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On 18 May 2021, the European Commission adopted a Communication on Business Taxation1for the 21st century which takes account of the G20 / OECDdiscussions on global tax reform and sets out both a short term anda long term vision to support the EU's recovery from theCOVID-19 pandemic. There are three key strands to thisCommunication:

Firstly, by 2023, the Commission will present a new frameworkfor business taxation in the EU. The BEFIT aims to:

BEFIT will replace the long pending but never agreed EU proposalfor a Common Consolidated Corporate Tax Base (CCCTB) across the EU.It will be based on the key features of a common tax base and theallocation of profits between EU Member States based on a formula(formulary apportionment).

The Commission notes that "common rules for determiningthe corporate tax base will deliver substantial simplification forgroups of companies operating in the Single Market. Instead ofhaving to comply with up to 27 different sets of corporate taxrules, a group will be able to determine its tax liability in eachEU Member State according to one single set of rules. This willalso pave the way for even further administrative simplifications,such as the possibility of a single EU corporate tax return for agroup".

BEFIT will consolidate the profits of the EU members of amultinational group into a single tax base, which will then beallocated to Member States using a formula, to be taxed at nationalcorporate income tax rates.

Secondly, the Communication also defines a tax agenda for thenext two years, with measures that promote productive investmentand entrepreneurship, better safeguard national revenues, andsupport the green and digital transitions. This builds on the July2020 EU Tax Action Plan. Measures will include:

Thirdly, the Commission has adopted a non-binding Recommendationon the domestic treatment of losses. It encourages EU Member Statesto allow loss carry back for businesses to at least the previousfiscal year due to the pandemic. This will benefit businesses thatwere profitable in the years before COVID-19, allowing them tooffset their 2020 and 2021 losses against the taxes they paidbefore 2020. EU Member States are asked to inform the Commissionabout the measures it implements based on this recommendation.

Following on from the above, on 20 May 2021 the Commissionadopted an inception impact assessmentroadmap2 for an EU Council Directive to fightbusiness tax avoidance arising from the use of so called 'shellcompanies' and arrangements for tax purposes.

The Commission states that although the EU has taken severalactions to address abusive tax arrangements, the use of shellcompanies (entities with little or no economic substance, incross-border arrangements for purposes of avoiding taxes) continuesto be an issue.

The Commission noted that there are existing measures addressingthe substance of legal entities in the context of certainpreferential tax regimes, however there are no legislative measuresdefining substance requirements for tax purposes within the EU.This roadmap aims to provide an EU legislative measure whichdefines substance requirements for tax purposes to be met byentities within the EU. This will focus on situations where theultimate objective is to minimise the overall tax of a group orstructure.

Under the roadmap, several policy options will be analysed forthe purpose of designing the legislative proposal, including:

The roadmap acknowledges the potential risk that multinationalswould relocate shell companies to non-EU 'third countries',but states that this negative impact would be offset by thebenefits of a standardised common assessment of substance for taxpurposes.

This roadmap is open for feedback until 17 June 2021. It willsupport the preparation and inform the Commission's decision ofthis proposal. A public consultation will be launched in June 2021.The Commission is planning to adopt a Directive in last quarter of2021.

In addition to the corporate tax reforms set out in theCommunication, the Commission is to publish measures to ensure fairtaxation in the digital economy shortly.

This is a detailed and far reaching set of proposals from theEuropean Commission which would affect businesses based in andinvesting into the EU. It comes on top of already significant newEU tax measures such as the ATAD which have been or are currentlybeing implemented across the EU. It will be important that proposedmeasures in this initiative such as the DEBRA are carefullyconsidered by all stakeholders as it is similar to and would comein alongside the new EU 'interest limitation' rules whichare, and will continue to be, a very significant and complex taxchange for companies doing business in the EU.

The initiative as regards companies which do not have'substance' will also need to be carefully considered toensure that this is consistent with existing EU law, such as the'freedom of establishment' and 'free movement ofcapital' and European Court of Justice case such as the CadburySchweppes case (Case C-196/043), and also evolvingOECD and international tax principles such as the business'principal purpose test'. It should recognise thelegitimate use of holding companies in international groups andthat certain sectors, such as securitisation companies set upacross the EU, will outsource their business requirements toinvestment managers and service providers rather than employstaff.

We will be part of industry groups involved in the publicconsultations on the Communication and please let us know if we candiscuss any matters in that regard.

Footnotes

1 Future-proof taxation - Commission proposes new,ambitious business tax agenda

2 Tax avoidance - fighting the use of shell entitiesand arrangements for tax purposes

3 Case C-196/04 - Cadbury Schweppes plc and CadburySchweppes Overseas Ltd v Commissioners of InlandRevenue

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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