EU Commission proposes a common framework for corporate taxation

Proposal for multinational companies

BEFIT ("Business in Europe: Framework for Income Taxation"), is a new initiative by the European Commission for a harmonized corporate tax base for multinational companies in the EU. The proposed directive aims to support cross-border business activity in the internal market, reduce red tape and tax compliance costs. Following the tabling of the BEFIT proposal, the EU Commission has withdrawn the proposals for a Common Corporate Tax Base (CCTB) and a Common Consolidated Corporate Tax Base (CCCTB).

Harmonized rules for determining the tax base

The new proposal lays down a single set of rules for determining the tax base in the EU. They will be mandatory for large multinational or domestic groups in the EU with annual consolidated revenues exceeding at least 750 million euros in two of the preceding four financial years. Special provisions apply to EU group members of groups headquartered outside the EU.

The starting point for determining the tax base are the annual financial statements under commercial law based on an acceptable accounting standard, being subject to certain adjustments. For BEFIT purposes, these preliminary tax results would be aggregated into a single tax base, with losses automatically set off against cross-border profits. A further advantage would be no withholding tax on intra BEFIT group payments and simplifications with respect to transfer pricing.

For a transitional period, the aggregated tax base is then allocated among the group members according to pre-defined ratios based on the taxable results of the particular group members. This may pave the way for a permanent allocation mechanism that could be based on a formula.

One-Stop-Shop

A One-Stop-Shop in the country of residence of the ultimate parent entity is provided for the filing of the group information return, which would be shared with other Member States where the group operates. In addition, group companies still need to submit individual tax returns with the local tax administrations. They would also remain in charge for tax audits and dispute resolution. 

Simplifications for SMEs operating abroad

The second draft directive ("Head Office Taxation System" - HOT) provides for simplifications for standalone small and medium-sized enterprises (SMEs) with permanent establishments abroad. Under certain conditions, they would calculate their taxes based on the rules of the Member State of their Head Office. This Member State would be in charge for transferring any resulting tax revenue to the countries where the permanent establishments are located.

Furthermore, the BEFIT rules would be optional for smaller businesses with annual combined  revenues of less than EUR 750 million as long as they prepare consolidated financial statements.

Next steps

According to the EU Commission's plans, the BEFIT proposal should come into force in 2028. For the proposal to be adopted, unanimous approval by EU member states is required and intense and lengthy negotiations in Council can be expected. The “Head Office Taxation” System is proposed to come into effect as of 2026.