EU Corner

  • Posted 22.12.2023

1. Legislation

Transfer Pricing Directive proposal: a potential EU harmonised framework for transfer pricing?

On 12 September 2023, the European Commission introduced the Transfer Pricing Directive proposal (“TP Proposal”). It aims at creating within the European Union a harmonised legal framework for transfer pricing (“TP”) and ensuring a consistent application of the arm’s length principle among the Member States.

The TP Proposal essentially seeks to integrate the arm’s length principle and, more generally, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) into the legislation of all Member States. As such, the latest version of the OECD Guidelines would be binding for all Member States, regardless of the TP rules that may be already implemented in the local law prior to the TP Proposal.

The TP Proposal not only resumes the OECD Guidelines but it also intends to incorporate complementary aspects for a common approach when applying TP. To list a few, it establishes a specific arm’s length range and the concept of “associated enterprises” is defined more precisely.

The TP Proposal requires unanimous approval from 27 Member States. If adopted, it should be transposed into their domestic legislation by 31 December 2025 and applicable from 1 January 2026.

Absence of an EU legal basis for TP matters left room for a discretionary application by Member States of the application and/or interpretation of the OECD Guidelines. This situation has been a source of increasing challenges around the TP arrangements, as testified by recent State aid cases concerning the interpretation of the arm’s length principle.

In any case, interested stakeholders should closely monitor developments regarding the TP Proposal in order to ensure compliance on time.

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CCTB (common corporate tax base) and CCCTB (common consolidated corporate tax base) proposals, which have been withdrawn.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. 

For more information on this topic, please refer to our article.

Proposal for the Directive “HOT” 

On 12 September 2023, the European Commission published a proposal for a new directive “Head Offices Tax System” (“HOT Proposal”) aiming at creating a simplified tax system for small to medium-sized enterprises (“SMEs”) based in a EU Member State and carrying out their activity through one or several permanent establishment(s) (“PE”) established in other EU Member States.  

For more information on this topic, please refer to our article.

“FASTER” Directive Proposal 

The proposal for a Council Directive published on 19 June 2023 on Faster and Safer Relief of Excess Withholding Taxes (“FASTER Proposal”) seeks to make withholding tax (“WHT”) procedures in the EU more efficient and secure for investors, financial intermediaries (such as banks) and Member States’ tax administrations while simultaneously fighting against tax fraud. In this respect, the requirement to issue a digital certificate of tax residence (eTRC) within one day is obviously a relevant solution to achieve this. However, in order to mitigate potential abuses, the Faster Proposal also includes extensive standardised reporting and due diligence obligations for the Certified Financial Intermediary (“CFI”). In attempting to create a solution to WHT refund in the line of TRACE2 , the Faster Proposal could lead to its downfall in view of the contemplated burden on CFIs and liability associated therewith, and ultimately its actual real benefit would be the eTRC. 

For more information on this topic, please refer to our article.

2. CJEU decisions

CJEU ruled: The end of Luxembourg VAT on director’s fees

Elvinger Hoss Prussen won a landmark preliminary ruling on 21 December 2023 in which the Court of Justice of the European Union (CJEU) decided in Case C-288/22 that remuneration received by a director for his activity as a member of the board of directors of a Luxembourg limited company is not subject to VAT.

Indeed, the CJUE ruled, following the opinion of the Advocate General on these points, that the activity of a member of a board of directors of a limited company under Luxembourg law is not exercised independently for VAT purposes since the board member does not act on his own behalf or under his own liability and does not bear the economic risk linked to this activity. According to the CJUE, this holds true despite the fact that this member freely organizes the modalities of execution of his work, acts in his own name and is not subject to a subordination relationship.

For more information on the context and impact of this decision, please refer to our previous article.

It is important to note that this ruling reverses a Luxembourg administrative practice that has been applied since 2016 (and enshrined in Circular No 781) on the principle that independent directors are taxable persons for VAT purposes and that directors’ fees are subject to VAT.

CJEU ruled: no illegal State aid in the European Commission’s Engie and Amazon cases

In December 2023, the Court of Justice of the European Union annulled two decisions of the European Commission that had decided that Luxembourg had granted the Engie and Amazon groups unlawful State aids.

Please refer to our previous newsflash and article for more information in this regard.

Advocate General’s opinion on Apple State aid case

As a reminder, on 30 August 2016, by its 2016 decision (SA.38373), the European Commission considered that tax rulings granted by the Irish tax authorities in favour of two Apple companies constituted illegal State aid under EU State aid rules, and ordered Apple to pay back EUR 13 billion to Ireland (plus interest), representing the undue tax advantage.

On 15 July 2020, the General Court of the European Union (“Court”) annulled the Commission’s decision considering that the Commission failed in demonstrating that the Irish tax authorities had granted Apple a selective advantage that could constitute illegal State aid.

By an application lodged on 25 September 2020, the Commission sought to have the judgment of the Court set aside.

According to Advocate General Pitruzzella’s opinion released on 9 November 2023, the CJEU should indeed set aside the judgment of the Court “in the light of the errors of law committed by the General Court” and refer the case back to the Court.

Read our previous article for more background on this topic.

1 Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union.
2 TRACE refers to the OECD Treaty Relief and Compliance Enhancement initiative which aim is to provide a framework for a standardised system allowing the reclaiming of withholding tax relief at source on portfolio investments, helping minimising administrative costs and ensuring proper compliance with tax obligations.