159th CoR Plenary Session (31 January - 1 February 2024)

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

On 19 September 2022 Commissioner Thierry Breton wrote: "Today we have presented a Single Market Emergency Instrument to preserve the functioning of our Single Market and of our supply chains in times of crisis – including the provision and purchasing of essential products and services by Europe's SMEs. The pandemic has shown us how much SMEs were exposed to disruptions across supply chains and the ensuing solvency issues.
We must also put SMEs at the centre of our focus for all policies we design in more “regular” times – times that are tough but do not qualify as a crisis. Our competitiveness depends on it [...] For Europe to recover, SMEs need to recover. After suffering the consequences of the COVID crisis, SMEs are now particularly affected by soaring energy prices, inflation, and supply chain bottlenecks [...]
Europe has not stood by idly, offering advice and support to SMEs as they, too, are embarking in the twin green and digital transition. But we need to do more. I believe that the SME Relief Package should deliver much-needed support in at least three key areas:
1. Combating late payments once and for all;
2. Making it easier to do business in the Single Market;
3. Facilitating access to finance and skills."

When businesses start operating across borders, they are faced with a new and unfamiliar corporate tax system in each EU Member State. As a result, businesses with cross-border activities have to spend time and resources on understanding and complying with complex local corporate tax rules. This represents a significant administrative burden, in particular for small companies. To lower tax compliance costs, the European Commission tabled a proposal on 12 September 2023 to establish a head office tax system (HOT) for small businesses. Under HOT, micro-enterprises and small and medium-sized enterprises (SMEs) operating exclusively through permanent establishments would be able to continue to apply their national corporate tax rules – i.e. the rules they are already most familiar with – when they expand across borders. They would also be able to file a single tax return in the Member State of their head office, rather than separate tax returns in the different Member States. This would cut compliance costs and remove an important barrier to the cross-border expansion of small companies in the single market.

On 12 September 2023, the European Commission tabled the Business in Europe: Framework for income taxation initiative (BEFIT). This proposal introduces a common EU-wide system for the calculation of the corporate tax base for large business groups. The corporate income tax base of each group member is established according to common rules, and subsequently added together into a single EU-wide tax base. The aggregated income is then reallocated between the group entities, where it is taxed according to the national corporate tax rate of the country in which the entity is resident.

If implemented in the EU and globally in 2024, the two-pillar agreement reached in 2021 by 137 countries as part of the OECD Inclusive Framework will change international corporate tax rules significantly. In the meantime, the European Commission is preparing to relaunch the idea of an EU common consolidated corporate tax base (BEFIT), which should build on the foundation laid by the OECD agreement.

The European Commission presented proposals to ease bureaucratic requirements for small and medium-sized businesses (SMEs), but business representatives criticised the vague nature of the package. The SME relief package was initially announced in Ursula von der Leyen’s 2022 State of the Union speech – but it took the Commission until one day before this year’s speech to spell out the proposals in more detail.

Eurochambres considers the SME Relief Package as a small step in the right direction towards providing European smaller businesses with the support they need to drive Europe’s recovery. Eurochambres President, Vladimír Dlouhý, underlined that in the year it has taken to prepare this package since its announcement 12 months ago by President von der Leyen, SMEs have continued to struggle with high inflation, energy crisis, and are still held back by unnecessary obstacles and regulatory burdens. “Today’s communication addresses some of the needs of SMEs, but much more must be done to provide them with tangible relief after several years of very challenging conditions.”