Recent developments on the Unshell Directive.

Background and objectives
The Unshell Directive, formally known as the proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes, was introduced by the European Commission on 22 December 2021. Its primary aim is to combat tax avoidance and evasion by targeting entities within the EU that lack substantial economic activity, thereby preventing such entities from benefiting from tax advantages. The Directive also seeks to enhance the proper functioning of the internal market by ensuring that only companies with genuine economic substance can access tax benefits.

Legislative progress and current status
Since its introduction, the Unshell Directive has undergone extensive technical analysis and negotiation within the Council, with discussions focusing on several key aspects, including:

• the definition and scope of shell entities
• minimum substance requirements
• reporting obligations and hallmarks
• the relationship with existing anti-abuse legislation and the Directive on Administrative Cooperation (DAC)
• mechanisms for rebuttal of presumption and reduction of administrative burden

In June 2024, a revised approach was presented, followed by concrete drafting suggestions in November 2024, particularly addressing scope, hallmarks, reporting, and information exchange. However, concerns were raised regarding potential overlaps with DAC 6, which could result in duplicative reporting requirements and increased administrative complexity for both businesses and tax authorities.

By May 2025, it became apparent that many Member States believed the objectives of the Unshell Directive could be achieved through clarifications or amendments to DAC 6, rather than through a separate legislative instrument. There was broad support for prioritising tax simplification and avoiding additional compliance burdens. As a result, the Council decided not to continue with the analysis of the Unshell proposal in its current form, aligning with the EU’s broader tax decluttering and simplification agenda.

Key legal and regulatory implications

• No immediate new directive: The Unshell Directive is not expected to progress further in its current form. Businesses should not anticipate imminent new EU-level obligations specifically arising from this proposal.
• Focus on existing frameworks: The Council’s preference is to address concerns about shell entities through amendments or clarifications to existing frameworks, particularly DAC 6, which already targets aggressive tax planning and mandates the reporting of certain cross-border arrangements.
• Administrative burden: The decision reflects a strong policy trend towards reducing administrative and compliance burdens for both taxpayers and tax authorities, in line with the EU’s competitiveness and simplification agenda.

Enforcement trends and guidance
While the Unshell Directive itself is not advancing, the underlying policy objective—preventing the misuse of shell entities—remains a priority at both EU and Member State levels. Businesses should expect continued scrutiny of cross-border structures and substance requirements under existing anti-abuse rules and reporting obligations, especially those set out in DAC 6. The Council has emphasised that any future solutions should avoid duplicative reporting and excessive administrative costs.

Practical considerations for businesses

• Review substance requirements: Companies should continue to ensure that their EU entities have sufficient economic substance and can demonstrate genuine business activity, as required under current anti-abuse and reporting regimes.
• Monitor DAC 6 developments: Further amendments or clarifications to DAC 6 may be proposed to address the issues originally targeted by the Unshell Directive. Businesses should stay alert to any such changes and assess their impact on compliance processes.
• Stay informed on national measures: Some Member States may continue to introduce or enforce domestic anti-abuse measures targeting shell entities, even in the absence of new EU legislation.

Conclusion
The Unshell Directive, as initially proposed, is not moving forward, with the Council opting to address its objectives through existing legislative instruments and a broader simplification agenda. Businesses should remain vigilant regarding substance requirements and reporting obligations under current EU and national frameworks, and monitor for further developments, particularly in relation to DAC 6.

For further information or tailored advice on how these developments may affect your organisation, please contact the Tax team or your usual ALG contact.

Date published: 3 July 2025