This proposal replaces all previous proposals regarding a Common (Consolidated) Corporate Tax Base (C(C)CTB). These previous proposals have now all been withdrawn.
With this proposed set of rules, the EC aims to contribute to a reduction of compliance costs for large enterprises operating in multiple EU member states, and at the same time to help national tax authorities determine the taxes they are owed.
Along with the proposed BEFIT directive, the European Commission also published proposals for harmonised transfer pricing rules within the EU and a head office tax system for micro, small and medium-sized enterprises (SMEs).
What follows, assumes the proposal is accepted in its current form. That would require unanimous approval by the council. Given the prior discussions regarding the now withdrawn C(C)CTB proposals however, that may prove challenging.
Scope
Groups who are subject to the OECD Pillar II rules (i.e., operating within the EU, either headquartered in the EU or in a third country and with an annual combined revenue of at least 750.000.000 EUR) will have to comply with the new rules. The exception would be non-EU headquartered groups whose combined revenue of their EU subsidiaries and permanent establishments (PE) does not exceed either 5% of the total group revenue or 50.000.000 EUR in two of the last four years.
Groups who do not meet these thresholds may nonetheless choose to apply the BEFIT rules. In that case they will have to prepare consolidated financial statements and the BEFIT rules will apply to the entire BEFIT group.
In any case, the new BEFIT rules will only apply to companies that are tax resident in an EU member state and permanent establishments located in EU member states, regardless of whether the PE belongs to a company that is tax resident within the EU. A BEFIT group consists of two or more companies or PEs to which the rules apply and that meet an ownership threshold of 75%, directly or indirectly.
Rules to determine the tax base under BEFIT
1. Individual taxable basis of each individual group member subject to BEFIT
Each individual member subject to BEFIT has to start by preparing their individual financial accounts. These accounts must be prepared according to the accounting standard applied by either the ultimate parent entity, or the so called “filing entity” if the group is not headquartered in the EU. Moreover, the applied accounting standard must be compliant with EU law (e.g., member state GAAP or IFRS).
Subsequently, the net result of the so prepared financial accounts has to be adjusted. Adjustments concern taxable income (e.g., financial assets held for trading, etc.), excluded income (e.g., certain qualifying dividends, capital gains or losses on shares, etc.), non-deductible-expenses that need to be added back to the result, depreciation rules and other specific adjustments (e.g., with regard to entities joining or leaving the group, etc.).
Moreover, certain particular rules have been outlined with respect to certain industries (e.g., the shipping industry, the aviation sector, etc.).
2. Aggregation and allocation of the results
The results of the abovementioned exercise by each group member are subsequently added together with the exception of certain types of income and losses (e.g., from extractive industries).
Then the results (positive and negative) of transactions between the group members are removed as well with the exception of those relating to items that are not aggregated to begin with.
Subsequently, during a first transitional phase of seven years, the result of the aggregation exercise is allocated to each group member based on their share in the taxable results during the previous three years. Meanwhile the EC will review the results of this approach and may at a later stage propose a permanent approach of “formulary apportionment”.
3. Local adjustments
Finally, each group member will need and be allowed to make local adjustments to the part of the group result that has been allocated to them respectively, as long as those adjustments are compliant with the Pillar II rules.
Therefore, member states will be allowed to grant further deductions and tax incentives. They will also need to provide cross-border relief for both taxable profit allocated to other member states as well as cross-border losses and provided the beneficial owner is a BEFIT group member, no withholding tax on interest and royalty payments is allowed.
Moreover, all be it subject to anti-abuse rules, transfer pricing compliance is subject to a simplified approach with regards to transactions between BEFIT group members, as are business reorganizations with BEFIT groups.
Finally, the BEFIT proposal contains a detailed set of rules that should be applied to individual entities joining or leaving a BEFIT group during the year.
Procedure and administration
Each BEFIT group will need to submit a BEFIT information return annually. That return needs to be submitted by the group “filing entity” (in principle the ultimate parent entity) within four months after the end of the fiscal year. This return needs to be submitted with the domestic tax authorities of the filing entity as a one-stop-shop for the whole BEFIT group. In turn, they will share the contents of the return with all EU member state tax authorities in which the BEFIT group has members.
The BEFIT information return will have to contain:
- The identity of the filing entity and the other BEFIT group members;
- The overall corporate structure of the BEFIT group including ownership interest;
- The fiscal year to which the return relates
- Information and computation of:
- The outcome of the preliminary tax result of each BEFIT group member;
- The BEFIT tax base;
- The allocated part of each BEFIT group member;
- Information about the ‘baseline allocation percentage’ as computed in accordance with the directive.
The individual BEFIT group members would still need to submit their individual corporate income tax returns with their domestic tax authorities (and members who are nationals of the same EU member state may choose to submit one combined corporate tax return if domestic legislation provides for that possibility).
The respective domestic tax authorities will be the competent authorities for the further procedural handling of the domestic corporate income tax returns of the respective members who are tax resident in their jurisdiction, including the audits of said returns. The domestic authorities of the filing entity however will also have jurisdiction with respect to the BEFIT information return.
Next steps
This proposal is sent over to both the European Parliament (in a consulting capacity) and the European Council. It will be the European Council where this proposal will be assessed and where further negotiations amongst the member states will take place.
Considering its contents (i.e., direct taxation), unanimous acceptance of the final proposal is required for the directive to ultimately be approved and implemented. It may therefore take many years before this, or an amended version of BEFIT is approved.
As BEFIT builds on the OECD/G20 international tax agreement on a global minimum tax and the EU Pillar II Directive, the Commission is hopeful that the BEFIT proposal would be adopted by the European Council. If so, member states would have to transpose the BEFIT directive into their national legislation by 1 January 2028 with the directive applying as from 1 July 2028.
Should you like to learn more about this topic, or have immediate questions regarding the BEFIT proposal, then do not hesitate to contact one of our experts or your trusted BDO-advisor.