In a significant development, the European Union has introduced the BEFIT proposal, aimed at establishing a unified corporate income tax system that would replace domestic corporate tax regulations for specific groups of taxpayers across the EU.

THIS ARTICLE IS WRITTEN BY MELLE VAN DER STOEL AND TIM HARTONG. MELLE ([email protected]) AND TIM ([email protected]) ARE PART OF THE INTERNATIONAL TAX TEAM WITHIN RSM NETHERLANDS’ INTERNATIONAL SERVICES PRACTICE (ISP). 

Understanding BEFIT

The BEFIT proposal, short for "Business in Europe: Framework for Income Taxation," encompasses a set of provisions designed to bring about substantial changes to the corporate income tax landscape within the EU. The primary objective is to replace the intricate web of 27 distinct corporate income tax systems with a single, harmonized system, thereby streamlining tax procedures and alleviating the administrative burden associated with conducting business in multiple EU member states. Scheduled for implementation in 2028, BEFIT will apply to multinational corporations headquartered in the EU or elsewhere, with global revenues surpassing EUR 750 million. Non-EU headquartered multinational entities must report at least EUR 50 million in revenue or 5% of total revenue within the EU to qualify. Smaller multinational groups may also opt into BEFIT, provided they compile consolidated financial statements.

Under BEFIT, EU subsidiaries of a multinational group incorporated into a BEFIT group will no longer be subject to local corporate income tax. Instead, their taxable profit will be computed according to the standardized rules outlined in the BEFIT proposal. For each member of a BEFIT group, the tax base will originate from post-tax profits reported in their financial statements. Subsequently, a predefined series of adjustments will be applied to determine the BEFIT tax base. After calculating the consolidated BEFIT tax base, it will be allocated to each entity within the BEFIT group based on their respective profit shares. The allocated tax base will then undergo local adjustments and be subjected to taxation in the entity's country of residence, subject to rates set by individual member states.

From a compliance perspective, BEFIT groups will be obligated to submit a BEFIT information return in one EU member state for the entire group, containing all relevant calculations and allocations related to the tax base. Subsequently, local returns will be filed for each group member, with the tax due payable accordingly.

EU's Objectives with BEFIT

The European Union's pursuit of a consolidated tax base dates back to the inception of the EU internal market three decades ago. Although harmonizing direct taxes throughout the EU aligns with the EU's overarching goals, many member states were initially hesitant to relinquish control over this revenue stream and policy instrument.

In 2011, the European Commission introduced a concrete proposal for the first time, but it failed to garner consensus among member states, with the United Kingdom and Ireland notably dissenting. A revised proposal emerged in 2016, only to be withdrawn in 2021, paving the way for BEFIT.

The European Commission presents the BEFIT proposal, under the moniker "Business in Europe: Framework for Income Taxation," as a mechanism to enhance the efficiency of the internal market, attract investments, and stimulate economic growth. Key selling points include the simplification of tax compliance, with potential annual cost savings of up to 65% for companies, enhanced tax certainty, and group taxation benefits such as loss offsetting within the BEFIT group and the elimination of withholding taxes among BEFIT group members.

Initial Observations and Considerations

The current proposal for BEFIT has a considerably higher likelihood of being implemented compared to previous attempts, thanks to the adoption of measures like BEPS, Anti-Tax Avoidance Directives, Public CbCR, and Pillar 2 directives across the EU in recent years. Additionally, the absence of the United Kingdom from the EU has reduced resistance to further harmonization in this domain. However, as a preliminary draft proposal, BEFIT is likely to undergo significant revisions before receiving approval.

Companies must prepare for the impact of these new rules by modeling their effects well in advance. While certain aspects of international structures may become more straightforward under BEFIT, it could reduce the participation exemption from 100% to 95% at each level for entities with complex multi-layered legal structures, potentially diminishing tax benefits unless restructuring to a flatter legal structure is undertaken.

Despite the aspirations for simplification, it remains uncertain whether BEFIT will achieve the promised 65% reduction in compliance complexity. The regime will still necessitate per-country calculations and the application of transfer pricing regulations. Multinational enterprises will need to conduct per-entity calculations, consolidate profits and losses from EU entities into a single tax base, and allocate this base to each member state. Most member states are expected to introduce local incentives or restrictions based on their policy choices, further complicating matters. Nevertheless, once BEFIT is fully operational and the proposed transfer pricing simplifications are implemented, some degree of simplification is anticipated.

BEFIT may not be advantageous for companies benefiting from a 100% participation exemption, but it does offer potential tax savings, particularly through the offsetting of results among BEFIT group companies operating across Europe. One significant benefit of BEFIT is the improved certainty it offers in tax filings and dispute resolution. Filing a consolidated tax return eliminates the risk of double taxation and transfer pricing disputes between member states. As a result, lengthy mutual agreement procedures should become obsolete for BEFIT groups by 2028.

Timing is crucial for taxpayers, necessitating that companies prepare their financial departments to provide the required data for completing the BEFIT information return within four months after the end of the financial year. The BEFIT team, in turn, will aim to render a decision on the BEFIT return within the same four-month timeframe, potentially expediting the overall filing process for BEFIT groups.

Concluding remarks

The BEFIT proposal carries both advantages and drawbacks for taxpayers. While it seeks to foster investment and improve the business environment in the European market, companies should be prepared for the potential loss of local tax benefits and incentives. As transparency and reporting continue to evolve, it remains to be seen whether BEFIT returns will be included in EU public disclosures. Until local implementation legislation is finalized, uncertainty will persist, with member states likely introducing rules for adjusting the tax base allocated to their respective states, potentially adding complexity to local regulations. Nonetheless, an overhaul of existing tax benefits and incentives should be anticipated.