European Commission's Tax Simplification Package And The Future Of The Unshell Substance Tests

The European Commission has adopted its long-anticipated tax simplification package, comprising a direct taxation “Omnibus” Directive and a recast of the Directive on Administrative Cooperation (DAC). 

In an update issued on 24 June, the Commission announced that the package is projected to deliver approximately €7.9bn in compliance cost savings for EU businesses and represents a cornerstone of the Commission's broader competitiveness agenda. 

For private capital managers with holding structures in the EU, the most consequential development may be what the package does not contain: the Unshell Directive.

The Omnibus: streamlining the direct tax framework

The Omnibus Directive tackles several long-standing friction points for investors and corporate groups operating across the single market, setting out a positive direction of travel focused on reducing compliance costs and increasing legal certainty.

Most notably, the Directive abolishes withholding taxes on cross-border payments of dividends, interest, and royalties between EU companies, removing a significant barrier to the free movement of capital. Also, companies may benefit from the participation exemption regardless of the level of participation or the duration of the shareholding. 

It also modernises the Anti-Tax Avoidance Directive (ATAD) interest limitation rules by raising the mandatory de minimis threshold, and excluding low-risk third-party borrowing and market-based financing arrangements from the scope of the limitation rule. 

On Controlled Foreign Company (CFC) rules, the package streamlines the interaction with Pillar Two, removing overlapping requirements. 

For restructurings, the Tax Merger Directive will be expanded to cover all corporate reorganisations recognised under EU company law, allowing these to take place on a tax-neutral basis.

The Unshell Directive and its withdrawal

The original Unshell Directive, proposed in December 2021 and sometimes referred to as “ATAD 3,” sought to establish EU-wide substance requirements for shell entities. Those failing to demonstrate minimum substance indicators would be denied tax benefits under EU directives and bilateral treaties. 

The proposal never achieved consensus, and in June 2025, ECOFIN formally discontinued work on Unshell, concluding that the directive's objectives could be achieved through clarifications or amendments to the DAC6 mandatory disclosure hallmarks rather than through a parallel framework. The Commission's 2026 Work Programme, published in October 2025, subsequently confirmed that the proposal would be withdrawn. 

How substance is being taken forward

The expectation had been that substance-related principles from Unshell would be incorporated as new hallmarks under DAC6, folded into the broader DAC recast. The Commission's own DAC evaluation report flagged this possibility and noted that it would explore the feasibility of adding new hallmarks relating to the substance criteria outlined in the Unshell proposal. However, concerns that embedding Unshell-style substance hallmarks into DAC6 would delay the wider simplification agenda appear to have led the Commission to postpone this integration. As a result, the substance requirements have not been incorporated into the DAC recast as adopted on 24 June. 

This should not be taken as a signal that substance has fallen off the regulatory agenda. While the standalone directive has been withdrawn and the substance hallmarks deferred, the underlying policy objective has not been abandoned. It will be important to monitor whether - and in what form - substance hallmarks resurface in future amendments to the DAC framework.

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