The European Commission published the draft directive on December 21, 2021. A year later, in December 2022, the European Parliament adopted a resolution proposing certain amendments. However, the EU Council is not obliged to accept these changes. Due to such bureaucratic nuances, the final version of the directive is still pending, although many of its provisions are already known. Despite this, EU member states are required to implement the directive into their national legislation.
ATAD 3 is scheduled to come into force on 2025. Notably, the directive provides for a two-year retrospective period, meaning companies must In cross-border structures, shell companies can facilitate unfair tax competition. These entities often lack economic substance and are created solely to gain tax benefits. While EU member states have their own general anti-abuse rules, they vary in effectiveness and scope. The ATAD 3 directive was designed to establish a harmonized EU-wide standard to identify and limit the use of such companies.
Timeline and Legislative Process
The European Commission published the draft directive on December 22, 2021. The European Parliament proposed amendments in December 2022, though these were not binding. Initially, the directive was intended to be adopted in 2023 and enforced starting January 1, 2024, with retrospective data required for 2022 and 2023.
Gateway Test and Risk Indicators
ATAD 3 introduced a “gateway test” based on three main indicators to identify high-risk entities:
- More than 75% of the company’s income is derived from dividends, interest, royalties, financial leasing, real estate, insurance, banking, or other financial activities.
- Over 60% of the company’s assets (movable or immovable) are located outside its country of residence, or more than 60% of its income is earned from abroad.
- In the past two years, the company outsourced day-to-day management and key decision-making.
Entities meeting these thresholds were obliged to report detailed information proving their economic substance. Exceptions were made for publicly listed companies, regulated financial firms, and companies with at least five full-time employees and physical presence.
Substance Requirements
High-risk companies had to report:
- – Business premises in their country of residence;
- – Active local bank account;
- – Resident directors and qualified staff.
Non-compliance could lead to denial of tax residency certificates and ineligibility for tax treaty benefits.
Penalties and Appeals
Penalties for non-compliance could reach at least 5% of turnover. The European Parliament later proposed lower fines: 2% for failure to report, 4% for false reporting. Entities could appeal their shell status by providing commercial justification and proof of genuine activity in their jurisdiction.
Final Status – July 2025
Despite its ambitious goals, ATAD 3 was formally dropped by the EU Council (ECOFIN) on June 18, 2025. The directive was never finalized due to disagreements among member states and concerns about overlaps with the DAC6 framework and administrative burden on businesses.
Instead of introducing a separate directive, EU countries are expected to strengthen existing instruments like DAC6 and domestic anti-abuse rules. While ATAD 3 will not come into effect, its core principles—economic substance, transparency, and anti-avoidance—remain central to EU tax policy.
