A new EU wide corporate income tax system

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On 12 September 2023, the European Commission published the “Business in Europe: Framework for Income Taxation” (BEFIT) proposal. The BEFIT proposal consists of a new corporate income tax system and new transfer pricing rules. With the new corporate income tax system rules, the European Commission tries to align the corporate income tax bases of multinational groups that operate in the EU. When adopted, BEFIT will replace the current corporate income tax systems of EU Member States for certain EU based entities. In this alert, we will guide you trough the most important topics of BEFIT.

What is BEFIT? 

BEFIT is a new corporate income tax framework that aims to align the taxable base for EU-based entities that are part of a multinational group. All EU based entities and permanent establishments that fall within the scope of BEFIT will be subject to this new tax framework. For the entities in scope, BEFIT will replace the domestic corporate income tax rules. This implies that these entities will no longer calculate their taxation based on the domestic corporate income tax rules, but rather use the BEFIT tax calculation. The BEFIT proposal replaces the previous proposals from the European Commission aimed at creating a common set of tax rules. The other part of the BEFIT proposal concerns new transfer pricing rules. For more information on this topic, we would like to refer to our other page.

Which companies will be affected? 

The BEFIT system will apply to groups operating in the EU irrespective of whether these are headquartered within the EU or outside. The application of BEFIT is in principle mandatory for EU resident entities when the group's combined annual revenues exceed €750 million in at last 2 out of 4 years. Only entities that have an ownership of at least 75% are considered as part of the BEFIT group. For groups with non-EU headquarters, BEFIT only applies if their EU-based revenues either exceed €50 million annually or account for at least 5% of the total group revenue in specific reference periods.  

Smaller groups that don't meet these thresholds can also opt-in to BEFIT, provided they prepare consolidated financial statements. 

How will the BEFIT tax calculation work? 

BEFIT is created as a separate tax system. EU entities that are part of a BEFIT group will no longer be subject to the regular national corporate income tax rules. As a result of this, new rules apply to the computation of the taxable income and to the allocation of taxable income.  

1. Computation of the tax base 

The basis of BEFIT is that one common set of EU rules apply to the calculation of the taxable base. In order to determine the taxable base, the group’s consolidated financial accounts will be used as the starting point. Subsequently, certain adjustments should be made to the entity results. The most eye catching adjustments are the following: 

Excluded income 

A number of income items may be excluded from the taxable result. The first important income item that might be excluded is dividend (and other forms of distributions). These can be excluded for 95% of the value provided that the shareholding is at least 10% and that the receiving entity owns the shares for at least 1 year. Also capital gains or losses obtained are excluded from the taxable base in case the shareholding meets the same criteria as for dividends and under the condition that the shareholding was not held for trading purposes.  

A second important category of income items that is excluded from the taxable base is the income or loss that is attributable to a permanent establishments. 

A third important category of income that is excluded is shipping activities covered by a tonnage tax regime. All revenues, expenses and other deductible items derived from shipping activities covered by a tonnage tax regime must be excluded. 

Non-deductible expenses 

The BEFIT proposal mentions a number of expenses that will be treated as non-deductible for BEFIT purposes. The first important category is borrowing costs that are non-deductible based on the earnings stripping rule (as introduced in the first AU Anti-Tax Avoidance Directive). The earnings stripping rule determines that the net borrowing costs are non-deductible in so far as it exceeds the highest of EUR 3,000,000 or 30% of the EBITDA. This rule will also be implemented in BEFIT. A second category of non-deductible expenses are fines, penalties and illegal payments. The last category of non-deductible expenses are corporate income or profit taxes. Corporate tax, similar taxes on profits and deferred taxes accrued are non-deductible. The same will apply for any top-up taxes which will be imposed as a result of the implementation of the global minimum tax rules of Pillar 2 . please find a more information on the rules of Pillar 2 in this link.   

Depreciation adjustments 

In order to calculate the taxable base of each BEFIT entity, BEFIT includes its own depreciation rules. Important is that any tangible fixed asset with a value below EUR 5,000 can be depreciated at once. All other assets must be depreciated individually over their useful life on a straight-line basis. The useful life will be determined as follows: 

  • all buildings as well as any other type of immovable property and structure in use for the business: 28 years. 
  • all other fixed tangible assets: their useful life as assessed in accordance with the acceptable accounting standard in the EU. 
  • fixed intangible assets, including acquired goodwill: the period for which the asset enjoys legal protection or for which the right has been granted and, where that period cannot be determined, 5 years. 

2. Calculation of the BEFIT group result and Allocation of the BEFIT tax base 

After the taxable base has been assessed per entity, all taxable bases will be added to form one BEFIT group base at the level of the filing entity. This can either be the EU ultimate parent company or an appointed EU BEFIT group member. This implies that all positive and negative results of the BEFIT group entities will be netted to calculate one BEFIT taxable result. This BEFIT tax base could be positive or negative. When the BEFIT tax base is positive, this tax base will be divided between the Member States where the BEFIT group is presence (see below). When there is a BEFIT loss, the loss could be carried forward to be offset against a future positive BEFIT tax base. 

Allocation of the BEFIT tax base 

In the first seven fiscal years following the implementation of BEFIT, the tax base is allocated to BEFIT group members using a baseline allocation percentage. This baseline allocation percentage is calculated by using each of the BEFIT group entity’s share in the BEFIT tax base over the previous three fiscal years. 

After the initial seven-year transition phase, the European Commission plans to review the allocation rule and may propose a formulary apportionment method for distributing the tax base among group members. 

3. Amendments to BEFIT taxation by EU Member States 

The BEFIT directive allows EU Member States to increase or decrease the BEFIT tax base which is allocated to each Member State by domestic rules. For example, EU Member States are allowed to provide tax incentives to resident entities or to reduce the tax rate for entities that perform certain activities. However, this all under the condition that these incentives are in line with the rules of Pillar 2. 

How will the compliance obligations be organised? 

The BEFIT proposal states that two different returns should be submitted. This is the BEFIT information return and the individual BEFIT tax returns which will be prepared per BEFIT group entity. The information return must contain information such as the names of the BEFIT group entities, the group structure and certain information regarding the BEFIT computations. Within the BEFIT group, there should be one filing entity who should file the BEFIT information return within 4 months after the financial year ended. This is either the ultimate parent entity when this entity is resident in the EU or an elected group entity when the ultimate parent entity is not resident in the EU. All BEFIT group entities must also file an individual BEFIT tax return in their EU Member State of residence. 

It is important to note that the financial years of all BEFIT group entities must be aligned. 

What will not be regulated by BEFIT? 

A number of items are not regulated by BEFIT. These are either not mentioned in the BEFIT proposal or these items are left to the EU Member States to be organized. EU Member States remain for example free to determine their tax rates and tax incentives as long as this is in line with the Pillar 2 rules. One of the most striking points of the BEFIT proposal is that the provisions of the DEBRA proposal were not implemented.  

When will these rules be implemented? 

The BEFIT proposal that was published in September 12, 2023, is still a proposal that needs to receive the approval of all EU Member States. This is required as the proposal concerns EU legislation in the field of direct taxation. If all EU Member States approve the proposal, it is aimed by the European Commission that BEFIT will be implemented in the EU member states as per 1 January 2028.