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Common corporate income tax framework in the EU

On 12 September 2023 the European Commission proposed a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT). BEFIT will have a major impact on the tax calculation and administration of multinational groups with a European footprint.

BEFIT will mean that (i) companies that are members of the same group will calculate their tax base in accordance with a common set of rules; (ii) the tax bases of all members of the group will be aggregated into one single tax base; and (iii) each member of the BEFIT group will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.

A BEFIT group will generally be formed by a parent company and subsidiaries in which it holds, directly or indirectly, at least 75% of the ownership rights or profit rights. The BEFIT rules are mandatorily applicable to EU headquartered groups with annual combined revenues exceeding EUR 750 million. BEFIT applies to groups with non-EU headquarters if the relevant EU part raises either at least EUR 50 million annual combined revenues in a certain reference period or accounts for at least 5% of the total group revenue. Groups below these thresholds may opt-in for BEFIT, for at least a five-year period, provided they prepare consolidated financial statements. In such cases, the group is bound to the BEFIT rules for a period of at least five years. If BEFIT is applicable, it will apply to all EU-based entities and permanent establishments that meet the aforementioned 75% ownership requirement. The BEFIT proposal is designed to build on the OECD’s global tax deal. It aims to reduce tax compliance costs, increase tax certainty, and support growth and competitiveness in the EU.

The European Commission also includes a proposal aiming at harmonising transfer pricing rules within the EU and ensuring a common approach to transfer pricing. The proposal will increase tax certainty and mitigate the risk of litigation and double taxation. The Directive will also further reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes.

Once the BEFIT is adopted by the Council, Member States must implement it by 1 January 2028 and apply its provisions from 1 July 2028.