Hybrid scope of BEFIT
A BEFIT group will generally be formed by a parent company and subsidiaries in which it holds, directly or indirectly, at least 75% of the ownership rights or profit rights. The BEFIT rules are mandatorily applicable to EU headquartered groups with annual combined revenues exceeding EUR 750 million (Pillar 2 threshold). BEFIT applies to groups with non-EU headquarters if the relevant EU part raises either at least EUR 50 million annual combined revenues in a certain reference period or accounts for at least 5% of the total group revenue. Groups below these thresholds may opt-in for BEFIT, for at least a five-year period, provided they prepare consolidated financial statements. In such case, the group is bound to the BEFIT rules for a period of at least five years. If BEFIT is applicable, it will apply to all EU-based entities and permanent establishments that meet the aforementioned 75% ownership requirement.
Tax base for BEFIT group members
For the computation of the tax base of each group member, BEFIT uses as a starting point the financial accounting net income or loss (FANIL) as stated in the consolidated financial accounts. Adjustments need to be made for, amongst others, profit distributions and non-deductible exceeding borrowing costs under the ATAD earnings stripping rule. Comparable to Pillar 2, BEFIT makes adjustments for results from permanent establishments and for 95% of dividends and capital gains from financial assets in which the BEFIT group member holds an interest of more than 10% for more than one year. Furthermore, specific provisions regarding deprecation method and duration apply. There are also adjustments for certain timing and quantification issues, including rules for provisions and hedging results. Specific carve-outs are available for the shipping industry, the aviation sector and the extraction industry. With this comprehensive set of tax rules, the preliminary tax result of each BEFIT group member is determined.
Aggregation and allocation of the BEFIT tax base
As a next step, the preliminary tax results of all BEFIT group members are aggregated into a single pool to determine the BEFIT group tax base. This aggregated group tax base is allocated to BEFIT group members through a (seven year) transitional allocation rule. The allocation is based on each BEFIT group member’s weighted share in the aggregated tax base in the previous three fiscal years. The EC will review the transitional allocation rule and may subsequently propose a formulary apportionment approach.
Specific consequences of BEFIT
A BEFIT group member ceases to be subject to its national corporate tax law in respect of all matters covered by the BEFIT rules. However, Member States may apply deductions, tax incentives, or base increases to their allocated parts. The EC expresses explicitly that this needs to be in accordance with the Pillar 2 Directive. Within the BEFIT group, cross-border loss relief is applicable and no withholding tax on interest and royalty payments is allowed, unless the beneficial owner is not a BEFIT group member. For purposes of the transitional allocation rule, transfer pricing presumptions relating to intra-BEFIT group transactions exist. With respect to transactions between BEFIT group members and other associated enterprises outside the BEFIT group, a so-called simplified approach to transfer pricing compliance is introduced. Business reorganisations within the BEFIT group are facilitated, subject to anti-abuse rules.
Entering and leaving a BEFIT group
When BEFIT becomes applicable to a group member, all its assets and liabilities will be recognized at their value under the applicable accounting standard. Pre-entry losses of a BEFIT group member can be offset against its share in the BEFIT tax base. Detailed rules for entering and leaving a BEFIT group are included. It remains to be seen how these rules will interact with the national corporate tax systems of Member States.
Administrative aspects
The BEFIT group deals with a so-called BEFIT team for its BEFIT information filing obligation. For EU groups, the EU-based ultimate parent of the group is the filing entity. Non-EU headquartered groups may appoint an EU filing entity. The BEFIT team, composed of representatives from each relevant tax administration, examines the completeness and accuracy of the filed information. However, each BEFIT group member continues to be required to file individual tax returns locally and tax administrations of the relevant Member States will issue individual tax assessments. Hence, the enforcement of the tax liability shall be governed by the laws of such Member State.
Concluding remarks
BEFIT contains advantages like cross-border loss relief, no withholding tax on intra-BEFIT group interest and royalty payments as well as a one-stop-shop for BEFIT filing obligations, while it also creates new corporate tax rules to be dealt with by taxpayers.
We will closely monitor the developments in this regard and keep you posted. Should you meanwhile like to have more information on this BEFIT proposal or analyse the impact it may have to your corporate tax situation, please do not hesitate to contact one of us or your trusted adviser at Loyens & Loeff.