BEFIT: evaluating the EU’s proposed common tax framework for large companies

The EU’s Business in Europe: Framework for Income Taxation (BEFIT) initiative represents a significant legislative proposal aimed at establishing a unified set of rules for determining the tax base of corporate groups.

The European Commission’s goal is to create a common framework for corporate income taxation across the EU, enabling companies with operations and subsidiaries in multiple countries to enjoy a clearer, more predictable, and less bureaucratic tax environment.

Additionally, BEFIT seeks to combat tax evasion and artificial profit shifting by fostering a more transparent, equitable, and unified system within the European tax market, characterised by simplified regulations.

The core idea behind BEFIT is to simplify the tax compliance process for companies. Under this framework, businesses will be able to calculate and declare their taxes more easily, without the need to navigate the varying tax rules of each EU member state. This simplification is expected to facilitate accurate tax calculations by national authorities and reduce the administrative burden on companies.

The initiative aligns with the international agreement on global minimum taxation negotiated within the OECD/G20, integrated into European law through the EU’s Pillar Two Directive.

One of the most critical aspects of the BEFIT legislative proposal is the allocation of the consolidated tax base among member states. This allocation occurs in two stages:

• Transitional stage (2028–35) – during this initial period, the total profit of the corporate group will be distributed among its EU entities based on the average tax results achieved by each entity over the previous three tax years. This method aims to ensure a smooth transition without causing significant disruptions to existing tax structures.

• Subsequent phase (post-2035) – following the transition period, the European Commission may propose a permanent allocation formula that accurately reflects the actual economic activity in each member state. This formula could take into account various factors, including sales volume, workforce metrics (such as wage costs or employee numbers), and the value of tangible assets utilised in business operations.

While BEFIT establishes a common tax base for calculation, it does not harmonise tax rates across member states. Each country will still apply its own corporate tax rate to the portion of the tax base allocated to entities within its jurisdiction.

For instance, if the total tax base is €200 million, distributed according to the applicable allocation key, the tax liabilities would be calculated as follows:

• Romania (rate: 16%) – 16% × €50 million = €8 million;

• Germany (rate: 30%) – 30% × €90 million = €27 million; and

• France (rate: 28%) – 28% × €60 million = €16.8 million.

In total, the tax paid in the EU would amount to approximately €51.8 million. This calculation is based on a single common rule, although jurisdictions may allow for certain local adjustments. The actual taxation will be applied locally, ensuring that double taxation or artificial profit shifting between subsidiaries is avoided.

The proposed benefits of BEFIT include:

• Simplified tax compliance – fewer divergent rules between countries will streamline the compliance process;

• Reduced administrative costs – companies can expect fewer returns and audits, leading to lower operational costs;

• Increased transparency – automatic profit allocation will minimise aggressive tax optimisation practices; and

• Greater predictability – a common tax framework will facilitate long-term planning for businesses.

However, there are also risks and implications for companies to consider:

• Possible loss of local tax advantages – companies may lose favourable tax regimes in certain countries;

• High transition costs – adapting ERP systems, revising business models, and conducting internal recalculations may incur significant expenses;

• Profit sharing implications – tax increases may occur in countries with higher rates (e.g., Germany), while profits could decrease in those with lower rates (e.g., Romania); and

• Lack of rate harmonisation – although the tax base is common, significant differences in tax rates between countries (e.g., 9% in Hungary versus 30% in France) remain.

To effectively prepare for BEFIT, companies should:

• Analyse their current exposure to national tax regimes;

• Simulate the application of the allocation formula based on tax results from the previous three years;

• Collaborate with legal, tax, and IT teams to adapt internal systems accordingly;

• Prepare staff for new reporting and compliance requirements; and

• Reassess tax policies and intercompany contracts in light of the new rules.

According to the OECD, large groups with a consolidated turnover of at least €750 million contribute approximately €132 billion (about 1% of GDP) in taxes. The new, simpler BEFIT rules could reduce current tax compliance costs by up to 65%.

If adopted, this initiative could fundamentally transform the taxation landscape for companies in the EU, replacing older proposals such as the Common Consolidated Corporate Tax Base.

The estimated deadline for full implementation is 2030, but the success of BEFIT will hinge on achieving political consensus within the European Parliament and the Council.