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18 September 202317 minute read

European Commission issues two draft directives to further harmonize corporate taxation in the EU

The European Commission recently published two draft directives: the Council Directive on Business in Europe: Framework for Income Taxation (BEFIT) and the Council Directive on transfer pricing.

The Commission proposed a July 1, 2028 deadline for implementation of the BEFIT Directive into EU Member State domestic legislation, and January 1, 2026 for the implementation of the Transfer Pricing Directive. 

Both proposals will require unanimous approval by all EU Member States before being adopted, and achieving political consensus – in particular, on the BEFIT proposal – may not be self-evident.


The proposed BEFIT Directive requires qualifying multinationals to calculate their European tax base in line with a single of set of rules followed by an allocation of the tax base to the EU Member States.

The concept of calculating the European tax base resembles the approach taken as part of the OECD Pillar 2 initiative. However, the BEFIT proposal significantly deviates from the OECD Pillar 2 taxable base calculations (Pillar 2 GloBE calculations) on a number of fronts. In addition to a single set of rules to calculate the tax base, the BEFIT proposal contains a simplified transfer pricing approach to certain qualifying distribution and marketing functions.

The proposed Transfer Pricing Directive aims to harmonize and codify the arm’s-length principle into EU Member State domestic legislation.  It does so by requiring each Member State to adopt the principle, which aligns with the arm’s-length principle as defined in the OECD Transfer Pricing Guidelines.

The Commission envisages a dynamic interpretation of the OECD Transfer Pricing Guidelines to be incorporated into Member State domestic legislation.

Proposed Council Directive on BEFIT


Context of the proposal


Development of a harmonized European corporate tax framework has long been a Union objectives, the idea first appearing as early as the 1960s. According to the Commission, the existence of 27 different national tax systems makes tax compliance complex and costly for European groups and may discourage cross-border EU investments. This is seen by the Commission as a competitive disadvantage for EU businesses compared to similar groups operating elsewhere.


The proposal foresees that, by adopting a single set of rules to determine the tax base of businesses, BEFIT will encourage cross-border investment and stimulate growth in the EU.


BEFIT replaces the Commission’s Common Corporate Tax Base and Common Consolidated Corporate Tax Base proposals, which are officially withdrawn, but appears to be based on the exchanges of views and insights shared by the Member States during the negotiation phase of these proposals.


BEFIT is also consistent with a number of recent Commission proposals, such as the Directive on Administrative Cooperation, debt-equity bias reduction allowance (DEBRA), and the ATAD 3 “Unshell” directive targeting shell entities.


Scope of BEFIT


The BEFIT rules will apply on a mandatory or optional basis.


The new rules will be mandatory for (i) EU-headquartered groups with an annual combined revenue of EUR750 million or more in at least 2 of the last 4 fiscal years and (ii) for groups headquartered in third countries (such as the US), if the EU companies of the group raise at least EUR50 million of annual combined revenue or at least 5 percent of the total revenue of the group based on its consolidated financial statements in at least 2 of the last 4 fiscal years.


Smaller groups preparing consolidated financial statements may choose to opt in for the application of the BEFIT rules and will be bound by the rules for a period of five years.

Calculation of tax base

Under BEFIT, similar to Pillar 2, the financial accounting net income or loss for the fiscal year (before any consolidation adjustments are made) serves as the starting point for calculating the tax base (the so-called preliminary tax result). The financial accounting net income or loss must be based on the generally accepted accounting practice (GAAP) of the Member State of which the ultimate parent entity is a resident for tax purposes, or must be based on International Financial Reporting Standards (IFRS). If the ultimate parent entity is not a resident for tax purposes of a Member State, the GAAP of the Member State of the filing entity or IFRS should be used.

After the financial accounting net income or loss for the fiscal year is determined, the following adjustments are made to the financial accounting net income or loss in order to end up with the preliminary tax result:

  • 95 percent of the dividends received in a fiscal year are eliminated where the BEFIT group member holds an interest that carries right to more than 10 percent of the profits, capital, reserves, or voting rights in the subsidiary for more than a year, except where the financial assets are held for trading and in case of investments made for the benefit of life insurance policyholders bearing the investment risk in the context of a unit-linked/index-linked life insurance policy

  • Gains or losses from the disposition of shares are excluded for 95 percent under the same conditions as the exclusion for dividends received

  • Changes in fair value of ownership interests are excluded under the same conditions as the exclusion for dividends received

  • Income or loss from a permanent establishment is excluded

  • Exceeding borrowing costs that are non-deductible for tax purposes under the implementation of the ATAD I earnings stripping rule of the Member State where the BEFIT group member is a resident for tax purposes, except where the borrowing costs arise from a transaction between BEFIT group members are included in the financial accounting net income or loss

  • The financial accounting net income or loss of a BEFIT group member carrying out shipping activities is adjusted to exclude the amount of revenues, expenses, and other deductible items derived from activities covered by a tonnage tax regime

  • Fines, penalties, and illegal payments are added back to the financial accounting net income or loss

  • The financial accounting net income or loss of a BEFIT group is adjusted to include the amount of corporate tax, similar taxes on profits, and deferred taxes accrued for the fiscal year, as well as any amount recorded as current taxes in the financial accounts in relation to payment of Pillar 2 top-up tax due

  • In case of proceeds from the disposition of a fixed depreciable asset or land where the proceeds are to be re-invested in a similar asset used for the same or a similar business purpose before the end of the second fiscal year after the fiscal year in which the disposition took place, roll-over relief is available

  • Revenues and expense in relation to fixed assets subject to depreciation are excluded from the financial accounting net income or loss. This includes the acquisition or construction costs as well as costs connected with the improvement of fixed assets which are depreciable in accordance with the rules laid down in the BEFIT proposal and subsidies directly linked to the acquisition, construction, or improvement of such assets

  • Unrealized currency exchange gains or losses are excluded from the financial accounting net income or loss, and

  • The financial accounting net income or loss is adjusted to exclude from the preliminary tax result amounts relating to certain items identified in the BEFIT proposal. These items mainly relate to losses, revenues, and costs incurred prior to becoming subject to BEFIT that have not yet been offset.

Further, the BEFIT proposal contains timing and qualification rules in relation to stocks and work-in-progress, provisions, bad debts, long-term contracts, and hedging and rules relating to the entering and leaving of a BEFIT group and corporate restructurings.

Once the preliminary tax result of all BEFIT group members has been determined, these are aggregated to obtain the BEFIT tax base. The BEFIT proposal prohibits Member States from imposing withholding taxes or any other source taxation on intra-BEFIT group transactions unless the beneficial owner of the payment is not a BEFIT group member.

Finally, before allocation of the BEFIT tax base to the Member States, tax credits on income taxed at source are generally allocated to the BEFIT group members under the baseline allocation method provided for by the BEFIT proposal.

A transitional allocation rule applies for each fiscal year between July 1, 2028 and June 30, 2035 at the latest. Under this transitional allocation rule, the baseline allocation equals the taxable result of a BEFIT group member divided by the total taxable result of the BEFIT group.

The BEFIT tax base allocated to a Member State may be increased or decreased through additional items by the Member State in which the BEFIT group member is resident for tax purposes or situated in the form of a permanent establishment in that Member State.

Simplified approach to transfer pricing

The BEFIT proposal outlines a simplified approach to transfer pricing for Member States, targeting intra-group transactions between a BEFIT group member and related entities outside the BEFIT group. The approach focuses on the following two activities:

  • Distribution: Performed through a low-risk distributor, resident in a Member State for tax purposes, and

  • Manufacturing: Conducted through a contract manufacturer, also resident in a Member State for tax purposes.

Both low-risk distributors and contract manufacturers must meet specific criteria, which include (i) a primary functional focus on their respective function (distribution or manufacturing; (ii) the ability to reliably price transactions using a one-sided transfer pricing method, with a low-risk distributor/contract manufacturer being a tested party; (iii) no legal or economic ownership of intellectual property contained in the products distributed or manufacturer; and (iv) limited or no assumption of price, market, inventory, capacity utilization, and credit risks.

Entities involved in multiple economic activities can still benefit from the simplified approach, provided other activities can be adequately segmented and separately priced, and these additional activities are ancillary, are immaterial, or do not add significant value to distribution or manufacturing.

Risk assessment framework: Furthermore, the proposal requires Member States to establish a risk assessment framework mechanism for the qualifying distribution and manufacturing activities. This framework categorizes entities into low-, medium-, and high-risk zone categories based on their annual profit performance in reference to a five-year average interquartile range of public benchmarks. These benchmarks will be based on the profit performance of independent comparable companies operating in the internal market and made publicly available on the European Commission’s website.

Member States are encouraged to adapt their domestic legislation and shape their transfer pricing risk review and audit procedures in line with the proposed risk assessment framework.

Administration/BEFIT information return

One-stop shop: Aiming for simplification of the current systems, the BEFIT proposal would provide for a one-stop shop to allow businesses to work with one single authority in the EU for filing obligations. The ultimate parent entity (filing entity) will be responsible for the filing obligation of a single information return for the whole BEFIT group (BEFIT Information Return) directly with its own tax administration (filing authority), which will share this with the other Member States where the group operates (Article 57).

The BEFIT Information Return would require information on the group and group members, ownership structure, calculation of the preliminary tax result of each BEFIT group member, BEFIT tax base, allocated part of each BEFIT group member, and baseline allocation percentage as part of the BEFIT Information Return. The deadline for the filing is no later than four months after the end of the fiscal year.

In addition, each individual BEFIT group member would also be required to file an individual tax return to their local tax administration, in order to ensure that any additional local adjustments to their allocated part of the BEFIT tax base are captured correctly.

A so-called BEFIT team will be designated for each BEFIT group, bringing together representatives of each relevant tax administration from the Member States where the group operates (Article 60). The team will examine and reach consensus on the completeness and accuracy of the BEFIT Information Return and will aim to share information, provide a degree of early certainty on specific topics, and resolve issues through an online collaborative tool.

Tax assessment and audits: The BEFIT information return will be within the competence of the Member State of the filing authority. While the individual tax return is managed by the Member State in which the BEFIT group entity filed the return, such MS would be required to issue an individual tax assessment in accordance with its domestic law.

Further procedural aspects, such as those relating to audits, would be governed by national law of the Member State in which a BEFIT group entity is resident. Following the outcome of an audit, the BEFIT team would facilitate corrections and adjustments. To ensure that the rules of the common framework are implemented and enforced correctly, the proposal would require Member States to set out rules on penalties applicable to infringements of national BEFIT provisions.


The BEFIT directive, if enacted, will need to be adopted by Member States by January 1, 2028, with the provisions applying from July 1, 2028. Under the proposed directive, the Commission would have the following delegated powers:

  • The power to amend Annexes I (the list of legal forms covered by the BEFIT proposal) and II (the list of corporate taxes or similar taxes covered by the BEFIT proposal) and

  • The power to supplement the BEFIT directive by laying down additional rules for insurance undertakings.

The BEFIT proposal contains a provision calling for review of the operation of BEFIT five years after the BEFIT directive becomes effective.

While the proposal contains certain advantages, such as cross-border relief, a lack of withholding tax on intra-BEFIT group interest, royalty payments, and one-stop-shop filing obligations, it also creates new tax rules to be dealt with by in-scope businesses, which would require close monitoring.

Proposed Council Directive on transfer pricing

As part of the September 12, 2023 publications, the Commission also released a proposal for a Directive for harmonizing transfer pricing rules across the EU (the TP proposal).  

The TP proposal addresses the Commission’s concerns regarding a lack of harmonized transfer pricing rules at the EU level, which have led to varying interpretations among Member States related to transfer pricing concepts such as “associated enterprises” and “control." According to the Commission, the complex nature of transfer pricing rules leads to several issues including (i) profit shifting and tax avoidance, (ii) litigation and double taxation, and (iii) high compliance costs. The proposal establishes a unified approach to transfer pricing covering three key elements.  

Incorporation of the arm's-length principle

The TP proposal, which makes reference to the 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Administrations (OECD TP Guidelines), establishes a common definition of the arm's-length principle in Article 3. It adopts a threshold of 25 percent to determine whether the control criterion is met for associated enterprises. Additionally, it provides specific rules on the corresponding adjustments when a primary adjustment is made in another jurisdiction. 

Common core elements for applying the arm's-length principle

The second part of the draft TP proposal establishes common rules with respect to (i) accurate delineation of commercial and financial relations, (ii) transfer pricing methods, (iii) selection of the most appropriate method, (iv) comparability analysis, (v) the arm's-length range, and (vi) documentation. In particular, the methods listed in Article 9 of the draft TP proposal align with Chapter II of the OECD TP Guidelines, and no preference is indicated for any of these recognized transfer pricing methods.

Further simplification and tax certainty

According to the draft proposal’s guiding principle, the latest OECD TP Guidelines will be binding for all Member States when applying the arm's-length principle. It also proposes to establish implementing acts which (i) offer guidance on tax authorities' approach towards specified transactions, such as transfer of intangible assets, business restructurings, or financial transactions, and (ii) provide safe harbors aimed at reducing the compliance burden and the amount of disputes.

The Commission will require Member States to transpose the proposal, if enacted, into domestic law by December 31, 2025, with the changes taking effect on January 1, 2026. The Commission shall complete an evaluation five years after national rules transposing the Directive come into effect and every five years thereafter.

Multinational businesses active in the EU are encouraged to consider whether their transfer pricing policies and documentation are in line with the contemplated rules of the TP proposal. 

For more information, please contact the authors.