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BEFIT: Another step towards uniform income taxation rules in EU

The European Commission has published its draft BEFIT (Business in Europe: Framework for Income Taxation) directive, which proposes a uniform approach to the taxation of large multinational groups in the EU and is the result of the EC's continuing efforts to introduce a common consolidated income tax base in the EU. The proposal also builds on the results of negotiations on a global minimum tax and a directive on the introduction of a minimum taxation level.

The new directive is based on the following principles:

  • The BEFIT rules shall apply to EU tax residents and permanent establishments in the EU if the consolidated annual turnover of the whole corporate group (including non-EU members) exceeds EUR 750 million. Such a corporate group will then be referred to as a BEFIT group.
  • The preliminary tax result of a member of the BEFIT group shall be determined based on the profit or loss recognised in the financial statements for consolidation purposes, before adjustments for intragroup transactions.
  • Intragroup transactions must meet the arm's length principle. However, the directive introduces certain simplifications as well as specific safe harbour rules for transactions with related entities that are not part of the BEFIT group.
  • The preliminary tax results of member entities shall be adjusted by specific items (similar to the calculation of the top-up tax; however, the directive proposes a smaller number of adjustments). The directive also introduces a uniform approach to the calculation of depreciation and loss allowances, and to certain derivatives.
  • The tax results of individual member entities adjusted in this way shall be aggregated into a single BEFIT tax base. This procedure should allow the (cross-border) offsetting of tax bases and tax losses of individual member entities.
  • The BEFIT tax base shall be allocated to each entity based on the ratio of the average tax base of the member entity for three preceding years to the total BEFIT tax base. In the first three years, the average tax base shall be determined using the local tax rules in force before the implementation of the BEFIT directive. However, this is a transitional rule, with the understanding that a permanent but not yet specified rule for the reallocation of the tax base will be determined in the future.
  • The local income tax rate shall be applied to the allocated BEFIT tax base. The member states will be able to adjust the allocated BEFIT tax base according to domestic legislation.
  • Withholding taxes on, e.g., dividends or interest between individual group members should not be applied.
  • The directive is expected to enter into effect on 1 July 2028.

For the BEFIT directive to be implemented, it must be unanimously approved by all EU member states. Historically, attempts to harmonise direct taxes have not been successful, mainly due to concerns about the loss of revenue to national budgets.