During the ECOFIN meeting of 20 June 2025, the EU Council approved its bi-annual report on the evolution of tax initiatives and officialised the discontinuation of its work on the Unshell Proposal.
Background
On 22 December 2021, the European Commission released a legislative proposal for a Council Directive (the “Unshell Proposal”) laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU on administrative cooperation in the field of taxation (“DAC”).
The proposal aimed at identifying shell entities through a series of tests (broadly targeting entities receiving passing income in a cross-border context with a low level of economic substance), denying certain tax benefits to these shell entities and ensuring that EU Member States exchange relevant information under the DAC.
The Unshell Proposal remained under discussion amongst EU Member States without reaching a consensus to move the legislative process forward. By the end of 2023 Member States’ representatives at the ECOFIN started contemplating a two-step approach to move forward the proposal. First, ensuring an exchange of information and secondly, at a later stage, agreeing on the tax consequences attached to the shell qualification (see our January 2024 Newsletter for more details).
Unshell proposal victim of the decluttering initiative
According to the ECOFIN report, during discussions held in 2024, the objective of the Unshell Proposal was unanimously shared but the technical aspects and redundancy with DAC 6 were amongst the contentious points. DAC 6 provides for the exchange of information between EU Member States of potentially aggressive cross-border tax arrangements to be identified through a series of hallmarks.
While the proposal was still in discussion, the EU Council approved in March 2025 its conclusions on setting a tax decluttering and simplification agenda to contribute to the EU’s competitiveness. These conclusions rely on four principles:
- reduce reporting, administrative and compliance burdens for member states’ administrations and taxpayers;
- eliminate outdated and overlapping tax rules;
- increase the clarity of tax legislation; and
- streamlining and improving the application of tax rules, procedures and reporting requirements.
The Unshell Proposal was identified as a matter to be reconsidered in light of these principles and the discussions were held on 27 May 2025 between representatives of the EU Member States with following conclusions:
- the objectives of the Unshell Proposal converge with those of DAC 6;
- the information to be exchanged under the Unshell Proposal overlaps with those of DAC 6 and both proceeding through separate systems would lead to the same information being received twice;
- simply clarifying and amending the DAC 6 hallmarks could reach the objectives intended under the Unshell Proposal.
On this basis, the EU Council decided to no longer analyse the Unshell Proposal and focus on an update of the DAC. The new proposal should take into account the decluttering principles and not create “undue administrative” burden.
In the meantime, the EU Commission is undertaking a review of the DAC and the anti-tax avoidance directive (“ATAD”) with its report to the EU Council still expected in 2025. These reviews have been integrated within the simplification agenda and involve merging or coordinating overlapping rules, reducing fragmentation in rules while maintaining the “EU tax acquis”. New initiatives are then to be presented in 2026.
Conclusion
The Unshell Proposal attracted a lot of criticism since inception from Member States and other stakeholders notably due to its one size fits all approach to economic substance and lack of clear tax consequences.
Integration with DAC 6 hints at an exchange of information only approach with potential tax consequences left in the hands of individuals Member States but evolutions should still be monitored in the context of the ATAD review.
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