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European corporate income tax base – BEFIT

On 12 September 2023, the European Commission introduced two directive proposals. One of the proposals (“BEFIT”) aims to improve efficiency for both corporate income taxpayers and tax authorities by introducing a new, single set of rules to determine the tax base of (European) groups of companies. This proposal replaces the previous proposals regarding a harmonized European corporate income tax base (CCTB and CCCTB). If unanimously accepted by all EU member states, these rules would apply as from 1 July 2028.
Dennis Nijssen
17 October 2023
17 October 2023

The other directive proposal concerns a transfer pricing directive. This proposal aims to reshape the landscape of transfer pricing regulations. This proposal will be further elaborated upon in a separate blog.

In this blog we will further elaborate on the main points of BEFIT and we will provide you with the key take aways.

1. Scope – BEFIT group

BEFIT will be mandatory for groups with annual combined revenues of at least EUR 750 million. If the ultimate parent of the group resides outside the EU, BEFIT will only be mandatory if additional conditions are met. Furthermore, under certain conditions, groups which do not meet the revenue threshold of EUR 750 million, can choose voluntary to apply BEFIT.

In the remainder of this blog, a group that applies BEFIT will be referred to as a BEFIT group.

2. European corporate income tax base

The proposal outlines rules for determining a European corporate income tax base for a BEFIT group. Starting point is the accounting result from the financial accounts based on accepted accounting standards under EU law (national GAAP or IFRS).

Various adjustments need to be made to the accounting results, in order to get to the result for BEFIT purposes. The adjustments relate to (among others):

- Depreciations
- Limitations on the deduction of interest
- Financial assets held for trading
- Corporate and top-up taxes (for example Pillar 2 )
- Fines, penalties and illegal payments
- Dividends and capital gains or losses on shares or ownership interests (for 95%)
- Profit or losses from permanent establishments (for 95%)
- Unrealised gains or losses from currency exchange fluctuations on fixed assets.

The proposal furthermore addresses timing and quantification issues which are needed to avoid abuses. This pertains, for example, valuation of stocks and work-in-progress and the creation of provisions.

Two components will not be part of the BEFIT tax base. This concerns (i) the income and losses from extractive activities and (ii) the revenues and expenses from shipping (not covered by a tonnage tax regime) or air transport.

The tax base will be determined for each entity individually. The tax base of all members of the BEFIT group will be merged into one tax base, which will be the BEFIT tax base. Adding up the results, will lead to cross-border loss compensation. In addition to the loss compensation in the current year, a negative BEFIT tax base can also be offset against future positive BEFIT tax bases.

In principle, BEFIT only applies to entities that are part of the BEFIT group throughout the whole year. However, in the proposal some rules are included regarding entities entering or leaving the BEFIT group. This also includes rules regarding changes in the group during a year.

3. BEFIT Information Return

The BEFIT group will file one BEFIT Information Return for the whole group each year. This tax return should be filed within 4 months after the end of the relevant financial year. This return will be assessed by a multilateral BEFIT team with representative from the tax administration of each country in which the BEFIT group is subject to corporate income tax. The BEFIT team shall endeavor to reach a consensus on the content of the BEFIT information return, within four months after the BEFIT information return was filed.

4. Individual tax returns

Each BEFIT group member will also file an individual tax return to their local tax administration. The BEFIT tax base will be allocated to the members of the BEFIT group based on the average contribution of each member to the BEFIT tax base in the previous three fiscal years.

After the allocation of the BEFIT tax base, each group member needs to apply additional adjustments based on local law. In order to ensure member states’ full competence over their tax rate policies, member states will be free to further apply any deductions, tax incentives, or base increases to their allocated parts.

Members of the same BEFIT group which are resident for tax purposes (or situated in the form of a permanent establishment) in the same member state may choose to file one combined individual tax return in that member state.

The individual tax returns need to be filed within 3 months after the receipt of notice from the tax administration where the BEFIT information return was filed.

5. Withholding tax

There will be no withholding taxes on transactions such as interest and royalty
payments within the BEFIT group, as long as the beneficial owner of the payment is
a BEFIT group member.

6. Transfer pricing

The proposal introduces a "traffic light system" to simplify compliance with transfer pricing rules for low-risk activities. Transactions can fall within three risk zones (low/medium/high). Member state tax administrations would be expected to focus their efforts to the high-risk zones.

The proposal does not interfere with the substantive rules that determine whether a certain transaction has been priced at arm’s length.

7. Takeaways

- An EU tax base could lead to more certainty about the tax position of an entity, as the tax laws in the EU will be more in alignment.
- Cross-border loss compensation for BEFIT groups would be beneficial to taxpayers.
- The extent to which the proposal will actually result in a reduction of compliance activities for taxpayers also depends on the amount of rules that individual countries will apply at their local level.
- The deadlines for filing the tax returns seem to be optimistic.
- In the current Dutch legislation, both the participation exemption and the object exemption are applied for 100% of qualifying benefits. Under BEFIT however, there will only be a 95% exemption. At local level, the Netherlands may potentially introduce an additional 5% exemption. However, this remains uncertain at this moment.
- If you have any further questions regarding this proposal, please feel free to contact us.