International tax reform of multinational enterprises: The European Union's contribution


published on 29 June 2022 | reading time approx. 8 minutes


In the context of the Base Erosion and Profit Shifting (“BEPS”) project regarding the tax chal­lenges of the digital economy, the OECD has engaged works to reform the international tax­ation of multinational enterprises (“MNE”) through a two-pillar solution (Pillar 1 and Pillar 2). In parallel to the OECD’s BEPS project, the European Union (“EU”) launched initiatives to reform the international taxation at the EU level. The European Commission proposed directives on 21 March 2018 on the temporary introduction of a tax on digital services and on the modification of the rules on corporate taxation at EU level in order to adapt them to digital firms. Nevertheless, these proposals were not adopted, due to a lack of consensus between EU Member States.



The European Commission expressed its willingness to renew its efforts when it announced its work plan through a Communication of 18 May 2021 on Business Taxation for the 21st Century. Indeed, the EU reiterated its intention to implement the OECD guidelines laid down in Pillar 2 and, above all, its willingness to go beyond the OECD's efforts by tackling actively the misuse of shell entities for tax purposes.
In this context, the European Commission issued two proposals for directives on 22 December 2021:


I. Proposal for a directive on ensuring a global minimum level of taxation for multi-national groups in the Union (Pillar 2 transposition)

One of the main measures of Pillar 2 is to introduce a minimum tax rate of 15 per cent. This measure is based on the application of the Global anti-Erosion Rules (hereinafter “GloBE”) including:

  • An income inclusion rule (“IIR”) which allows the residence State of the ultimate parent entity (“UPE”) to levy an additional tax equal to the difference between the minimum tax rate (15 per cent) and the effective tax rate on the profits of its subsidiaries (or “Constituent Entity”);
  • A subsidiary rule related to the undertaxed profits (“UTPR”) which denies the deduction or requires an equivalent adjustment where the income of a constituent entity is taxed below the minimum tax rate of 15 per ceent and is not covered by the IIR at the UPE level.


The multinational enterprises (“MNE”) affected are those with a consolidated turnover of more than 750 million euros.
Pillar 2 introduces the subject to tax rule (hereinafter “STTR”) which allows the source jurisdictions of an income to levy a withholding tax on a cross-border payment if the taxation of such income in the beneficiary's hands is lower than 9 per cent. The STTR will be implemented through international conventions and, as announced by the European Commission in its Communication dated 18 May 2021, requires an adaptation of the Interest and Royalty Directive, which was the subject of a proposal for amendment in 2011 and was never adopted.
The European Commission was particularly involved in the international tax discussions related to the two-pillar solution. The European Council was largely in favour to find a global solution regarding the MNE's corporate taxation.
The main divergence of the EU Proposal compared to the Pillar 2 approach described by the OECD in its Statement on a two–pillar solution to address the tax challenges arising from the digitalisation of the economy dated 8 October 2021 is the following:

  • Within the EU, any Member State in which the effective tax rate of a member company of an international group is less than 15 per cent may itself remedy this under-taxation by levying an additional national tax (whereas, according to the OECD, it is the sole responsibility of the State where the parent company is located).


Regarding the coordination between the Proposal for a Directive on Pillar 2 and the anti-tax avoidance directive (so called “ATAD”), the European Commission clarified that the IIR and the controlled foreign company (“CFC”) rules should both apply, without modification of the latter.
The implementation of the Proposal for a Directive is scheduled for 31 December 2023 (according to a compromise text published on 12 March 2022), except for the UTPR, which is deferred to financial years beginning after 31 December 2024.
All Member States need to reach unanimous consensus within the EU Council to adopt a directive in the field of taxation. Compromises are currently under negotiation to ensure that all Member States will agree the Proposal for a Directive (e.g., additional delay when the number of UPE in a Member State does not exceed a determined threshold).
The EU's current efforts on international corporate tax reform also include the struggle against the misuse of shell entities for tax purposes.

II. Proposal for a Directive to prevent the misuse of shell entities for tax purposes

According to the Communication from the European Commission dated 18 May 2021, the Proposal for a Directive, so called ATAD 3, was an opportunity to affirm EU's willingness to work further than the OECD framework.
In line with the previous directives related to the struggle against tax avoidance practices (ATAD 1 and ATAD 2), the aim of ATAD 3 is to bring an end to the misuse of shell entities for tax purposes by identifying them and thereby excluding them from the tax benefits granted to companies located within the EU. Companies which are considered as shell entities are those ‘which have minimal or no substantial presence and economic activity’ according to the European Commission.
Companies which fall within the scope of the Proposal for a Directive are companies which are considered to be resident for tax purposes in a Member State and which fulfil the conditions for obtaining a certificate of tax residence in that Member State.
The deadline for transposition of the Proposal for a Directive is 30 June 2023 with entry into force on 1 January 2024.
In order to reach the aim defined by the European Commission, ATAD 3 is based on successive steps which are described below.

Identification of shell companies: A forward and backward movement between the taxpayer and the tax authorities

The Proposal for a Directive is organised in 4 steps thought to be a logical procedure for testing the substance of companies:

Step 1: Testing by the company of its own substance
A company will be considered “at risk” if it cumulatively meets the following characteristics:

  • A passive activity: more than 75 per cent of the company's income within the two preceding tax years is composed of passive income (e.g., interest, royalties, dividends, real estate income);
  • A cross-border activity: more than 60 per cent of the company's income is received/transferred from/to another jurisdiction, or more than 60 per cent of the company's balance sheet is composed of real estate or private assets located abroad with a value of above EUR 1 million.
  • An outsourced activity: in the two preceding tax years, the company outsourced the day-to-day management and decision-making process related to significant functions.


If the three criteria are met, the company will be subject to a reporting obligation accordingly. However, a safety net is foreseen for companies that do not comply with this first step. Indeed, to avoid the reporting obligation as a second step, they can justify that their interposition did not result in a tax advantage for their group. In practice, the company has to prove that its interposition does not result in a tax advantage for its beneficial owner(s) or for the group as a whole, if any. The exemption from the reporting obligation will be effective for a one-year period, however, Member States may extend it up to five years, provided that the situation and circumstances of the organisation are not modified.
Step 2: Subsequent reporting obligation
The company identified as “at risk” will have to include additional information in its annual tax return to allow its Member State to determine whether or not it has a minimum level of substance.
Thus, the following elements have to be included:

  • The ownership or exclusive use of premises by the company in the Member State where the company is established;
  • The holding of at least one active bank account within the EU;
  • The physical presence of directors/managers and employees in the Member State.
  • These substance elements attached to the annual tax returns will have to be properly documented.


Step 3: Decision of the Member State of residence: rebuttable presumption regarding the substance of the company
Based on the information provided, the Member State's tax administration may either:

  • Establish a rebuttable presumption of minimum level of substance if all indicators are met;
  • Establish a rebuttable presumption that the company can be considered as a shell entity if one of the above-mentioned indicators is missing.


Step 4: Possibility granted to the company to reverse the presumption of lack of minimum level of substance
If the company is considered as a shell entity, the latter can provide the following additional information on its activity to rebut the presumption:

  • A document which allows to verify the commercial rationale of the company's set up;
  • Any information with regards to the employees' profiles, including their level of experience, function, responsibilities and position in the organigram;
  • A concrete proof that the decision-making process regarding the activity which generates passive income is located in the Member State where the firm is resident.


The company can also justify that it has the ongoing control of the operations and carries the risks related to the activities which generated passive income.

Once the shell entity is identified, the tax consequences of such a qualification should be considered.

Consequences of the qualification as a shell entity: reconsiderations of the tax residence

First of all, as regards to the consequences in the Member State where the company is established, the latter may choose:

  • To refuse to issue a tax residence certificate to the company to be used outside its jurisdiction;
  • To issue a tax residence certificate stating that the company is a shell entity for tax purposes.

Then, regarding the tax consequences in the other Member States, the latter may:

  • Not apply the international tax treaty provisions for the avoidance of double taxation. They will thus be able to tax the income of the shell entity directly in the shareholders' hands;
  • Not apply the specific exemptions provided by the Parent-Subsidiary Directive and the Interest-Royalty Directive.


The ATAD 3 proposal requires an amendment to the Directive as regards mandatory automatic exchange of information in the field of taxation (so called Directive on administrative cooperation, or “DAC”) to allow Member States to supervise companies qualified as shell entities within the EU.
In addition, in order to enhance the implementation of the obligations under ATAD 3, the Proposal for a Directive provides for:

  • On the one hand, the tax authorities of a Member State will be able to request the tax authorities of another Member State, in the case of suspicions regarding an entity, to conduct an audit in that other Member State. In addition, the competent authorities that carried out the tax audit will have to provide feedback on the result of this audit to the competent authorities of the requesting Member State;
    • On the other hand, penalties are foreseen to sanction the default of reporting if an entity meets all the indicators of lack of substance:
      • One will be at national legislation's discretion;
      • The other will consist in an administrative fine equal to at least 5 per cent of the company's turnover in the relevant tax year.


The European Commission, in its communication dated 18 May 2021, announced its ambition to present the BEFIT (Business in Europe: Framework for Income Taxation), replacing the CCCTB project (Common Consolidated Corporate Tax Base).
The BEFIT initiative will provide the EU with a single body of rules for corporate taxation, based on an apportionment and a common tax base. It aims to reduce red tape and compliance costs, limit opportunities for tax evasion, and support employment, growth as well as investment within the Single Market. More information on the BEFIT initiative is expected in 2023.

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