The shell-company directive was dropped. Nothing about your exposure changed
For three years, European advisers sold preparation for ATAD 3, the Unshell Directive. It is now gone: taken off the Council’s agenda in June 2025 and listed for withdrawal in the Commission’s 2026 work programme. The conclusion being drawn from that is wrong. Substance was never tested by ATAD 3. The directive would have added a reporting layer on top of tests that already existed, still exist, and are already being enforced — including, in Portugal, with recovery.
ATAD 3, and why its death proves nothing
The timeline matters, because a great deal of advisory content is still written as though the directive were imminent, and a second wave is now being written as though its withdrawal were a reprieve. Both are wrong.
After successive redrafts failed to bridge the gap between member states, ECOFIN removed the file from its agenda. The decision was recorded in the ECOFIN report of 18 June 2025. In practice this was the end of the directive as a legislative project.
ECOFIN Report 9960/25The Commission’s 2026 work programme, adopted on 21 October 2025, lists the Unshell proposal among pending proposals it intends to withdraw. Sources differ on whether the formal withdrawal has completed, which is a distinction without a practical difference for anyone planning a structure.
COM(2021) 565 finalOn 24 June 2026 the Commission tabled a recast of the administrative cooperation directive. Commentary expects the anti-shell substance ideas to resurface as reporting hallmarks rather than as a standalone regime — which would mean disclosure obligations rather than a new substantive test.
COM(2026) 308 finalCase law on freedom of establishment, the general EU prohibition of abuse, the anti-abuse rules in the directives, each preferential regime’s own conditions, and national residence rules. None of these were created by ATAD 3 and none were affected by its abandonment.
The point of this pageRead the dates in the right order and the story is simple. ATAD 3 was an attempt to systematise a judgement that is currently made case by case, by tax authorities and courts, using tools that already work. The member states could not agree on the systematisation. The judgement continues to be made.
Which tests would your structure survive?
Tick what is genuinely true today, not what you intend to put in place. Each instrument below reacts to a different combination, because they are asking different questions.
What is actually true of the companyToday, not in the plan
The oldest and most-cited test. A national rule may restrict freedom of establishment only where it targets arrangements whose creation does not reflect economic reality, assessed on objective and verifiable evidence — the Court names real premises, staff and equipment. Incorporating in another member state is not, by itself, evidence of avoidance.
Cadbury Schweppes, Case C-196/04, 12 September 2006.In the Danish cases the Grand Chamber held that a general prohibition of abuse exists in EU law and must be applied by member states, and treated beneficial ownership as an EU-law notion rather than purely an international-tax one. The factual assessment was left to national courts, with conduit companies named as a key consideration.
N Luxembourg 1 and T Danmark, joined cases including C-115/16 and C-116/16, 26 February 2019.The general anti-abuse rule in the anti-tax-avoidance framework, and the equivalent rule in the Parent-Subsidiary Directive, disregard arrangements that are not genuine — meaning not put into place for valid commercial reasons which reflect economic reality. This is the test that a structure built only around a rate fails.
ATAD general anti-abuse rule; Parent-Subsidiary Directive anti-abuse provision.Not an anti-abuse rule at all, which is why it catches people who thought they were safe. Article 2(3) of the Portuguese corporate tax code makes a company resident here if it has either its registered office or its place of effective management in Portugal. The two are alternatives, and residents are taxed on worldwide income.
CIRC Articles 2(3) and 4(1).Portugal’s preferential regimes carry their own substance language. The Madeira free-zone regime treats income and costs as generated in the region only where attributable to activity carried on through an adequate business structure located there. The interior regime requires the activity to be exercised and effective management to sit in the beneficiary area.
EBF Article 36.º-A n.º 17; EBF Article 41.º-B n.º 2.This maps facts to instruments; it does not assess your case. Runs in your browser, nothing is recorded. The mapping is our reading of which facts each test turns on, and reasonable advisers would weight them differently.
In Portugal this is a worked example, not a warning
Most writing about substance is hypothetical. Portugal has an actual case, recently confirmed, with money recovered from companies that believed they were compliant.
When the European Commission approved the Madeira regime, it conditioned the reduced rates on jobs genuinely created in the region and on the reductions applying only to activity effectively and materially carried out there. Those two conditions are the whole substance test, stated in plain terms years before anyone drafted ATAD 3.
It concluded that the regime had not been implemented in line with the conditions approved, and that the aid was accordingly incompatible. Recovery followed, reaching companies that had operated under the regime in good faith for years.
An EU court rejected the annulment action brought by six Brazilian companies against that decision. Twelve days before this page was written, the principle was tested in litigation and held.
A failed substance test does not switch off a benefit going forward. It unwinds benefits already taken, with the amounts repayable. That asymmetry is why substance is a structuring question rather than a compliance one, and why it cannot be fixed in the year somebody asks.
Substance in practice, and the things mistaken for it
No instrument on this page sets a threshold. Each asks whether the facts support what the structure claims about itself, which means the answer scales with the claim.
- People on the payroll doing the work the company says it does
- Premises occupied and used, proportionate to that work
- Decisions taken by people who are there and could have decided otherwise
- A commercial reason for the structure that survives being said out loud
- Money that arrives and stays, rather than passing through on a known path
- Records, contracts and minutes that someone local can explain
- A registered address, however prestigious, with mail forwarded elsewhere
- A local director who has never exercised a decision
- Board minutes signed in the right country by people who flew in to sign them
- A website and a phone number answered abroad
- A bank account opened locally and operated entirely from somewhere else
- Being compliant with filings, which is a different question entirely
The uncomfortable implication is worth stating. A holding company that genuinely only holds participations is assessed against that modest claim and can be defensible with very little. A company claiming to carry on a trading business from a jurisdiction where nobody works is not saved by having filed everything on time. The test is proportionate to the claim, and the claim is yours.
What we cannot tell you
There is no number, in any of the instruments on this page. ATAD 3 would have introduced indicators and presumptions, which is precisely why advisers wanted it and precisely why member states could not agree on it. Anyone quoting you a headcount is quoting a rule that does not exist.
Proportionate to the claim, not to a tableSelection for review is not published and not predictable. What is predictable is that a structure which cannot explain itself will not improve under examination, and that the examination comes years after the decisions it questions.
Plan for being asked, not for not being askedThe recast of administrative cooperation tabled in June 2026 is expected to carry some of the substance ideas as reporting hallmarks. What that means in practice depends on a text that is not final, and we will not speculate about a directive we have not read in its adopted form.
Watch the file, do not plan around a draftThis one is answerable today, without new legislation and without speculation. It is the only part of the question that is fully within your control, and it is the part that determines the outcome of every test above.
Answerable now, by lookingWhat this page is based on
- Cadbury Schweppes, Case C-196/04, 12 September 2006 — wholly artificial arrangements; objective and verifiable evidence including premises, staff and equipment; establishing in another member state does not by itself found a presumption of avoidance.
- The Danish cases, Grand Chamber, 26 February 2019 — N Luxembourg 1 (C-115/16, C-118/16, C-119/16, C-299/16) on the Interest and Royalties Directive and T Danmark (C-116/16, C-117/16) on the Parent-Subsidiary Directive; the general prohibition of abuse in EU law and beneficial ownership as an EU-law notion.
- ATAD general anti-abuse rule and the Parent-Subsidiary Directive anti-abuse provision — arrangements that are not genuine, in the sense of not being put into place for valid commercial reasons reflecting economic reality.
- Unshell Directive, COM(2021) 565 final — removed from the ECOFIN agenda in June 2025 and listed for withdrawal in the Commission’s 2026 work programme adopted on 21 October 2025. Recast of administrative cooperation, COM(2026) 308 final, tabled 24 June 2026.
- CIRC Articles 2(3) and 4(1) — Portuguese corporate residence by registered office or effective management, and worldwide taxation of residents.
- EBF Article 36.º-A n.º 17 — income and costs generated in Madeira only where attributable to activity through an adequate business structure located there. Article 41.º-B n.º 2 — activity exercised and effective management in the beneficiary area.
- European Commission decision of 4 December 2020 on the Madeira regime, and the EU court judgment of 8 October 2026 rejecting the annulment action against it.
On the status of the Unshell file we are relying on reporting from European tax practices and on the Commission’s published work programme, and sources differ on whether the formal withdrawal has completed. We have said so rather than picking the tidier version. The case law and the Portuguese statutory provisions we have read directly.
What people ask after reading that the directive was dropped
Is ATAD 3 still coming?
No. ECOFIN took the file off its agenda in June 2025 after successive redrafts failed to find agreement, and the Commission’s 2026 work programme, adopted in October 2025, lists the proposal among those it intends to withdraw. In June 2026 the Commission tabled a recast of the administrative cooperation directive instead, and commentators expect the substance ideas to reappear as reporting hallmarks rather than as a standalone regime.
So substance does not matter any more?
That is exactly the wrong conclusion, and it is the one being drawn. Substance was never tested by ATAD 3 — the directive would have added a reporting and presumption layer on top of tests that already existed and still exist. Freedom-of-establishment case law, the general anti-abuse rule, the beneficial ownership analysis and every preferential regime’s own conditions are all unchanged.
What does "substance" actually mean in law?
The clearest statement remains Cadbury Schweppes: a wholly artificial arrangement is one whose creation does not reflect economic reality, and the assessment turns on objective, verifiable evidence such as whether the company has real premises, staff and equipment. Establishing a company in another member state is not by itself evidence of avoidance — the Court was explicit about that too.
Does Portugal have its own substance rules?
Several, and they are more specific than the EU framework. Corporate residence turns on registered office or place of effective management under Article 2(3) of the corporate tax code. The Madeira regime requires income and costs to be attributable to activity carried on through an adequate business structure located in the region. The interior regime requires activity and effective management in the beneficiary area.
What happens if a regime is applied without substance?
In Portugal there is a worked example rather than a hypothesis. The European Commission found in December 2020 that the earlier Madeira regime had not been applied in line with the conditions it approved, and recovery followed. On 8 October 2026 an EU court rejected an annulment action brought against that decision by six companies. The cost is repayment of benefits already taken, not merely their loss going forward.
How much substance is enough?
There is no threshold, which is uncomfortable but honest. The tests are proportionate to what the structure claims: a company claiming to carry on a trading activity needs the people and premises to do it, while a holding company claiming only to hold participations is assessed against that narrower claim. The question is always whether the facts support what the structure says about itself.
Have the gap between claim and facts measured
Send us the structure and what it claims to do. You will get a written view on which of the tests above it would currently struggle with, what would close the gap, and whether the benefit it was built for is worth the cost of closing it. Sometimes the honest answer is to unwind the structure rather than to furnish it.