The EU BEFIT proposal lays out rules for an EU-wide corporate income tax system to replace domestic corporate tax rules for certain groups of tax payers.
Cross border tax loss relief, reduced intra EU withholding taxes and filing only one corporate income tax return for the entire group within the EU. These are a few of the benefits for tax payers, included in the EU “Proposal for a council directive on Business in Europe: Framework for Income Taxation” or BEFIT in short. This long-awaited proposal introduces a common set of rules for corporate income tax within the EU. The purpose of the proposal: replacing 27 different corporate income tax systems with just one system applicable within the entire EU, reducing the tax complexity and additional administrative burden of doing business in more than one EU country.
BEFIT is currently expected to enter into force on July 1, 2028 and would be applicable to three types of taxpayers:
- EU headquartered Multinationals with global revenues exceeding EUR 750 million in at least 2 of the last 4 fiscal years;
- Non-EU headquartered multinationals with global revenue exceeding EUR 750 million in at least 2 of the last 4 fiscal years, provided that at least EUR 50 million of this revenue or 5% of the total group revenue is earned in the EU;
- Smaller multinational groups are also allowed to opt into BEFIT, provided they prepare consolidated financial statements.
How will it work?
European group entities and non-EU group entities with a permanent establishment ("PE”) in the EU, of a multinational group generally become a part of a BEFIT group, provided the ultimate parent of the group owns directly or indirectly at least 75% of the EU entity, respectively the non-EU entity with an EU-PE. As such entities with EU nexus become members of a BEFIT group and will under BEFIT cease to be subjected to local corporate income tax rules. Instead, their taxable profit will be calculated based on the common rules outlined in the BEFIT proposal.
For each BEFIT group member, the tax base will be calculated using profit after tax from the financial statements as a starting point. Then a specified set of adjustments will be made, to derive the BEFIT tax base. These adjustments amongst others include:
- Adjustments for income tax expenses;
- Adjustments for income from participations and capital gains;
- Depreciation adjustments;
Afterwards, the calculated tax base of all BEFIT group members is aggregated into one tax base, which is consequently reallocated to each BEFIT group entity, based on their share in the BEFIT aggregated tax base (this temporary allocation method will apply until max. 2035 and will thus ultimately be replaced with another allocation key). The allocated tax base is then subjected to local adjustments, consisting of specified adjustments in relation to income and expenses that arose in periods in which BEFIT did not apply, as well as other changes at the discretion of EU Member States themselves. Then, this final tax base will be taxed in the country of residence of the respective entity at a rate set by each respective EU Member States.
From a compliance perspective, the EU parent entity of the BEFIT groups will be required to file a BEFIT information return in one EU Member State for the entire BEFIT group, containing all relevant calculations and allocations for the tax base. Non-EU headquartered BEFIT groups should appoint an EU entity that files this return. Then, still a local return should be filed for each group member upon which the tax due will be payable.
Benefits and downsides
BEFIT will introduce one system to calculate the corporate income tax base that will be applicable within the entire EU. Entities that are part of a BEFIT group, will also cease to be subject to local corporate income tax rules. According to the EU, this could save up to 65% of annual compliance costs.
The EU expects this system to incentivize further investment in the EU.
For taxpayers, there seem to be several clear benefits:
- Simplified corporate tax filings, closer aligned with financial statements positions and shorter deadlines for finalization of tax filings and dispute resolution;
- With the aggregation of EU profits into one tax base, it will be possible to offset tax losses in one member state with profits in other Member States;
- The BEFIT proposal provides rules for simplified transfer pricing compliance for BEFIT groups (please note that this is separate from the EU transfer pricing proposal issued on September 12, 2023 as well);
- Intra-BEFIT group transactions will no longer be subjected to withholding tax, unless the beneficial owner of the income is not a BEFIT group member.
On the downside, as entities will cease to be subject to local corporate income tax, certain local tax benefits and incentives might be lost.
For instance, holding companies resident in member states that apply a 100% participation exemption will see that exemption drop to 95%.
Until the full set of local implementation legislation is available, uncertainty will remain. This is because Member States will be allowed to include rules for upward and downward adjustments of the tax base allocated to their state, potentially adding more complexity to local rules than the EU would like. Nonetheless, an overhaul of existing tax benefits and incentives should be expected.
Creating a common corporate tax system, has been a long time goal of the EU. Previous attempts through the CCTB and CCCTB have failed, but with the adoption of the minimum corporate tax rules of Pillar 2 within the EU, it seems there is momentum for more harmonization of tax rules within the EU. With only a first draft proposal issued, it is likely that BEFIT will undergo significant changes prior to approval. Nonetheless, it seems likely that BEFIT will be implemented in some form.
Currently implementation is planned for 2028 and will result in a transition for EU entities, respectively non-EU entities with EU-PEs into a new corporate tax system. Furthermore, BEFIT will presumably have an impact on available tax incentives for EU entities and non-EU entities with EU PEs. As such, the expected transition to BEFIT should already be considered in tax planning exercises.
As more details regarding BEFIT are released, we will provide you with relevant updates. Multinational groups that will be subject to BEFIT should start preparing in time for the upcoming changes. Maybe more importantly, multinational groups that do not reach the revenue threshold should start on time to model whether opting in to this new regime could bring benefits to the group from a tax cash out, tax management or tax risk perspective.
In case you have any questions regarding BEFIT, kindly reach out to your trusted RSM advisor.