The impact of the draft "Unshell Directive" on Luxembourg-based collective investment undertakings

The (draft) “Unshell Directive” (or ATAD3) seeks to abolish tax-driven structuring by virtue of empty corporate ‘shells’ without economic activity and substance. In particular, this article analyses the Unshell Directive Proposal’s impact on collective investment undertakings.
Undertakings of this kind that are neither widely held nor listed are potentially exposed to the Unshell Directive Proposal’s rules on transparency, on the disregard of the existence of a corporate shell for tax purposes entailing denial of benefits under EU tax directives and double tax conventions, as well as on tax audits. While the Unshell Directive Proposal carves out all UCITS and AIF investment companies, UCITS management companies and AIFMs, a number of additional entities are employed in the context of the given fund that link it to the manager, the assets and the investors. We find that AIF investment companies, general partners of limited partnerships and carry vehicles all benefit from the AIF carve-out as it stands under the initial Commission Proposal for the Unshell Directive. We further argue that, in line with the OECD approach, Special Purpose Vehicles (SPVs) between the fund and its assets benefit from this carve-out since EU fund regulation treats these SPVs as an integral part of the AIF/UCITS. Among the entities between fund and investors, however, only “regulated financial institutions” are to be carved out.
For in-scope SPVs, we see robust grounds for the rebuttal of the shell presumption under Article 9 (2) (a) Unshell Directive Proposal as SPVs between fund and manager, as well as between fund and assets, often serve to protect investors, reduce costs and increase legal certainty. Contrary to this purpose, the rebuttal procedure for these entities de- creases legal certainty in tax matters and enhances tax advisory and legal costs that undermine the efficiency of the European single market.
We further identify at least six different context-dependent legitimate commercial rationales for putting entities between fund and investors. While the objectives of the Unshell Directive Proposal entail a carve-out in this case, the EU legislature is encouraged to enhance legal certainty on the accepted commercial rationales for the use of SPVs.
In summary, the Unshell Directive Proposal prevents private investors’ use of SPVs for “double (close-to-)zero tax structuring” at both entity and investor level. Furthermore, non-AIF and non-UCITS undertakings (e.g. collective debt investment structures and family offices), as well as some AIFs managed by sub-threshold AIFMs, will feel the impact of the Unshell Directive Proposal. Opting-in to a regulated financial institution is one plausibly effective solution in response to the Unshell Directive Proposal. After the introduction in Pt. I, Pt. II provides an overview of the Unshell Directive Proposal’s framework. Thereafter, Pt. III analyses the impact of the Unshell Directive Proposal on the given fund, the fund manager and the SPVs employed in the fund’s context. Meanwhile, Pt. IV outlines policy considerations on how to improve the Unshell Directive Proposal, before Pt. V concludes.