Back in 2023, many were wondering what the Draft ATAD III (or “Unshell Directive”) would look like in practice. The answer has now come, and it is a short one: there will be no Unshell Directive. On 20 June 2025, the ECOFIN Council approved a report confirming that work on the proposal is abandoned. Here is what happened, and why substance remains very much on the agenda.
The end of a long road
The proposal was presented by the European Commission on 22 December 2021 and endorsed by the European Parliament in its non-binding opinion of January 2023, but it never secured the unanimity required within the Council. Member States could not agree on key aspects of the text, from the gateways to the consequences attached to the shell qualification. The 1 January 2024 application date set in the original proposal therefore never materialised.
The final blow came from the EU’s own simplification agenda. During the discussions, the proposal was found to overlap with DAC6, the mandatory disclosure regime for cross-border arrangements, with a risk of double reporting and additional compliance work. Member States concluded that the objectives of the Unshell Directive could rather be pursued through targeted amendments to DAC6.
Substance still matters
It would be tempting to see this as a green light for letterbox companies. It is not. The abandonment of the directive removes a new layer of reporting, but it does not change the existing rules under which substance is tested every day:
- the principal purpose test introduced in many double tax treaties through the OECD Multilateral Instrument;
- the anti-abuse provisions of the Parent-Subsidiary Directive and the general anti-abuse rule of Luxembourg tax law;
- the case law of the Court of Justice of the European Union on beneficial ownership and abuse, which foreign tax authorities increasingly rely on when reviewing payments to Luxembourg entities;
- the information exchanged between tax authorities under DAC6 and the other DAC directives.
In practice, the questions that the Unshell gateways were meant to ask remain the questions that tax authorities, banks and investors ask anyway: who takes the decisions, where, with which means, and how this is documented. A board that meets in Luxembourg, with qualified local directors, proper minutes, premises suited to its activity and an active bank account remains the best protection against having treaty or directive benefits denied.
A welcome pause, not a free pass
The abandonment of the proposal is good news in that it avoids an additional and largely redundant reporting burden. However, the topic could come back through the revision of DAC6, and the definitions used will be worth watching closely. Luxembourg entities are therefore encouraged to keep their substance under review rather than put it on hold.
We are here to help
JW Partner provides domiciliation, independent directors and corporate secretarial services designed to support genuine substance in Luxembourg, alongside its tax advisory services. Should you wish to assess the substance of your structure, please reach out to us at contact@jwpartner.lu: we would be delighted to assist.