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Draft BEFIT Directive introducing a common EU framework for corporate income taxation

Local contact

Peter Moreau

21 Sep 2023
Subject Tax alert
Jurisdictions Belgium

On 12 September 2023, the European Commission adopted a BEFIT (“Business in Europe: Framework for Income Taxation”) package1, including two Directive proposals, aiming to reduce tax compliance costs for large, cross-border businesses in the European Union.

As part of this BEFIT package, the Commission published a legislative proposal for a Directive “Business in Europe: Framework for Income Taxation” (BEFIT Directive), which takes a new approach to and replaces the Commission’s Common (consolidated) Corporate Tax Base (C(C)CTB) proposals, introducing a common framework for corporate income taxation in the European Union (EU). This proposal aims to replace the current Member States’ various ways for determining the taxable base for groups of companies that have annual combined revenues exceeding €750 million. The BEFIT proposal would also apply to non-EU-headquartered groups exceeding specific thresholds.

The rules on determining the tax base included in the proposed Directive, resemble those contained in the Pillar 2 Directive implementing Minimum Tax rules2 (Minimum Tax Directive) (i.e. starting from financial accounts), though with fewer adjustments required. As under the Minimum Tax Directive, the tax base will be determined on a per-entity basis. Once defined, the adjusted profits of in-scope entities are aggregated, defining the BEFIT tax base which would allow for cross-border set-off of losses. The base is then allocated back to the Member States, which may make adjustments and apply their own rates. In the transition period, the allocation to the Member States is based on historic profits, with the aim to limit the budgetary consequences for Member States. Proposals on risk assessment and administration are also included.

Note that this proposal is linked to a new Transfer Pricing (TP) Directive proposal, issued on the same date by the European Commission and introducing a common framework in the EU for applying the arm’s-length principle (read our EY Tax alert).

The draft BEFIT Directive


The proposed rules would apply to all entities in the EU that meet the following criteria:

a. Belong to an MNE group with consolidated combined revenues exceeding €750 million in at least two of the last four fiscal years;
b. Companies (entities) must also:

  • Take one of the forms listed in the Directive;
  • Be subject to one of the corporate taxes listed, or to a similar tax subsequently introduced;
  • Be the ultimate parent entity (UPE) or their assets, liabilities, income, expenses, and cash flows must be consolidated on a line-by-line basis by the ultimate parent entity.

c. Permanent establishments must also:

  • Be subject to one of the corporate taxes listed or to a similar tax subsequently introduced.
  • Be a permanent establishment of the UPE or of a company whose assets, liabilities, income, expenses and cash flows shall be consolidated on a line-by-line basis by the UPE;

In addition, there is a carve-out for entities belonging to non-EU headquartered MNEs, if either the combined revenues of the group in the EU do not exceed 5% of the total combined revenues of the group or the amount of €50 million in at least two of the last four fiscal years.

Entities belonging to MNEs that do not meet the turnover criterion or are carved-out as per the above provision may still opt into the new regime on a voluntary basis.

Although the Directive is explicitly inspired by work on BEPS 2.0, the definition of “group” is not completely aligned with that contained in the Minimum Tax Directive, as BEFIT requires a 75% ownership threshold for entities to be considered in the BEFIT group.

Computation of the tax base

Each entity of the BEFIT group will determine its preliminary tax results starting, from its financial statements prepared in accordance with the accounting standard used for consolidation purposes and making upward or downward variations in accordance with the rules of the Directive.

Although the mechanism looks similar to the Minimum Tax Directive, BEFIT applies fewer adjustment. Therefore compliance should, in principle, be easier for in-scope MNEs, even though duplication of calculations may arise if companies would be asked to separately ensure compliance with both regimes.

Tax bases are then aggregated into the BEFIT tax base and (i) if the BEFIT tax base is positive, the profit shall be allocated among entities; (ii) if the BEFIT tax base is negative, the loss shall be carried forward and shall be set-off against the next positive BEFIT tax base. The aggregation and loss carryforward mechanisms are relevant as they introduce cross-border loss compensation mechanisms within the EU, which in the view of the Commission should avoid over taxing the profits of the group and incentivize businesses to operate across borders in the internal market.

Allocation of the BEFIT tax base

The BEFIT tax base is finally allocated to the BEFIT group members in accordance with the baseline allocation percentage, in turn determined as follows (ratio of a/b):

a. The average of the taxable results in the three previous fiscal years;
b. The addition (sum) of taxable results determined in point (a) above.

Negative taxable results would be considered as zero for determining the baseline allocation.

To simplify the transition to the new system, in the first three years of the Directive’s application the average taxable results in point (a) above should be determined starting from the domestic tax rules progressively introducing BEFIT-determined results.

Taxation by the Member States

The Directive leaves Member States free to increase or decrease the allocated part of the tax base through domestic provisions, with the purpose of allowing the system to meet specific tax-policy objectives of each Member State. Examples of such cases could be local tax incentives or deductions, as long as they are aligned with Pillar Two requirements. Tax rate and enforcement policies will fully remain with Member States.

Although there is not a carveout from BEFIT for financial services institutions, ad hoc rules apply for upstream extractives activities, international shipping not covered by a tonnage tax regime, inland waterways transport and air transport.

With respect to upstream activities, the Directive states that revenues, expenses and other deductible items that stem from extractive activities shall be attributed to the BEFIT group member(s) located in the Member State where the extraction takes place, unless the Member State contains associated group entities that are not part of the BEFIT group or the extraction takes place in a third country jurisdiction.

Revenues and costs relating to (i) the operation of ships in international traffic where the taxable result is not covered by a tonnage tax regime, (ii) the operation of aircraft in international traffic and (iii) the operation of boats engaged in inland waterways transport are excluded from the BEFIT tax base. These shall be attribute to a BEFIT group member on a transaction-by-transaction basis and subject to the arm’s-length principle.

Simplified approach to Transfer Pricing

Because BEFIT takes the financial results of individual group entities as a point of departure for tax-base calculation and apportionment, pricing of transactions between these entities will remain relevant as this impacts profits.

For BEFIT, the Commission proposes a risk-based approach to TP for intra-BEFIT-group transactions. Increases by more than 10% in the amount of intercompany transactions would be seen as high-risk and could be disregarded by tax administration unless counterproof is provided by the taxpayer.

Moreover, following an approach inspired by Amount B of Pillar One, a simplified approach to TP has been proposed for testing intercompany transactions involving low-risk distribution and low-risk manufacturing activities. Comparing the results achieved by the tested party with a regional benchmark analysis prepared by the Commission, taxpayers will be classified as low/medium/high risk and this should influence the likelihood of tax audit or inquiries by the involved tax authorities. This simplified approach applies to transactions between a member of the BEFIT group and an associated enterprise outside the BEFIT group.

Although similar to the approach contained in Amount B of Pillar One for baseline distribution activities, the BEFIT Directive differs in that it has a wider scope and also includes (i) retail distribution activities and (ii) manufacturing activities.

Besides that, although Pillar Two obligations will apparently still apply to the entities involved, the TP obligations under these rules must nonetheless be respected.

Administration and procedures

The fiscal year of all BEFIT group members must be aligned, as one BEFIT information return must be filed for the entire group by the filing entity (either the UPE or a designated entity). A BEFIT team shall be composed of one or more representatives of each relevant tax administration per Member State. This team must then examine the return and, once consensus is reached on the content, the team informs the filing entity that the process is complete.

Each BEFIT group member must then file an individual tax return in its jurisdiction, including the information used to determine the local corporate tax.

Member States will undertake tax assessments for each BEFIT group entity resident in their territory, but where the assessment would affect the BEFIT tax base, they shall notify the other authorities to ensure the BEFIT tax base is amended accordingly.

Audits may be undertaken individually by Member States or jointly and, if the results would cause a change in the BEFIT tax base, the BEFIT team shall be notified and a revised BEFIT information return should be filed to allow other Member States to adjust their tax assessments accordingly.

Appeals against the BEFIT information return must be made in the Member State of the filing authority, whereas appeals against the individual tax assessment are made in the Member State where the BEFIT entity is resident. Appeals shall be made to an administrative body or, if no such body exists, to the competent judicial authority directly.

In any event, no amended tax assessments shall be issued where the difference between the initially declared BEFIT tax base and the revised BEFIT tax base does not exceed the lower of €10,000 or 1% of the BEFIT tax base.

Next steps

The draft Directive will now move to the negotiation phase among Member States, with the aim of reaching unanimous agreement3. Once unanimity is achieved, the next step would be the publication of the Directives in the Official Journal of the European Union.

The Commission proposes that the Member States transpose the BEFIT Directive by 1 January 2028 and that they apply these provisions from 1 July 2028.


Adoption of the proposed BEFIT Directive would mark a significant step toward the harmonization of corporate tax rules within the EU, even though additional costs for taxpayers for the compliance and the adaptation to the new regime should be taken into account. The BEFIT’s simplifications under the Directive are limited, as the regime would still largely apply on a country-by-country basis, including TP obligations. Also, the combination of per-entity calculations, aggregation of the profits/losses into a single tax base, subsequent allocation of this tax base to Member States and allowing additional local adaptations and deductions reflect design choices that depart from the earlier CCCTB proposal. These choices also rule out more fundamental simplifications, such as a consolidated tax base, cross-border EU tax incentives and an application of Pillar Two at an EU level, instead of at a Member-States level.

Although it is not yet known whether Member States will embrace the Commission’s proposal, businesses should closely monitor the adoption process for any changes or clarifications to the proposal. As with previous Directives on direct taxation, changes likely will be made to the proposals during the negotiation process. Consequently, the final Directive, if adopted at all, could differ from the current proposal.

In case of any further questions with regard to these developments, please do not hesitate to reach out to your trusted EY person of contact.

1 New proposals to simplify tax rules and reduce compliance costs for cross-border businesses

2 See Global Tax alert ‘EU Member States unanimously adopt Directive implementing Pillar Two Global Minimum Tax rules’

3 Article 115 of the Treaty on the Functioning of the EU forms the legal basis for both draft Directive Proposals. Therefore, the proposals are subject to the Council’s unanimity for adoption, while the European Parliament only has an advisory role.