2021, the Commission published a draft Directive the purpose of which was, as one of the ways of combatting aggressive tax planning, to ensure that EU entities involved in cross border activities, and therefore relying on international tax agreements, would have a minimum level of economic substance. It has become clear that, as we have moved through the French presidency of the EU Council, then that of the Czech Republic, and now that of Sweden, there have been significant difficulties in achieving the unanimity required in order for the Directive to be adopted.

There appear to have been similar difficulties at the level of the EU Parliament. Although it has no legislative powers in relation to a Directive, they have finally come to a consensus position on the draft Directive and on or about 17 January 2023 formally adopted a number of recommendations for amendments to the draft. It should be noted that none of these recommendations is binding on the Commission but they will no doubt be taken into account.

While one might expect the recommendations to amount to a significant tightening up of the ATAD 3 proposals, this is in fact not always the case and they therefore provide some hope that the original proposals, which in many ways do not reflect economic reality, will be adjusted further by the Commission in the course of its own deliberations.

The recommendations that serve to tighten the proposal include the following:

• The thresholds built into the so-called Gateways have been reduced the effect of which is that more, rather than less, entities will be in scope. Thus the percentage of so-called relevant income as a proportion of total income has been reduced from 75 per cent to 65 per cent and the percentage of cross-border income or assets reduced from 60 per cent to 55 per cent.
• The exclusion of entities on the basis that they have at least five full-time equivalent employees has been removed.

Some of the more encouraging EU Parliament recommendations are the following:

• The focus on outsourcing in one of the Gateways has been refined so as to refer to outsourcing to a “third party”. It is hoped that this accommodates outsourcing within a corporate group but, like many of the provisions of the Directive, the wording is not entirely clear.
• As regards the minimum substance requirements:
  • The need for exclusive use of premises has been toned down so as to allow the sharing of premises with other group entities.
  • The requirement that at least one member of the board of directors exercises their authority actively and independently on a regular basis has been deleted.
  • It also appears to be considered no longer necessary that at least one board member is a group employee and has no other board positions – but a word of warning on this as the considerable use of double negatives in the original wording is somewhat confusing.

While the recommendations tightening up the proposals may be considered to be a reasonable trade-off for the recommendations to relax some of the other provisions, there remain significant deficiencies in the ATAD 3 proposals and it is hoped that further flexibility will be shown by the Commission in its own deliberations.

It remains unclear when the revised draft Directive will appear and whether there will be concessions regarding the timing of implementation and the retrospective nature of the Gateway tests.