BEFIT Proposal

On 12 September 2023, the European Commission proposed the Business in Europe: Framework for Taxation directive, which lays down a new, single set of rules to determine the tax base of groups of companies in the EU (“BEFIT”).

BEFIT builds on the OECD/G20 international tax agreement on a global minimum level of taxation, and the Pillar 2 directive¹  adopted at the end of 2022. It replaces the Commission’s CCTB (common corporate tax base) and CCCTB (common consolidated corporate tax base) proposals, which have been withdrawn.

The BEFIT initiative is meant to reduce compliance costs for large businesses who operate in more than one Member State and make it easier for national tax authorities to determine which taxes are rightly due by introducing a new, single set of rules to determine the tax base of groups of companies. 

How would this common framework be achieved?

In a nutshell, BEFIT is built around 3 mains steps:

Step 1: Determination of the preliminary tax result

• Each BEFIT group member will calculate its tax base in accordance with a common set of tax adjustments to its financial accounting statements.
• For the adjustments, on one hand, some items would be included, e.g. non-deductible exceeding borrowing costs within the meaning of ATAD1²  that are paid to parties outside the BEFIT group or corporate taxes that were already paid or top-up taxes in application of Pillar 2. On the other hand, some items would be excluded, e.g. 95% of the amount of dividends or other distributions received or accrued during the fiscal year as well as 95% of the amount of gain or loss, provided that at the date of distribution/disposition, the ownership interest is held by the BEFIT group member for more than one year and this interest carries right to more than 10% of the profits, capital, reserves or voting rights. The amount of income or loss that is attributable to its permanent establishments would also be excluded.

Step 2: Determination of the BEFIT taxable base

• The tax bases determined under Step 1 would be aggregated into one single tax base (the “BEFIT tax base”)

Step 3: Allocation of the BEFIT tax base

• By using a transitional allocation rule, each member of the BEFIT group will have a percentage of the BEFIT tax base calculated on the basis of the average of the taxable results in the three previous fiscal years.
• On the part allocated, Member States would be allowed to individually apply additional post-allocation adjustments in areas not covered by the common framework.
• The transitional allocation rule would be applicable for each fiscal year between 1 July 2028 and 30 June 2035 at the latest.

Who is in the scope of BEFIT?

• The new rules will be mandatory for groups operating in the EU which prepare consolidated financial statements with annual combined revenues of at least EUR 750 million (in at least two of the last four fiscal years), and where the ultimate parent entity holds at least 75% of the ownership rights or of the rights giving entitlement to profit.
• The rules will be optional for smaller groups which may choose to opt in as long as they prepare consolidated financial statements.

What is the compliance process?

• The “filing entity” (i.e. in principle the ultimate parent entity) would have to file one information return for the whole BEFIT group with only its own tax administration.
• Each BEFIT group member would also file an individual tax return to their local tax administration to be able to apply domestically set adjustments to their allocated part.

How does BEFIT address transfer pricing (TP) issues?

It introduces a simplified approach to TP compliance which would decrease compliance costs for the businesses and improve the efficiency of tax administrations in the use of human capital. To this aim, it would enact a common risk assessment framework for TP based on a commonly accepted benchmark analysis. Each transaction within the scope of the system should be assessed as being of low or high risk, depending on how this compares to the profit markers.

Once adopted by the Council, the proposal should come into force on 1 July 2028.