The EU in the recent years has been relentlessly working on new tools to curb the use of abusive and aggressive tax structures by companies operating across borders.

The EU now has the shell companies in its crosshair, aiming to adopt a directive by the first quarter of 2022. The preparation of said directive has just finished the “Public consultation” phase, during which the EU consulted with the industry on the key issues. STEP took part in this consultation by filling out the questionnaire that the EU has prepared, and also published a paper on the taxation of the shell companies.

BékésPartners is a proud member of STEP, and as such we hereby share the paper on the taxation of shell companies below unaltered.

The preparation of the paper was a collective effort by the whole STEP, and although BékésPartners contributed to its preparation as member, the paper by no means is our own intellectual property.

Should you have any questions regarding the paper, the planned directive or the shell companies in general, do not hesitate to contact our experts below.

dr. Balázs Békés
dr. Balázs Horváth



About Us

STEP is the worldwide professional association for those advising families across generations. We help people understand the issues families face in this area and promote best practice, professional integrity and education to our members.

Today we have over 22,000 members in over 100 countries and over 8,000 members in the UK. Our membership comprises a range of professions, including lawyers, accountants and other specialists. Our members help families plan for their futures: from drafting a will or advising family businesses, guiding international families with cross border interests, and protecting vulnerable family members.

We take a leading role in explaining our members’ views and expertise to governments, tax authorities, regulators and the public. We work with governments and regulatory authorities to examine the likely impact of any proposed policy changes, provide technical advice and support, and respond to consultations.

STEP Response


On 18 May 2021, the European Commission (EC) published the Communication on Business Taxation for the 21st Century (“the communication”) with the stated aim of setting out both a long-term vision to provide a fair and sustainable business environment and EU tax system and a tax agenda for the next two years.

The communication includes plans to prevent tax abuse involving shell companies i.e. companies with no or minimal substantial presence and real economic activity and invites public comments.


The key to the Questionnaire “Fighting the Use of Shell Entities and Arrangements for Tax Purposes” is understanding the concept of “shell entity” and the extent to which shell entities continue to be used in spite of a significant number of measures taken by the EU over recent years.

It is understood that a “shell entity” is in this context an entity that, beyond having a registered office and a local domiciliation agent, has no other substantial presence, does not carry on its core activities in its country of incorporation or residence, and has no commercial rationale other than to avoid tax.

While this appears to be an initiative that builds on the Economic Substance initiative of the OECD and EU in relation to so-called “tax haven” jurisdictions, it should be made clear that the context for this initiative is very different. Each EU country has its own tax regimes and no EU member state can be rightfully described as a “tax haven”. Given the various measures in place to ensure a commercial rationale for a structure, there is already generally a bedrock of substance built into EU structuring arrangements. Thus the “Substance” and “Economic Rationale” are concepts that can only be tested in the context of a particular entity or structure. This appears to have been recognised in the context of the tax haven initiative (arising from BEPS Action 5) where the substance measures apply differently depending on the type of activity being conducted. The central question is whether a degree of definitive guidance along those lines is needed or desirable in an EU context.

In the communication, the EC concedes that there may be valid reasons for the use of shell companies:

While there can be valid reasons for the use of such entities, there is a need for further action to tackle entities and structures created for the main purpose of reducing the tax liability or disguising improper conduct of the group or operations they belong to, without substance and real economic activities in the countries where they are incorporated.

Is there a need for further anti-abuse legislation?

The communication states that “While several actions at EU and international level provide instruments to tackle the use of abusive tax structures, legal entities with no or only minimal substance and economic activity continue to pose a risk of being used for improper purposes, such as aggressive tax planning, tax evasion or money laundering.”

The EU itself states “several actions taken by the EU over recent years provided new powerful instruments to administrations to tackle the abusive (often purely artificial) and aggressive tax structures by taxpayers operating cross border to reduce their tax liability”.

The measures taken to date include:

  • Numerous Directives on Administrative Assistance, including automatic exchange of information in various areas, including the Common Reporting Standard (CRS), Exchange of rulings, and DAC 6
  • The two ATADs
  • Increased focus on transfer pricing principles
  • The Multilateral Instrument, in particular the principal purpose test
  • Rules on deductible payments made to non-cooperative jurisdictions
  • Beneficial ownership registers
  • Withholding taxes for payments to entities registered in zero tax jurisdictions

Changes to the parent subsidiary directive and other directives introducing more extensive anti-abuse rules and the Multilateral Instrument from the OECD which has done the same for tax treaties mean that it should already be difficult to use a shell company for abusive purposes (and indeed also for some non-abusive purposes).

The efficacy of these initiatives remains to be fully tested, in particular in terms of determining whether the significant cost incurred by tax authorities, intermediaries, and taxpayers is justified by the benefit in particular to the EU as a whole. Those tests should be fully carried out before another set of potentially artificial and costly measures are introduced with probably minimal or no additional benefit. If the existing rules work then these new proposals are not required. If they do not work, then they should be scrapped and proposals which do work should be introduced.

While there will still be cases of letterbox entities that have escaped scrutiny, it is likely that these are in the minority and another series of measures, which will no doubt involve more onerous resources and cost, should not be introduced without being sure that there is a clear need and that the cost of the measures required to be taken will be materially outweighed by the benefit. Thus, while the economic substance measures imposed on the tax haven countries may be instructive, the policy objectives and considerations giving rise to them are very different from the current context, as per the introductory comments above.

The EU needs to take account of the international context and the stiff competition from the US and Asia in providing an investor friendly environment. It needs to be aware of the need to operate on a level playing field and to be pragmatic and realistic if it wishes not to damage its competitiveness and ultimately its own economic well-being.


Introducing rules on substance creates artificial situations. It is a hugely subjective area where it is extremely difficult to obtain clarity and certainty which is what businesses want. Another layer of rules complicates the practice of doing business even more.

Provided that an entity has a commercial rationale for its existence and it has commercial activities that should be sufficient – the level of those activities will in turn determine what resources are required for conducting those activities and how those resources are obtained and managed. Substance should not be the single basis for determining whether an entity is abusive or not. The US entity Berkshire Hathaway is at the head of a group with over 300.000 employees but in 2016 the holding company corporate office had 24 employees. Should this be considered too little substance for such a large group? What is reasonable substance for the holding company of a group with 0.01% of that number of employees?

The EU initiative would appear to be building off OECD BEPS Action 5 with an underlying theme appearing that the risk is simply in an EU context that shell entities are used for tax avoidance purposes as they frequently have no or minimal substance and are suitable for providing a home for so-called mobile activities.

BEPS Action 5 deals with preferential / no / nominal tax regimes and the need for mobile activities to be evidenced by economic substance. This focuses primarily on the so-called tax haven countries but also on preferential tax regimes for IP and other activities (e.g. holding company regimes). Within the EU, the IP nexus rules have been introduced by those countries with IP tax regimes and of course the EU member states do not have no or nominal tax regimes. However, it is recognised that there are certain non-IP related activities where preferential tax treatment can be afforded.  Particularly instructive are the following paragraphs from the OECD BEPS Action 5 report on this particular topic:

73. The determination of what constitutes the core activities necessary to earn the income depends on the type of regime. Even where regimes are aimed at a similar type of income there can be a wide variation in the application of different countries’ regimes, so a more detailed consideration of the relevant core activities would need to be undertaken at the time and in the context of a specific regime being considered. However, a brief description of the type of activities that might be required for the different types of preferential regime is set out below.

 86. Holding company regimes can be broadly divided into two categories:

  • those that provide benefits to companies that hold a variety of assets and earn different types of income (e.g. interest, rents, and royalties) and,
  • those that apply only to companies thathold equity participations and earn only dividends and capital gains. In the context of (i) above, to the extent that holding company regimes provide benefits to companies that earn income other than dividends and capital gains, the substantial activity requirement should require qualifying taxpayers to have engaged in the core activities associated with those types of income.

87. Holding companies that fall within category (ii) above and that provide benefits only to dividends and capital gains, however, raise different policy considerations than other preferential regimes in that they primarily focus on alleviating economic double taxation. They therefore may not in fact require much substance in order to exercise their main activity of holding and managing equity participations. These regimes could, however, raise policy concerns that are not directly related to substance. Countries’ concerns about holding company regimes are often related to transparency and their inability to identify the beneficial owner of the dividends. Related concerns include whether holding companies enable the payer and payee to benefit from treaty benefits in circumstances that would not otherwise qualify for benefits and whether holding company regimes are ring-fenced. Some of these concerns may already be addressed in other work or under other existing factors.

A number of examples or “other work” are then set out and it is clear that these have already been covered by EU rules. The report then concludes as follows:

88. Once these other policy considerations have been addressed, there should be less of a concern that these regimes are used for BEPS. Therefore, to the extent that holding company regimes provide benefits only to equity holding companies, the substantial activity factor requires, at a minimum, that the companies receiving benefits from such regimes respect all applicable corporate law filing requirements and have the substance necessary to engage in holding and managing equity participations (for example, by showing that they have both the people and the premises necessary for these activities). This precludes the possibility of letter box and brass plate companies from benefiting from holding company regimes.

Particularly relevant in many EU member States are holding company regimes which are almost equivalent across the Union. A consistent stream of case law from the highest courts of many EU Member States recognizes that the level of substance required for a holding company is different from that of a commercial company.

These are a few examples out of a substantial set of cases: Spanish National High Court, 21 May 2021 SAN 3097/2021 (parent-subsidiary directive applicable in relation to a Luxembourg holding company), Italy, Supreme Court, 9 March 2021 n. 6476 (place of effective management and control of a foreign holding company),  Italy, Supreme Court, 13 February 2014 n. 6995 (distinction between freedom of establishment within the single market and “wholly artificial arrangements”), Italy, Supreme Court, 7 February  2013 n. 2869 (substance of a Luxembourg holding company), France , Supreme Court 19 June 2019 n. 17-20.559 (a holding company does not have to actively manage all its subsidiaries).

In all these cases the substance of holding companies incorporated and resident in an EU member state was determined based on the actual activities of such companies, with a particular emphasis on the place where their management bodies regularly met and made decisions.

What are shell companies used for?

Lack of substance is not necessarily an indication of abuse, just as having substance is no indication that there is no abuse.

One can see that companies with little substance have a non-tax role to play, simply by looking at the very many domestic situations where such companies exist. Examples include:

  • liability issues both between parts of the business and between the management part and the operational part;
  • reporting issues;
  • coordination;
  • splitting operational activities from investments;
  • allowing external investors to participate in parts of the business;
  • exchange rate offsets;
  • historical issues (the result of a takeover or similar where restructuring is simply too expensive);
  • moving funds from one company to another without having to use loans which can lead to non-deducible interest;
  • forming a group for tax purposes.

International reasons include:

  • being able to produce accounts (and tax accounts) in particular currencies, either to avoid non-existent exchange gains or losses or to hedge;
  • the ability to move funds easily from one country to another;
  • exchange controls (who has done business with India?);
  • language;
  • audit requirements;
  • issues with US shareholders;
  • company law aspects which allow for instance certain types of shares;
  • estate planning.

Soft guidance

While the “wholly artificial arrangement” test set by the ECJ is helpful, it probably cannot be taken as a static concept and is likely to evolve and perhaps be diluted.

The risk of that happening may be reduced by there being some additional soft guidance on the shell company concept so as to provide practitioners and taxpayers some practical, if not legally binding, guidance. However, given that the concept of substance needs to be articulated by reference to the particular circumstances of the entity concerned, in particular the nature of its activities, great care would be needed to ensure that any guidance does not prejudice the inherent flexibility of the concept. In essence, the guidance would be to the effect that the core activities of a particular entity be identified (based on its commercial rationale) and that they be carried out in the relevant country. The latter can only be done if the entity has the necessary resources to do that. That need will be determined by the nature of the activities. What is key is that a pre-determined list of physical resources would not be appropriate.

But great care needs to be taken to reach a compromise between the need for legal certainty and for flexibility given the fact that substance is such a relative concept. As described above, any such guidance should also depart from an appropriate definition of “shell” as opposed to the direction the questionnaire appears to take.


If new requirements are imposed on EU taxpayers and tax administrations to tackle the use of shell entities for tax avoidance purposes, this would be unlikely to have significant effect on tax collection, resource allocation and competitiveness. It will however have an effect on the cost of doing business.

One area where further co-ordinated efforts could be helpful (given the measures already in place) would be some considered guidance as to what would be sufficient substance in any given situation to ensure that the entity would not be treated as a “shell”. This would also ensure that the entity would be treated as beneficial owner of its assets and income and be treated as a resident for tax purposes.

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