The EU's proposed Unshell Directive (ATAD 3) has been formally discontinued and will not enter into force. In its place, the European Commission has proposed a recast of the Directive on Administrative Cooperation (DAC recast, COM(2026) 308) that incorporates substance-testing elements directly into the EU's exchange-of-information framework. These are proposals, not yet law, and unanimous Council approval – targeted for 2027–2028 – is required before any national implementation obligation arises.
What Changed and When
ECOFIN discontinued the Unshell Directive in June 2025 after years of stalled negotiations over its entity-level substance thresholds and automatic tax consequences. Rather than revive a standalone directive, the Commission shifted the substance-testing logic into the broader administrative-cooperation architecture.
On 24 June 2026, the Commission published two interlinked proposals under its Direct Taxation Omnibus package. The first, COM(2026) 560, amends six existing directives – covering interest and royalties, tax mergers, parent-subsidiary arrangements, ATAD, dispute resolution and FASTER – and introduces an EU-wide R&D allowance alongside tax-neutral treatment for all reorganisations recognised under EU company law. The second, COM(2026) 308, is the DAC recast, which consolidates DAC1 through DAC9 into a single instrument.
Within the DAC recast, the Council would be empowered to set substance criteria for hallmark D2 (arrangements involving opaque offshore structures) by implementing act, meaning the detailed standards for what constitutes sufficient economic substance could be adopted by qualified-majority procedure rather than requiring a fresh legislative cycle requiring unanimity.
Who Is Affected in the European Union
The withdrawal of Unshell and its migration into the DAC recast has practical consequences for a broad range of market participants:
- Multinational groups with holding, financing or IP-holding entities in EU Member States that were designed or reviewed partly in anticipation of Unshell's gateway tests should reassess those structures against the substance criteria that may eventually be set under hallmark D2.
- Groups within Pillar Two scope benefit directly from one change already embedded in the DAC recast proposal: DAC6 mandatory disclosure obligations for arrangements falling within the Pillar Two perimeter would be removed, reducing a compliance layer that generated significant uncertainty.
- Intermediaries – law firms, tax advisers, accountants and financial institutions – would see the DAC6 reporting deadline extended from 30 to 90 days under the recast, easing immediate turnaround pressure on cross-border tax structuring work.
- Companies involved in cross-border reorganisations may benefit from the proposed tax-neutral treatment of all reorganisations recognised under EU company law in COM(2026) 560.
- Investors in funds and structured vehicles should note that the substantive content of any future substance test – thresholds, indicators, consequences – remains to be defined by Council implementing act and is therefore pending.
It is important to stress that none of these changes creates a current legal obligation. Until the proposals are adopted and Member States transpose them, existing national anti-avoidance rules, anti-avoidance rules under ATAD 1 and 2, transfer pricing frameworks and tax treaty provisions remain the operative instruments regulators and tax authorities will apply in audits.
Key Thresholds and Deadlines
The Commission's proposals do not at this stage prescribe specific substance thresholds, penalty amounts or minimum-activity indicators for entities in the EU. Those parameters are reserved for a future Council implementing act on hallmark D2. What the published package does establish is a procedural timetable and structural framework:
- Proposal publication date: 24 June 2026.
- Target adoption window: 2027–2028 (subject to unanimous Council agreement on COM(2026) 560 and COM(2026) 308, and qualified-majority procedure for the substance implementing act).
- DAC6 intermediary reporting deadline, if adopted: extended from 30 to 90 days.
- National transposition and implementation details: pending, to be confirmed after adoption.
Groups currently relying on the absence of Unshell to defer substance reviews should not treat the withdrawal as a clean bill of health. Tax audit activity in several Member States has continued to apply existing general anti-avoidance principles to low-substance structures, independently of whether Unshell would have passed.
Immediate Action Items for International Companies
Given the stage of the legislative process and the continued application of existing EU anti-avoidance architecture, companies with EU-based entities or cross-border intra-EU arrangements should consider the following steps now:
- Map your EU entity footprint against current ATAD 1 and ATAD 2 standards. The Unshell withdrawal does not suspend the general anti-abuse rule, CFC rules or hybrid-mismatch provisions already in force. Any entity that would have failed Unshell's gateway tests is also a candidate for scrutiny under these existing rules.
- Review DAC6 mandatory disclosure obligations with your intermediaries. The proposed removal of disclosure requirements for Pillar Two-scope arrangements, and the extension of the reporting window, are not yet in force. Until adoption, current deadlines and scope apply.
- Assess structures that depend on specific substance indicators – particularly holding, financing and IP-holding entities – in light of the fact that hallmark D2 substance criteria will be defined by Council implementing act. Early modelling of plausible scenarios will position groups to adapt quickly once the criteria are published.
- Consider the implications of proposed tax-neutral reorganisation treatment under COM(2026) 560 for any pending cross-border restructuring. The proposal is not yet law, but it is relevant input for structuring decisions with a 2027 or later effective date.
- Monitor the Council's progress and any ECOFIN working-group signals on the substance implementing act. Because that act can be adopted by qualified majority rather than unanimity, it may move faster than the directive itself once the recast is agreed.
If your group maintains entities in multiple Member States and you are uncertain how current rules interact with the proposed DAC recast, our tax practice is available to discuss your position. Please contact us at info@ferrazwhitmore.com or visit our contacts page.
Interaction With Broader EU Tax Reform
The DAC recast and the Direct Taxation Omnibus sit within a wider legislative moment at the European Commission. The same 24 June 2026 package addressed disputes resolution, withholding-tax relief under FASTER and the R&D allowance – signals that the Commission is attempting a structural consolidation of EU direct-tax instruments rather than piecemeal amendment. For groups undertaking tax risk management reviews, this means a single set of negotiations could reshape several compliance obligations simultaneously.
The CJEU's case law on abuse of EU law, freedom of establishment and the general anti-abuse principle embedded in ATAD continues to develop in parallel and remains binding regardless of the legislative timeline. Groups should not treat pending proposals as a substitute for analysis of current judicial standards.
Practitioners and compliance teams monitoring the EUR-Lex register will find both COM(2026) 560 and COM(2026) 308 available for review. Regulatory developments with financial-sector implications are also tracked by ESMA and EBA to the extent they intersect with fund and banking structures.
For context on how these proposals interact with our earlier analysis, see our alert on the EU Tax Omnibus and DAC Recast proposals.
Considerations for Specific Jurisdictions
Because the proposals require unanimity and subsequent national transposition, the practical impact will vary by Member State. National tax administrations retain discretion over audit priorities, penalty regimes and the pace of implementation. For groups with operations in Central and Eastern Europe, where holding-company and IP-box structures have historically attracted close scrutiny, the transition period between now and any final adoption is a window for proactive review. Our tax structuring practice in Poland can assist with entity-level assessments in that jurisdiction.
Corporate-law considerations – including whether entities satisfy local registered-office, governance and director-presence requirements independently of the tax analysis – will remain relevant input for any substance review. Our corporate law practice works alongside the tax team on multi-jurisdictional mandates of this nature.
Sources
European Commission, European Commission proposes landmark tax simplification package to streamline compliance and boost investment, 24 June 2026. Available at: taxation-customs.ec.europa.eu. Facts last verified: 22 September 2026.
To discuss how these developments affect your group's structure or compliance obligations, please reach out to the Ferraz & Whitmore team at info@ferrazwhitmore.com or through our contacts page.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.