Briefly put, the BEFIT Directive introduces a common corporate tax framework to compute the taxable base at a single entity level of the relevant group company. These tax bases are then aggregated at EU group level and ultimately reallocated to the relevant EU Member States. If the BEFIT Directive is adopted, it will come into force on 1 July 2028. Alongside the BEFIT Directive, the European Commission adopted a separate Council Directive proposal on Transfer Pricing (TP Directive). If Member States reach an agreement, the TP Directive shall enter into force on 1 January 2026.
Both directives may have a significant impact on the tax position of large-scale groups. This Tax Alert addresses the main aspects of the BEFIT Directive and the TP Directive.
Entities in scope of the BEFIT Directive
The BEFIT Directive contains a hybrid scope for mandatory and optional application. The BEFIT rules are mandatory for EU headquartered groups whose consolidated group revenue exceeds EUR 750 million. The BEFIT rules are limited, however, to situations where the ultimate parent entity (UPE) holds at least 75% of the ownership rights or of the rights giving entitlement to profit. This revenue threshold generally aligns with the application of Pillar Two rules (we refer to our earlier Tax Alerts of 16 January 2023 and 14 August 2023). Under certain conditions, the BEFIT rules also apply to groups with their headquarter outside the EU (i.e. if their EU group members raise at least EUR 50 million of annual combined revenue in at least two of the last four fiscal years or at least 5% of the total revenues of the group).
Smaller groups may choose to voluntarily opt in, albeit on the condition that they prepare consolidated financial statements and that they are bound for a minimum period of five years. If the BEFIT rules apply, the framework will apply to all EU tax resident companies and EU located permanent establishments of the group that meet the 75% ownership threshold (BEFIT Group Members).
In principle, the BEFIT Directive covers all sectors. However, certain sector-specific characteristics are included, such as a carve-out from the BEFIT tax base (which is discussed below) for shipping income covered by a national tonnage tax regime.
Single taxable base
The starting point for calculating a BEFIT Group Members' single tax base is the accounting result from the financial accounts. It is necessary in this regard that the financial accounts of the BEFIT Group Members are reconciled with the accounting standard of the UPE. Member States should then apply a set of tax adjustments to the financial accounting statements. These tax adjustments consist of inclusions (i.e. added back if they have been deducted in the financial statements) and exclusions (i.e. subtracted from the financial net income). Examples of inclusions are non-deductible borrowing costs paid to parties outside the BEFIT Group under the interest limitation rule of the ATAD (the earning stripping rule) or top-up taxes under Pillar Two rules. Certain dividend distributions and capital gains on shares, the profits or losses of permanent establishments or rollover relief for capital gains on the replacements of assets might be eligible for exclusion. The BEFIT rules also contain certain tax depreciation rules, and addresses timing and quantification issues.
Aggregation into a single tax base followed by allocation
After the single tax bases of the BEFIT Group Members have been determined, the preliminary tax results are aggregated at EU group level (the BEFIT Tax Base). This aggregation would, among other things, effectively allow cross-border loss relief within the BEFIT Group, as the incurred losses from a BEFIT Group Member operating in a Member State will automatically be set off against the profits from another BEFIT Group Member operating in another Member State. There will also be no withholding tax on interest and royalty payments within the BEFIT Group, provided that the beneficial owner of such payment is a BEFIT Group Member.
Subsequently, the BEFIT Tax Base is allocated to the BEFIT Group Members according to a transition allocation rule. Under this rule – which should then be in place for seven years – each BEFIT Group Member receives a percentage of the BEFIT Tax Base calculated on the basis of the average of the taxable results in the previous three fiscal years.
On allocation, each BEFIT Group Member will have a part of the BEFIT Tax Base. The BEFIT Group Member will have to apply additional adjustments to this part in its tax assessment. The Explanatory Memorandum of the BEFIT Directive stipulates in this regard that, to ensure Member States' full competence over their tax rate policies, Member States are free to further apply any deductions, tax incentives or base increases to their allocated parts, as long as these adjustments are in line with the rules laid down in the Pillar Two Directive.
The BEFIT Directive further contains certain rules that address the entry or leaving of entities of the BEFIT Group. The BEFIT Directive also provides for tax-facilitated corporate reorganisations within the BEFIT Group. There is, however, an anti-abuse provision in place to ensure that capital gains on certain assets are included in the preliminary tax base if those assets have been moved to another BEFIT Group Member without tax consequences and that BEFIT Group Member is subsequently sold outside the BEFIT Group. This would normally benefit from a tax exemption, but in this particular case the exemption would be refused unless the transaction was carried out for valid commercial reasons.
Administration and procedures
The BEFIT Directive further provides a common administrative framework by introducing a one-stop-shop. In principle, the UPE will be required to file one information return for the whole BEFIT Group (the BEFIT Information Return) with its own domestic tax administration. The tax administration will share the BEFIT Information Return with the other Member States in which the BEFIT Group operates. After filing the BEFIT Information Return, a team of representatives of each relevant tax administration is composed (the BEFIT Team). The BEFIT Team will examine and assess the completeness of the BEFIT Information Return.
In addition, each BEFIT Group Member must file an individual tax return with its national competent tax administration, as the Member States may apply domestic adjustments on its allocated part of the BEFIT Tax Base. In principle, individual Member States remain competent to perform (tax) audits. Appeals of an individual BEFIT Group Member against an individual tax return may be brought to its own tax administration. However, appeals against the BEFIT Information Return may be brought to the competent authority in the state of the filing entity (generally the UPE).
According the OECD's at arm's length principle – the current international standard – taxable profits or losses from domestic or cross-border transactions between related parties should be adjusted to reflect a situation with unrelated parties. This principle is laid down and further elaborated in the OECD Transfer Pricing Guidelines (TP Guidelines). Although domestic legislation of most of the Member States is based to a greater or lesser extent on the at arm's length principle, its practical application may vary between Member States.
To ensure a harmonised approach between the Member States, the TP Directive aims to incorporate a TP framework into EU law. The TP Directive incorporates the arm's length principle and certain rules with respect to the selection and application of the appropriate TP method into EU legislation, clarifies the role and status of the TP Guidelines and introduces certain mandatory TP documentation requirements.
The legal basis for both directives is Article 115 of the Treaty on the Functioning of the EU, which requires unanimity in the Council before the directives can be adopted. Provided that the Member States reach an agreement, they should take the necessary steps to comply with the BEFIT Directive by 1 January 2028, and by 31 December 2025 with regard to the TP Directive. The BEFIT Directive and the TP Directive shall then enter into force as per 1 July 2028, respectively 1 January 2026.
If the directives enter into force, they may have a major impact on large-scale groups operating in the EU, as it creates a new framework of EU tax rules. It might therefore be important for multinationals and large-scale groups operating in the EU to assess the potential impact of the BEFIT Directive and TP Directive. We will closely monitor any developments in this regard and aim to update you on the progress in our regular Tax Alerts.