ATAD 3 – a looming EU draft tax directive – a must read if you aren’t yet aware….

ATAD 3, an EU wide anti-tax avoidance directive which is set to be ratified by the European Parliament during the summer of 2023, and is expected to be effective as of early 2024 across all EU member states. It’s a noteworthy piece of legislation that may well make quite an entrance into the Luxembourg funds and corporate holding context.

ATAD 3 aims to tackle anti-tax avoidance measures and will have a particular focus on substance of concerned entities. Tests to determine whether an entity can demonstrate sufficient substance are thought to have potentially seismic shifts in how managers will be required to structure their Luxembourg holding structures in such was as to avoid triggering tax liabilities under these potential new rules. We foresee the out-workings on the Luxembourg labour market being impacted in a several potential ways:

Changes in corporate structures: ATAD 3 could require companies to restructure their operations requiring them to have far greater more substance in Luxembourg. This could involve moving employees from other locations to Luxembourg, or hiring new local employees to meet the substance requirements. This could potentially lead to an increase in demand for skilled professionals in certain sectors and thus likely creating further talent shortages in other existing traditional areas.

Impact on the overall economy: The implementation of ATAD 3 could be both a positive and negative on the overall economy in Luxembourg. Historically greater regulatory or substance pressures have tended to aid Luxembourg’s employment market, however this is a delicate balance and could where percieved draconian measures could in fact damage the competitiveness of the unique dynamics of the Lux market.

Increased demand for tax experts: ATAD 3 introduces new and complex rules to prevent tax avoidance. This will invariably lead to an increased demand for tax advisory. New tax legislation for some is always a good thing.

Overall, the impact of ATAD 3 on the Luxembourg funds and corporate industry is likely to be significant, as many funds operate on a cross-border basis and may be affected by the new rules on hybrid mismatches and interest limitation. However, Luxembourg has a strong reputation as a fund domicile and flexible corporate domicile known for its expertise in tax-efficient structuring. As such, industry is likely to adapt to the new rules and continue to be an attractive destination for managers and investors alike.

Happy to brainstorm this further with anyone that might also be interested in the topic!


First Published Feb 2023 Linkedin – Courtney Charlton