News

Overview

On 12 September 2023 the EU Commission proposed Council Directive establishing a Head Office Tax (HOT) System for micro, small and medium sized enterprises (SME), as defined under the Directive 2013/34/EU of the European Parliament, which aims at simplifying corporate tax compliance for SMEs that decide to operate across borders within the EU and amending Directive 2011/16/UE on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC.

The EU Commission calculates that 99% of European businesses are SMEs. They provide jobs to more than 85 million European citizens and SMEs are at the heart of innovation and entrepreneurship. The ideas and solutions of 24,3 million entrepreneurs, contribute to a sustainable and digital economy, central to Europe’s competitiveness. The European Commission is committed to supporting enterprises from the moment they start throughout their lifetime.

What is HOT proposal?

The Commission essentially proposes that SMEs with a permanent establishment (“PE”) in another (“host”) Member State, would continue to apply the tax rules they are familiar with (of the “home” Member State), to calculate and report the taxable result of their permanent establishments in other (“host”) Member States to the tax authorities of the “home” Member State through automatic exchange of information to the host Member States. The head office would settle with its domestic (“home”) tax authorities its own income tax and the tax liability of its PEs. In turn, the filing authority (“home”) would transfer the relevant amounts initially collected with the host Member States.

Once a SME chooses to apply the new rules, it may apply the rules for five fiscal years, unless the head office changes its residence in the meantime, or their foreign business activity doubles when compared to the business activity in the EU country of origin.

SMEs may renew the term every five years if they continue to meet the eligibility requirements. The eligibility and termination provisions are designed to discourage potential tax planning practices.

At the same time, each EU country remains competent for audits of permanent establishments in their jurisdiction and can also request joint audits with other EU countries.

The benefits of HOT are expected to be (i) reducing compliance costs for businesses, (ii) encouragement of cross-border expansion of SMEs and (iii) contribution to ensuring a level playing field for the participation of SMEs in the internal market.

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. Consultation of the EU Parliament produced on 10 April 2024 the EU Parliament report with specific recommendations.

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.

Following the first general discussion on the Commission proposal, more detailed examination was performed at working party on tax questions (WPTQ) meetings. The Commission also presented a summary of the findings by the informal group of experts from several Member States that analyzed potential administrative challenges for tax authorities pertaining to this proposal. These discussions were aimed at obtaining a comprehensive view of the technical issues and potential merits of the proposal.

The most notable executive conclusions were:

• All delegations support the general objective to facilitate cross-border activities by SMEs.
• A large number of delegations raised serious concerns as regards several aspects of the Commission proposal, such as the administrative or aggressive tax planning challenges that the Directive, as proposed by the Commission, may create for tax authorities, concerns about the potential effect on tax revenues of Member States, risks linked to competitiveness of the domestic markets (“home” SMEs that choose not to or can’t expand cross-border), as well as more general arguments linked to the burden for national tax systems and linked to tax sovereignty. Fewer delegations see room for further technical discussions on the basis of the Commission proposal as presented.
• The most accepted view is that a more general high level (orientation) discussion on this file should take place before any further technical progress can be made.

VACIERO SOLUTION:

The HOT proposal is part of a broader initiative by EU bodies to implement comprehensive taxation measures, like BEFIT and Transfer Pricing Directive.

While there is a general political will within EU to facilitate the SME activities across the single market, details of these measures are complex. The requirement for unanimity approval remains a significant obstacle to the implementation of practical measures for SME. Member States remain protective of the own tax collecting authority, which often hinders progress on these initiatives.

Staying informed about these measures is crucial for SMEs to anticipate potential benefits and opportunities in the evolving EU market. We encourage you to remain vigilant and proactive in understanding how these changes may affect your business and clients.

For further information, contact:

Alberto Bermejo

T.:+34915865867

abermejo@vaciero.es