On 10 April 2024, the European Parliament (“EU Parliament”) adopted its non-binding report on the proposal for a Council directive establishing a Head Office Tax system for micro, small and medium size enterprises and amending Directive 2011/16/UE.
Background
On 12 September 2023, the European Commission proposed a directive establishing a Head Office Tax System (“HOT”) for micro, small and medium sized enterprises (“SMEs”). The HOT system intends to simplify tax obligations of standalone SMEs with one or more permanent establishments (“PEs”) in other EU Member States.
The proposal intends to simplify the tax compliance obligations of SMEs operating in the EU through PEs. Such SMEs can opt to compute the taxable basis of their PEs under the rules applicable to the head office, file a single tax return and pay the tax liability to the head office EU Member State, thus interacting only with a single tax authority. The latter would apply the tax rate of the PEs’ relevant EU Member State, exchange the filed return, and share tax revenue with relevant EU Member States without affecting taxing rights allocation provided under the relevant double tax treaties.
For more information on the proposal, please refer to our previous newsflash.
EU Parliament report
To comply with the EU legislative procedure, the proposal requires unanimity in the Council for its adoption, following consultation of the EU Parliament and the European Economic and Social Committee.
At the level of the EU Parliament, the Economic and Monetary Affairs Committee adopted its report on 22 February 2024 supporting the overall proposal and proposing to extend the initial proposal to further alleviate SMEs compliance burden.
On 10 April 2024, the EU Parliament adopted its report, with the following key proposals:
- Extended scope: SMEs having a maximum of two subsidiaries should also benefit from the regime (while the initial proposal was only open to SMEs operating exclusively through PEs) and these subsidiaries should be included in the simplification mechanism.
- Turnover condition: while the initial proposal subjected eligibility to the condition that the joint turnover of the PEs in the last two years did not exceed the double of the head office turnover, the report proposes to set the limit to the triple of the head office turnover over a three-year period.
- Reduced waiting period: reduce the eligibility requirement for the head office SME to have been tax resident in its EU Member State for at least 2 years to being tax resident since the previous fiscal year or since incorporation.
- Extended deadline: the deadline for head offices to notify their domestic tax authorities to apply the HOT system should be reduced from 3 months before the end of the fiscal year preceding the application to 2 months before the end of the fiscal year.
- Extended application period: the application period should be extended from 5 to 7 years for SMEs opting to apply the HOT system.
- Shortened transposition time frame: The transposition and application timeframe should be reduced by one year, requiring a transposition by 31 December 2024 and application as from 1 January 2025.
Economic and Financial Affairs Council (ECOFIN) report
On 21 June 2024, ECOFIN approved a draft report to the European Council on tax issues providing an overview of the developments on several EU direct tax initiatives, including an update on the status of the HOT proposal, in the context of the coming change to the EU Presidency.
According to ECOFIN, a large number of EU Member States raised serious concerns regarding several aspects of the proposal, such as the administrative challenges that the current proposal may create for tax authorities, the potential effect on tax revenues and tax sovereignty of EU Member States as well as risks linked to competitiveness of the domestic markets.
Several EU Member States believe that a more general discussion on this topic should take place before any further technical progress can be made. The report also suggests that additional work could be performed with the objective of preparing a discussion on the policy choices that would need to be made.
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