On December 22, 2021, the EU Commission published a proposal for a new Directive "establishing rules aimed at preventing the abuse of shell companies for harmful tax purposes." This Directive defines the substance requirements for companies within the EU. These must be met in order to be recognized as tax resident in an EU state.

What is it about?

Shell companies are frequently used in practice to achieve tax advantages without there being any economic motives for these companies. With the proposal presented on December 22, 2021, the EU Commission wants to ensure that companies based in the EU with little personnel and functional substance, i.e. shell companies, are identified and can no longer be used for tax optimization. The proposal specifies the substance criteria that must be met by a company in order not to be considered a shell company, i.e. in order to be recognized as tax resident in an EU state.

Who does the new Directive affect?

For the time being, only companies (regardless of their legal form) based in the EU are affected by the Directive. However, the EU Commission will already present a proposal on the treatment of shell companies domiciled outside the EU later this year. The Directive does not provide for any minimum criteria; but rather exempts certain types of companies, in particular (i) certain regulated financial companies (e.g. funds), (ii) companies with transferable securities listed on a regulated market (iii) and companies employing at least five full-time employees who are engaged in the generation of the relevant income (see below) as well as (iv) companies with holding activities which have their registered office in the same member state as its shareholder or as the ultimate parent entity (UPE).

From when does the Directive apply?

The Directive is scheduled to enter into force on January 1, 2024. However, the question of whether a company is a shell company will be based on the substance existing in the country of domicile in 2022 and 2023. We therefore recommend that companies with their registered office or group companies in the EU comply with the criteria of the new Directive as early as 2022.

How is it determined if a company is a shell company?

The procedure is carried out in two stages. In a first step, it is established whether the company fulfills three criteria, so-called gateways (gateway test). In simplified terms, the gateways are as follows:

1. More than 75% of the company's income is derived from so-called relevant income. Relevant income includes income from passive income (interests, dividends, royalties, income from disposal of shares, etc.), income from immovable assets or income from other movable assets (other than cash, shares or securities) with a book value exceeding one million euros held for private purposes; and

2. At least 60% of the relevant income is derived from cross-border activities or at least 60% of the assets are invested in real estate or tangible assets outside the country of domicile; and

3. Day-to-day operations and decision-making on key issues are outsourced to third parties.

If all three criteria are met, there is a rebuttable presumption that the company is a company without substance (shell company). In this case, the company concerned must, in principle, provide evidence of its substance each year as part of its tax return. The presumption that the company is a shell company is rebutted if the company cumulatively meets the following three substance criteria:

1. The company has its own offices in the country of domicile or has premises available for exclusive use; and

2. The company has at least one active bank account in the EU; and

3. The company meets at least one of the following two conditions (including subconditions):

a. At least one of the directors of the company

  • Is resident or lives close to the company's headquarters (commuting distance); and
  • Is qualified and empowered to make major business decisions; and
  • Makes active, independent, and regular use of this authority; and
  • Is not an employee of an independent third party company and also does not perform the function of director or a similar function at an independent third party company.

b. The majority of the company's employees are residents of the country of domicile or live within commuting distance of the company's headquarters and are qualified to carry out the activities needed to generate the relevant income

If the aforementioned substance criteria are not met, the company is generally classified as a shell company. However, the Directive explicitly provides for the possibility of a counterstatement. In this case, the company must be able to prove in the specific individual case that it is pursuing an economic (non-tax) purpose, for the achievement of which, for example, no own offices, bank accounts or directors are necessary. Also in the context of a counterstatement, it can be asserted that no tax advantage results from the interposition of the company. The EU member state must then examine whether it wants to maintain the qualification as a shell company despite the counterstatement. Due to the substance criteria clearly stated in the Directive, we assume that a successful counterstatement will only be possible in very few and specific cases.

What are the consequences of classification as a shell company?

The taxation of the company in the state of residence itself remains unchanged. However, if a company is classified as a shell company, the state of residence is obliged either to not issue a residence certificate or to attach a warning to this residence certificate. As a result, the tax exemptions provided for in double taxation agreements (DTAs) or in EU treaties, such as the Parent-Subsidiary Directive, are no longer granted by the other EU member states. In particular, this means that these member states will no longer grant the shell company relief from withholding tax on dividend, interest or royalty payments. In addition, if the owners of the company are resident in an EU member state, that state will assess the relevant income of the company in accordance with the national tax law as if the income had accrued directly to the owners. In this context, any taxes already paid in the country of residence of the company will be credited and DTAs between the source country and the country of residence of the (EU) owners will also remain applicable according to the guidelines. If the owners are resident in a third country, e.g. Switzerland, there will be no direct taxation in the owners' income, as the Directive is not applied by the third countries. In principle, taxation in the third countries will therefore only take place when the funds are distributed to the owners. In our opinion, however, it is highly unlikely that the owners will then be able to claim back or have credited the taxes paid in the residence country of the shell company or in the source country.

In addition, member states may provide for fines of at least 5% of the companies' annual turnover if they do not comply with the provisions of the Directive. Data on companies with little substance, i.e. shell companies and those for which there is a presumption of lack of substance based on the gateway test, will be exchanged among EU states.

What does this mean for companies based in Switzerland?

Companies based outside the EU are not directly affected by the Directive. However, it can be assumed that the EU will issue a directive that relates to third countries before the end of this year. We expect that the substance criteria mentioned in the regulation will also be applied by the EU states in relation to Switzerland in the future. Switzerland's DTAs with other states provide for the residence of a company in the state in which the company has its (statutory) registered office or its management. If these places are different, the company is generally deemed to be resident where the place of actual management of the company is located. Companies domiciled in Switzerland that do not meet the gateway test of the new regulation must be prepared for the fact that their domicile could be questioned by EU member states if financial information on the company is available to these EU member states or if they receive corresponding reports in the future.

What action needs to be taken now?

We recommend that individuals and groups of companies review their structures to ensure that any companies they hold, in particular foreign holding companies or foreign intellectual property exploitation companies, meet the required substance criteria. If this reveals that companies lack substance, a decision must be made as to whether these companies should be provided with additional substance or whether the functions of these companies can be transferred to other companies with sufficient substance. Since the year 2022 is already included in the assessment, the analysis of the participation structure must be started as soon as possible.


The EU cracks down on shell companies that exist solely for the purpose of saving taxes. The EU Directive, which will come into force on January 1, 2024, defines the substance criteria in relatively concrete terms, so that companies already have legal clarity as to whether or not they will be considered a shell company. As the criteria for determining substance are based on the period 2022 and 2023, we recommend that companies with their registered office or group companies in the EU comply with the criteria of the new regulation as early as this year. Since we assume that the substance criteria mentioned in the EU regulation will also be applied by the EU states in relation to Switzerland in the future, we further recommend that companies here also comply with the substance criteria and take the appropriate measures if necessary.