CFE Opinion Statement on the EU Commission HOT Proposal

CFE Tax Advisers Europe has issued an Opinion Statement on the EU Commission Proposal on establishing a Head Office Tax system for micro, small and mediumsized enterprises and amending Directive 2011/16/EU. CFE in the statement recommends that the following factors are taken into consideration by the European Commission:

The Directive establishing a head office tax (HOT) system for micro, Small, and Medium-sized Enterprises is a further action to make it easier for small and medium-sizedenterprises to do business in the internal market, as announced in the SME ‘Relief Package’. The SME Relief Package, which the Commission adopted, delivers much needed support for small and medium-sized enterprises to secure cash flow, to simplify and to invest and grow.

The current systems of business taxation in the EU give rise to a significant degree of complexity. This translates into businesses facing high compliance costs, barriers to cross-border operation, risks of double and/or over-taxation leading to tax uncertainty and, frequently, time-consuming legal disputes. These setbacks constitute a significantly higher burden for Small and Medium-sized Enterprises than they do for large groups of companies.

If Small and Medium-sized Enterprises wish to operate cross-border, they become taxable in more than one Member State as soon as their activity abroad creates a permanent establishment. Compliance with those obligations comes with fixed costs, which creates a barrier that can prevent Small and Medium-sized Enterprises from developing their business cross-border. This is especially the case at the inception stage of expansion, when the extent of activities carried out abroad would mainly be ancillary to the primary business operations in the state of origin.

It is thus important that Small and Medium-sized Enterprises, which envisage growth and expansion across the border, through permanent establishments, can continue to apply the tax rules that they are familiar with to calculate the taxable result of their permanent establishments in other Member States. This will give these Small and Medium-sized Enterprises the opportunity to take the business decision that suits best, either to continue applying different sets of tax rules to their business operations or opt in for the head office taxation rules, after having taken into account the size of the compliance costs and administrative complexity that can arise from dealing with distinct tax rules.

The directive provides for a simplified approach to subjecting standalone Small and Medium-sized Enterprises operating cross-border in the EU to taxation in respect of their permanent establishments in other Member States. This simplified approach is referred to as ’Head Office Taxation’. The solution is limited to the taxation rules for the computation of the taxable result of permanent establishments and does not touch upon the social security rules applied in the Member State of the permanent establishment, nor does it affect the existing bilateral conventions on the avoidance of double taxation.

Eligible Small and Medium-sized Enterprises will have the option to calculate the taxable result(s) of their permanent establishments based only on the taxation rules of the Member State of their head office, while the applicable tax rate(s) will remain that/those of the Member State(s) where the permanent establishment(s) is/are located. The option, and its renewal, are however strictly confined by eligibility requirements aimed to address potential risks of circumvention of the rules. Such an option shall last for five years, unless the Head Office changes residence in the meantime or the joint turnover of the permanent establishments becomes at least triple of the head office’s turnover, in which case the HOT rules will cease to apply.

At the end of each five-year period, Small and Medium-sized Enterprises will be entitled to renew their choice for another five years without limit as long as they continue to meet the eligibility requirements.

The eligibility and termination provisions are designed to discourage abuse and potential tax planning practices, such as the deliberate transfer of the Head Office to a Member State with attractive features in its tax system that ensure low taxation. When a standalone Small and Medium-sized Enterprise decides to set up a subsidiary, or the joint turnover of its permanent establishments becomes at least double of the head office’s turnover, or when it ceases to qualify as a Small and Medium-sized Enterprise altogether, it cannot renew the HOT rules when the five-year period expires.

A one-stop shop will enable in-scope Small and Medium-sized Enterprises to interact only with the tax administration of the Member State of their head office both for the procedure to opt in and for filing obligations and paying taxes. The ‘filing entity’ for all permanent establishments will be the head office of the Small and Medium-sized Enterprise. Small and Medium-sized Enterprises will thus file one single tax return with the tax administration of their head office (the ‘filing authority’). This tax administration will then transfer the resulting tax revenues to each Member State where the Small and Medium-sized Enterprise maintains a permanent establishment. Such an approach will eliminate the complexities and related costs of having to deal with multiple tax systems and tax administrations.

The Member State of the head office will apply the rates applicable in the Member State(s) where the Small and Medium-sized Enterprise maintains permanent establishments and subsequently, transfers the resulting tax revenues to the latter.

Timely and streamlined exchange of information between the concerned tax authorities is provided for, in particular by using the existing framework set up by the directive on administrative cooperation in the field of taxation. Such exchanges shall be tailored so that it answers the needs and the simplification purpose aimed by this directive.

In relation to audits, appeals, and dispute resolution, each Member State would retain the authority to audit permanent establishments within their jurisdiction. Member States also would be able to request joint audits that obligate the addressed Member State to participate, which would maintain the integrity of the tax audit process.

Although in the opinion of CFE the aforementioned system of the optional application may create occasional competition distortions due to the varying tax rules for comparable businesses, according to the European Commission the proposed directive seeks to outweigh these risks, and the benefits overall would include significant reductions in tax compliance costs for enterprises availing themselves of the HOT system. CFE recognises that cross-border businesses face high tax compliance costs in the internal market, as they must comply with various legal frameworks. This is particularly the case for Small and Medium-sized Enterprises, for whom these costs are proportionately much higher. Moreover, the existing disparities between Member States could create mismatches that lead to double (non-)taxation.

The option would be able to be renewed at the end of the five-year period, provided the eligibility requirements are met. Renewal would be permitted without limit, as long as eligibility conditions are satisfied. If a standalone Small and Medium-sized Enterprise opts to establish a subsidiary, the combined turnover of its permanent establishmentsexceeds twice that of the head office, or it no longer qualifies as a small and medium-sized enterprise, it would be ineligible to renew the application of the HOT rules when the five-year term ends.

CFE is not opposed to this proposal, because it should bring simplifications for Small and Medium-sized Enterprises and prevent and lower the number of disputes arising over the presence and scale of permanent establishments. This proposal makes it easier for Small and Medium-sized Enterprise to expand abroad.

CFE and its Member Organisations stand ready to assist the Commission in considering the issues above in the course of the policy dialogue and public consultation.

CFE Opinion Statement on the EU Commission HOT Proposal