Changes from report parliamentary committee draft to plenary report

The ‘Business in Europe: Framework for Income Taxation’ (BEFIT) proposal introduces a common system for calculating the corporate tax base of large cross-border business groups in the EU and for allocating these tax bases among the members of the BEFIT groups.

Context

The BEFIT proposal aims to further coordinate and harmonise the EU's corporate tax framework, playing a key role in facilitating cross-border business and investments. The proposal will reduce the costs, complexity of administrative and tax compliance for both businesses and tax authorities, while also limiting the opportunities for corporate tax avoidance. BEFIT draws on two previous proposals made by the European Commission in 2016. The Common Corporate Tax Base (CCTB) and the Common Consolidated Corporate Tax Base (CCCTB). These proposals outlined a comprehensive set of rules for the calculation of a CCCTB base and the apportionment of this base according to a formula based on substance factors reflecting real economic activities. Despite broad support from the European Parliament, civil society, and businesses, these earlier proposals saw limited progress in the Council, mainly due to concerns over their uneven impact across the 27 Member States and a perceived lack of flexibility. Since 2016, international corporate tax rules have changed significantly. The OECD/G20 Inclusive Framework on BEPS, especially the agreement on Pillar II establishing a global minimum corporate tax rate, has set a new benchmark for tax coordination. These developments offer the EU a timely opportunity to revive discussions on a common corporate tax base and strengthen its internal alignment. At the same time, growing geopolitical tensions and the fragmentation of the global economy have made cross-border business more complex and unpredictable. In this context, corporate tax harmonisation within the EU is not just administrative efficiency, but a strategic necessity. A coordinated and stable tax framework is essential to support the Single Market and ensure policy coherence across Member States. Moreover, a transparent and consistent corporate tax system is vital for advancing the Capital Markets Union. It reduces regulatory disparities, removes investment barriers, and deepens financial and economic integration. Ultimately, BEFIT will enhance a fair and efficient EU business environment while strengthening the fight against aggressive tax planning.

The Commission Proposal

With the BEFIT proposal, the Commission seeks to integrate these international developments into a new, unified set of rules to create a common corporate tax base across the EU. Unlike the CCCTB proposal, which used taxable profits as the starting point, BEFIT begins with consolidated financial accounts and then applies adjustments to derive a taxable base. A key feature of BEFIT is its flexibility. Member States retain the ability to apply tax incentives and adjustments to their share of the allocated tax base. However, these incentives are constrained by the 15% minimum effective tax rate established in Directive (EU) 2022/2523.

BEFIT applies to large cross-border companies with an annual turnover of €750 million or more, forming the BEFIT groups. Smaller groups can voluntarily join and prepare consolidated accounts. Adjustments are then made to determine provisional tax results, including items like dividends, fines, excess interest, and corporation tax paid. The draft directive also includes common rules on amortisation, timing, and quantification. In particular, the BEFIT proposal introduces an apportionment rule for calculating the BEFIT base. The allocation to Member States will be based on the average share of the BEFIT base of each national BEFIT group member in the last three tax years, thus moving away from an allocation key based on the place of economic substance. However, this is proposed as a transitional rule until 2035.

The proposal also contains innovative transfer pricing rules, which are to be maintained until the end of the transitional period:

 For intra-group transactions, a risk assessment framework that defines low and high risk zones;

 For intra-group transactions outside the EU, a "traffic light system" with zones for low, medium and high risk, as far as low-risk distribution and contract manufacturing activities are concerned;

Finally, the BEFIT proposal outlines the administration of the BEFIT system, including the establishment of joint BEFIT teams for each BEFIT group, comprising representatives of the tax administrations of the Member States where the BEFIT group operates.

Main Adjustments Proposed by the Rapporteur

The rapporteur supports the objectives of the BEFIT proposal and affirms that further harmonisation of the corporate tax base is beneficial for the stability and competitiveness of the internal market, while safeguarding sustainable tax revenues for Member States. Fragmented national tax systems currently act as barriers to cross-border investment by increasing tax uncertainty, distorting competition, and raising compliance costs for businesses. By aligning corporate tax rules across Member States, BEFIT will help remove these obstacles - making it easier for BEFIT companies to raise capital, operate and expand seamlessly across borders, and minimise their compliance costs and administrative burdens. It will also be an effective instrument against tax evasion and avoidance.

To reinforce these objectives, the rapporteur proposes to:

 Lower the annual revenue threshold after the transitional period so that all large groups, defined under the Accounting Directive (Directive 2013/34/EU), fall within the scope of BEFIT.

 Adapt interest limitation rules to reduce distortions in the debt/equity ratio caused by excessive intra-group debt financing and to curb base erosion and profit shifting, which can occur as a result from excessive interest payments

 Strengthen Controlled Foreign Company (CFC) rules to enhance resilience against profit shifting within BEFIT groups.

 Refine depreciation rules to address the potential EUR 31 billion tax base loss highlighted in the Commission's impact assessment.

 Limit tax incentives, while giving Member States' flexibility, with a preference for input-based incentives, especially for R&D.

 Replace the transitional apportionment rule with a material factor-based allocation formula after 2035. The main change proposed by the rapporteur is an allocation formula based on material factors—labour, assets, and sales, equally weighted and applied after the transition period. This formula fully supports tax base harmonisation by eliminating the need for transfer pricing within BEFIT groups, reducing compliance costs and limiting base erosion and profit shifting.