With the proposed Unshell Directive (ATAD 3) formally discontinued by ECOFIN in June 2025 and now being withdrawn, the headline risk for holding and financing structures has not disappeared – it has dispersed across a broader and in some respects less predictable framework of existing anti-avoidance rules, EU Directives, and forthcoming legislative proposals. Companies relying on intermediate entities for dividend flows, interest payments, or royalty streams must now navigate the general anti-abuse rule under ATAD, the beneficial ownership doctrine confirmed by the CJEU, and a shifting layer of reporting obligations, without the clarity that a single codified substance test would have provided. Understanding precisely which instruments apply, and how they interact, is essential before any group restructuring or financing arrangement is finalised.
The Unshell Directive: What Was Proposed, What Was Withdrawn, and Why It Still Matters
ATAD 3 – commonly called the Unshell Directive – was the European Commission's attempt to introduce a harmonised, EU-wide minimum substance test for entities that receive passive income from cross-border sources. Had it entered into force, it would have imposed a gateway test, a substance assessment, and a consequences regime that could strip an entity of treaty and directive benefits for the purposes of EU-source income. ECOFIN declined to adopt the proposal, and the Commission is now formally withdrawing it.
The practical consequence of withdrawal is not that substance scrutiny disappears. It is that the burden of demonstrating genuine substance shifts entirely onto the pre-existing, less harmonised, and more interpretively contested body of instruments: the Anti-Tax Avoidance Directives, the Parent-Subsidiary Directive, the Interest and Royalties Directive, and the case law of the Court of Justice of the European Union. For tax risk management purposes, this outcome is arguably more demanding than a codified rule would have been, because the applicable standards are not uniform across Member States and the analytical framework must be reconstructed case by case.
The Existing Anti-Avoidance Architecture: What Fills the Gap
The primary instruments now governing substance assessments for holding and financing entities are the following.
The Anti-Tax Avoidance Directives
Directive (EU) 2016/1164 (ATAD 1) introduced, among other measures, an interest limitation rule, exit taxation provisions, a general anti-abuse rule (GAAR), and controlled foreign company (CFC) rules applicable across all Member States. Directive (EU) 2017/952 extended the hybrid mismatch rules. The GAAR in Article 6 of ATAD 1 requires Member States to disregard arrangements that are not genuine – meaning not put in place for valid commercial reasons that reflect economic reality – and that have been undertaken with the main purpose of obtaining a tax advantage that defeats the object or purpose of applicable law.
This standard is broad. It does not specify a minimum number of employees, a minimum wage bill, a required type of premises, or a quantitative income test. That flexibility allows Member States to apply it to a wide range of factual patterns, but it also means that the standard against which a structure is tested is ultimately a national-law characterisation of the ATAD minimum, subject to local administrative practice and judicial interpretation. Tax structuring analysis must therefore be jurisdiction-specific.
The CJEU Beneficial Ownership Doctrine
The most significant judicial development remains the Grand Chamber judgments of 26 February 2019 in joined cases C-116/16 and C-117/16 (the Danish beneficial ownership cases concerning dividends) and the related interest cases decided on the same date. The Court held that the benefits of EU Directives – specifically the Parent-Subsidiary Directive and the Interest and Royalties Directive – may be denied to abusive arrangements even in the absence of a specific domestic anti-abuse provision, because the prohibition of abuse is a general principle of EU law. The practical result is that a conduit entity receiving dividends or interest from an EU source, which then passes those flows on to a non-EU ultimate recipient, may be denied directive protection regardless of whether the Member State of the paying entity has transposed a GAAR in terms that appear on their face to apply.
The Court's approach focuses on whether the arrangement is genuine, whether the intermediate entity has effective decision-making capacity, whether the flows pass through without meaningful retention or risk, and whether the structure was put in place with the principal objective of accessing directive benefits. These are qualitative, fact-intensive enquiries. They reward early and thorough documentation of economic rationale, staffing, governance and treasury function.
The Parent-Subsidiary Directive GAAR: C-228/24 Nordcurrent Group
The CJEU's judgment of 3 April 2025 in C-228/24 (Nordcurrent Group) extended and clarified the reach of the Parent-Subsidiary Directive's own anti-abuse provision. The Court confirmed that this GAAR applies not only to the exemption provided directly by the Directive, but also to national participation exemption regimes that implement or extend the Directive's framework. Abuse, in the Court's formulation, requires both an objective element – the arrangement is non-genuine – and a subjective element – the main purpose is to obtain a tax advantage. This dual-element test is important because it means a structure with genuine commercial purposes and substance may still be analysed, but should survive scrutiny if the documentation supports both elements.
For groups holding EU subsidiaries through intermediate holding companies, this judgment has direct operational significance. A participation exemption available under national law cannot be treated as ring-fenced from EU anti-abuse analysis. Tax audit risk at the level of the paying entity's jurisdiction now extends to the nature and purpose of the recipient entity, not merely its residence.
If your group's holding or financing structure has not been reviewed against the post-Nordcurrent analytical framework, we encourage you to open a discussion early. Please contact us at info@ferrazwhitmore.com or visit our contacts page to arrange a preliminary consultation.
The Legislative Horizon: Commission Proposals of June 2026
On 24 June 2026, the European Commission published two significant legislative proposals that will shape the medium-term environment for substance analysis and reporting obligations.
The Direct Taxation Omnibus (COM(2026) 560)
This proposal amends six existing Directives: the Interest and Royalties Directive, the Tax Merger Directive, the Parent-Subsidiary Directive, the Anti-Tax Avoidance Directive, the Dispute Resolution Directive, and the FASTER Directive. The announced measures include an EU-wide research and development allowance and tax-neutral treatment for all reorganisations that are recognised under EU company law. For groups engaged in tax structuring involving mergers, demergers, or migrations of holding entities between Member States, the reorganisation provision could reduce friction in restructuring exercises, though the precise scope and conditions of the proposal remain subject to negotiation.
Unanimity in the Council is required for adoption. The Commission's target timeline is 2027–2028. Until then, the existing Directives remain in force in their current form, and groups should plan on the basis of existing law.
The DAC Recast (COM(2026) 308)
The proposed recast of the Directive on Administrative Cooperation consolidates DAC 1 through DAC 9 into a single instrument. Key adjustments include the removal of DAC 6 arrangement reporting obligations for groups that fall within the scope of Pillar Two, and an extension of the intermediary reporting deadline from 30 to 90 days. Importantly for substance analysis, the proposal would empower the Council to set substance criteria for hallmark D2 by implementing act – meaning that the content of that substance test is not yet determined and will be established through a separate, delegated process if the recast is adopted.
The removal of DAC 6 reporting for Pillar Two-scope groups reduces one layer of compliance burden for larger multinationals. However, it does not reduce the underlying substance risk for structures that fall below Pillar Two thresholds or operate in jurisdictions where Pillar Two has not been fully implemented. For those groups, the existing hallmark framework continues to apply, and the intermediary – whether internal tax counsel or external adviser – remains responsible for the reporting assessment.
Practical Substance Indicators: What Tax Authorities Are Examining
Across jurisdictions and instruments, the following categories of factual evidence consistently arise in tax audit and litigation contexts when the substance of a holding or financing entity is challenged. These are not statutory checklists under current EU law – that was precisely what Unshell would have provided – but they reflect the analytical framework applied by competent authorities and courts.
- Decision-making and governance: Are board members resident in the entity's jurisdiction? Do they have the qualifications and authority to make decisions on the entity's principal functions – holding investments, managing loans, approving dividends? Are board meetings substantive rather than formal? Are minutes contemporaneous and detailed?
- Staffing and premises: Does the entity employ personnel, or engage qualified service providers, capable of performing its stated functions? Is there a physical office with appropriate facilities? Are staff costs proportionate to the entity's activity and income?
- Treasury and risk management: Does the entity bear economic risk in relation to the assets it holds or the loans it extends? Does it have access to its own funds? Is it exposed to fluctuations in value, or does it immediately pass risk upstream or downstream?
- Income and expenditure: Is a significant portion of income retained rather than immediately distributed? Does the entity incur costs associated with managing its portfolio, overseeing subsidiaries, or monitoring credit risk?
- Commercial rationale: Can the group articulate reasons for the interposition of the entity that are independent of tax considerations – for example, regulatory requirements, investor expectations, ring-fencing of liability, or local market access?
None of these indicators is determinative in isolation, and the weight assigned to each will vary by Member State and by the specific instrument being applied. Transfer pricing documentation, where the entity participates in intra-group financing arrangements, adds a further dimension: the arm's length principle must be demonstrated alongside the substance analysis, and both exercises benefit from a unified factual record.
Cross-Border Implications: Treaty Access and Non-EU Structures
The analysis above focuses on intra-EU flows governed by EU Directives. Where flows involve third-country entities – whether as ultimate parents, intermediate holders, or ultimate recipients – the applicable framework shifts to bilateral tax treaties and the domestic law of the source state, alongside any applicable EU rules at the payer level.
The beneficial ownership standard under the OECD Model Convention, which most EU Member States have incorporated into their treaty networks, raises questions that parallel those arising under the CJEU's approach but are not identical to them. Treaty-based beneficial ownership analysis is conducted by source-state tax authorities applying their domestic interpretation of a treaty concept, without direct reference to EU anti-abuse principles. Groups that position non-EU entities in their holding chains should expect that the substance expectations applied to those entities will be at least as demanding as those applied to EU intermediate companies, and in some cases more so, because directive protections are not available as an alternative basis for relief.
For groups considering the use of EU-resident holding companies to access the treaty network – including structures involving jurisdictions with extensive treaty networks and participation exemptions – a careful review of the post-Nordcurrent framework is essential before implementation. The interaction between national participation exemption rules, treaty entitlement, and EU anti-abuse principles now creates a layered risk environment that requires coordinated advice across the jurisdictions involved.
Our team advises on cross-border tax structuring across multiple EU jurisdictions. For matters involving Scandinavian holding chains or financing structures, further analysis of how these issues arise in that context is available in our Sweden tax structuring service overview.
Strategic Recommendations for Holding and Financing Structures
Given the framework described above, groups maintaining or establishing holding and financing entities within or connected to the EU should consider the following strategic priorities.
Conduct a Substance Audit Before a Tax Authority Does
A proactive internal review of each intermediate entity – assessing governance, staffing, premises, economic risk-bearing, and commercial rationale – is significantly less costly than responding to a tax authority enquiry or defending a position in litigation. The review should produce a documented record that can be disclosed if necessary and that demonstrates the analysis was conducted in good faith at a meaningful point in time.
Align Transfer Pricing and Substance Documentation
Where an entity performs financing functions, transfer pricing documentation must reflect the entity's actual risk profile. If the documentation describes an entity bearing credit risk, market risk, and liquidity risk, but the substance analysis reveals that those risks are in fact managed from another jurisdiction, there is an inconsistency that will be apparent to any competent auditor. Aligning the two exercises reduces exposure and strengthens the overall position.
Monitor the DAC Recast and Omnibus Negotiations
The proposals published on 24 June 2026 are at an early stage of the legislative process. Unanimity is required, and Member States have divergent interests. However, the direction of travel – consolidation of reporting obligations, extension of substance analysis to participation exemptions, potential Council-level substance criteria for DAC hallmarks – is relevant to medium-term planning. Groups should track the negotiations and assess how proposed changes would affect their existing structures before adoption.
Review Corporate Law Compliance as a Foundation
Substance analysis is not only a tax exercise. The corporate law requirements applicable to holding and financing entities – directors' duties, capital maintenance rules, disclosure obligations – provide the foundation on which a substance argument is built. A holding company whose directors cannot demonstrate that they genuinely exercised business judgment in the jurisdiction of incorporation will struggle to establish substance for tax purposes regardless of the formal indicators. An overview of corporate law considerations relevant to EU structures is available through our corporate law services page.
Use Treaty and Directive Analysis Together
For intra-EU flows, the interaction between treaty provisions and directive benefits should be mapped explicitly. In some cases, a treaty may provide relief where a directive does not apply (or has been denied), and vice versa. Understanding the full matrix of available protections – and the conditions attached to each – is part of coherent tax risk management. Participation exemption thresholds, which affect the availability of directive benefits at the recipient level, are a further variable; a comparison of applicable thresholds across key jurisdictions is available in our participation exemption thresholds guide.
Outlook
The withdrawal of the Unshell Directive removes a specific codified threat but leaves the underlying policy objective intact and distributed across the existing framework. The CJEU's case law – now extended by Nordcurrent Group to national participation exemptions – continues to develop, and Member State tax authorities are applying that case law with increasing confidence. The legislative proposals of June 2026, if adopted, will further consolidate and in some respects sharpen the reporting and substance frameworks, though the timeline remains uncertain.
For groups operating holding and financing structures in or through the EU, the period between now and the anticipated adoption of the 2026 proposals is not a period of reduced risk – it is a period in which the applicable standards are being applied in real audits and litigated in real courts, without the predictability that a harmonised instrument would have provided. Proactive review, disciplined documentation, and coordinated cross-border advice remain the most reliable tools available.
To discuss how these developments may affect your group's holding or financing arrangements, please reach out to our team at info@ferrazwhitmore.com or visit our contacts page to submit an enquiry. We do not make representations about outcomes, but we can help you understand the landscape and develop a well-grounded position.
Sources
- European Commission, 24 June 2026 – Direct Taxation Omnibus and DAC Recast proposals
- Loyens & Loeff – CJEU rules on the application of the GAAR under the PSD to national participation exemptions (C-228/24)
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.