For as long as there have been cross-border structures, there have been entities that exist mainly on paper: a company in a favourable jurisdiction, with a registered address, a nominal director and little else, interposed to capture a treaty benefit or a directive. The European Union’s Unshell proposal, commonly known as ATAD 3, was the most direct attack yet on exactly that kind of entity. It was never adopted: it required unanimity in the Council, and in June 2025 ECOFIN removed it from the legislative agenda, with the stated intention of carrying its substance principles into a future revision of DAC6 rather than a standalone directive. Nothing described below is in force. It is still worth understanding, because the questions it asked are the questions treaty anti-abuse provisions, the principal purpose test and Dutch ruling policy already ask, and a structure built to answer them is unaffected by whether Unshell is ever revived.
What Unshell is trying to do
The purpose was narrow and pointed: to deny the tax advantages of European entities that have no genuine economic substance and exist principally to obtain those advantages. It did not attack structures with real activity, real people and real decision-making. It attacked the shell, the entity whose only function is to hold and to route, staffed by nobody, deciding nothing. The distinction the proposal drew was precisely the distinction between a structure and a pretence.
The gateways and the substance indicators
The proposed mechanism worked in stages. First, gateways identify entities at risk: broadly, those with mostly passive income, significant cross-border activity, and outsourced administration. An entity that passes through those gateways must then report against substance indicators, essentially whether it has its own premises, its own bank account in the Union, and at least one qualified, resident director or a majority of resident, qualified employees genuinely running its activities. An entity that fails these indicators is presumed to be a shell.
The proposal did not ask whether an entity was clever. It asked whether anyone actually worked there, decided there, and could be found there. That is a question a mailbox cannot answer, and it is the question every serious examiner still asks.
The consequences of being a shell
Under the proposal, an entity presumed to be a shell and unable to rebut the presumption would have faced real consequences: it might have been denied the benefits of the tax treaties and the European directives it was interposed to access, other member states may disregard it and tax the income as though it flowed directly to the shareholders, and it may be unable to obtain the certificate of tax residence on which cross-border relief depends. In short, the structure stops doing the one thing it was built to do.
Rebutting the presumption, and the exemptions
The presumption can be rebutted by demonstrating genuine commercial rationale and real substance, and certain entities are carved out, regulated financial undertakings and genuinely active companies among them. The burden would have sat on the taxpayer, and rebutting a presumption with evidence assembled after the fact is always harder than never triggering it. The entities that would have come through Unshell comfortably are the ones that were always real; the ones that would have struggled are the ones that were always thin.
Why this vindicates the substance approach
For a firm whose entire method is building structures with genuine substance, Unshell is not a threat but a confirmation. Everything the directive demands, resident directors who genuinely decide, real premises, a real bank account, real activity, is what we describe in our note on Dutch substance requirements and what we build as standard. The directive simply makes explicit, and enforceable across the Union, the standard that a serious structure met anyway.
What to do now
The sensible response is not to wait for the final text and timing, which have moved more than once, but to look at every existing entity and ask the Unshell questions of it today: does it have its own substance, its own decision-making, its own presence, or is it a shell that has simply not yet been challenged. Structures assembled years ago for a purpose that made sense then frequently fail that test now, and the time to fix a thin entity is before a tax authority applies the presumption, not after. This connects directly to treaty access, which we cover in our note on treaty access and beneficial ownership: the same fragility that fails Unshell also fails the principal purpose test.
Montclare builds and operates European structures with the substance and documentation that these rules require. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. Rules of this kind evolve and their application depends on the facts of each structure. Each engagement is subject to scope and applicable regulation.