HOT-proposal

HOT-proposal: a new Head Office Tax system in the EU

Monique Pisters
By:
Flag of european union on table
The European Commission proposed a new EU directive for micro, small, and medium-sized enterprises (SMEs) who operate cross-border through permanent establishments. This directive is called the Head Office Tax System for SMEs, also called the HOT-proposal. This directive is a set of rules designed to address the taxation challenges that arise when a company operates in more than one EU country.
Contents

One tax return 

The HOT-proposal specifically addresses the situation where an SME has a head office in one EU member state and a permanent establishment in another EU member state. The advantage for SMEs that fall within the scope and meet all the conditions of the HOT-proposal, is that SMEs only have to deal with the tax authorities of the EU member state where the head office is located. 

The head office serves as the "filing entity" for all permanent establishments, submitting a single tax return to the tax authority of the head office's EU member state. This process involves segregating the taxable income of the head office from that of its permanent establishments. The tax authority of the head office applies the tax rates applicable in the EU Member State where the permanent establishments are located. The tax authority of the head office will then collect the tax due and transfer the tax revenue to the relevant EU Member State of the permanent establishments. 

Regarding audits, appeals, and dispute resoluti

on, each EU Member State would retain the authority to audit permanent establishments within its own jurisdiction. 

HOT-rules 

To be able to apply the HOT-rules, the SME must meet certain conditions. Monique Pisters, Head of International Tax, explains the directive and the conditions in more detail in this video.  

Entry into force per 2026 

The HOT proposal must now be agreed unanimously by the EU Member States. If adopted, the HOT-proposal rules should be implemented into Member States’ national law by 31 December 2025 and will apply from 1 January 2026. 

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