Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

September 15, 2023

European Commission proposes BEFIT and Transfer Pricing Directives

  • On 12 September, the European Commission issued two proposals for Directives that will now move to negotiations between Member States.
  • The BEFIT Directive will introduce a common framework for tax-base determination and aggregated corporate income taxation in the European Union for in-scope multinationals.
  • The Transfer Pricing (TP) Directive will codify the Organisation for Economic Co-operation and Development principles and guidance on Transfer Pricing in the domestic laws of Member States and provides clarifications and processes to secure aligned TP administration and prevent double taxation.

Executive summary

On 12 September 2023, the European Commission (the Commission) published two new legislative proposals: a Directive “Business in Europe: Framework for Income Taxation” (BEFIT) and a Directive on Transfer Pricing (Directive on TP).

The BEFIT proposal sets forth rules introducing a common framework for corporate income taxation in the European Union (EU), with the aim of replacing the current Member States’ various ways for determining the taxable base for groups of companies that have annual combined revenues exceeding €750 million. The BEFIT proposal would also apply to non-EU-headquartered groups exceeding specific thresholds. The Commission announced this initiative in its Communication on Business Taxation for the 21st century published in May 2021.1

The rules on determining the tax base included in the Directive resemble those contained in the Minimum Tax Directive (i.e., starting from financial accounts), though with fewer adjustments required. As under the Minimum Tax Directive, the tax base will be determined on a per-entity basis. Once defined, the adjusted profits of in-scope entities are aggregated, defining the BEFIT tax base which would allow for cross-border set-off of losses. The base is then allocated back to the Member States, which may make adjustments and apply their own rates. In the transition period, the allocation to the Member States is based on historic profits, with the aim to limit the budgetary consequences for Member States. Proposals on risk assessment and administration are also included.

The Directive on TP aims to introduce a common framework in the EU for applying the arm’s-length principle. The TP Directive codifies the arm’s-length principle and the OECD Transfer Pricing Guidelines as a means of interpretation into EU law and introduces processes for relieving double taxation for multinational entities (MNEs). In particular, the Directive affirms key elements of the analysis under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines (delineation of the actual transaction undertaken, comparability analysis, the five recognized OECD TP methods) and clarifies how the mechanisms to perform adjustments should be performed within the EU to ensure that double taxation is prevented and relieved as effectively and efficiently as possible.

Both draft Directives will now move to the negotiation phase among Member States with the aim of reaching unanimous agreement. The Commission proposes that the Member States transpose the BEFIT Directive into their national laws by 1 January 2028 for the rules to come into effect as of 1 July 2028. The TP Directive, instead, shall be transposed by 31 December 2025 for the rules to come into effect as of 1 of January 2026.

Detailed discussion


On 18 May 2021, the Commission published the Communication on Business Taxation for the 21st Century (the Communication),  setting out its short-term and long-term vision to provide a fair and sustainable EU business tax system and support the recovery. Among the corporate tax reforms proposed in the Communication, the Commission announced its plans to table a legislative proposal in 2023 for a new framework for business taxation in the EU to reduce administrative burdens, remove tax obstacles and create a more business-friendly environment

The BEFIT takes a new approach to the Commission’s Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB) proposals. The BEFIT would also build on the OECD Inclusive Framework two-pillar approach, using the formula for allocating profits of Pillar One and the rules developed for Pillar Two as a source of inspiration.

On 13 October 2022, the Commission launched a public consultation on BEFIT consisting of a questionnaire and the opportunity to submit a position paper. The consultation closed on 26 January 2023 with a total of 48 replies, including EY feedback.

On 12 September 2023, the Commission published two separate Directives: (i) the BEFIT Directive, which should establish a common framework (at least, for in-scope MNEs) for corporate taxation within the EU and (ii) the TP Directive, which in turn aims at ensuring that all Member States adopt coherent TP legislation and procedures for administering TP and resolving double-tax situations.

Unlike the BEFIT Directive, the TP Directive was not announced formally in advance to its publication. The Commission sees an important role for the TP Directive to reduce compliance costs and legal disputes for businesses operating in the EU. In particular, the Commission refers to an EY Transfer Pricing Survey in highlighting that TP may be a source of double taxation, compliance costs, litigation, profit shifting and tax avoidance, thereby calling for a coordinated approach.

The draft BEFIT Directive


The proposed rules would apply to all entities in the EU that meet the following criteria:

  1. Belong to an MNE group with consolidated combined revenues exceeding €750 million in at least two of the last four fiscal years
  2. Companies (entities) must also:
    1. Take one of the forms listed in the Directive
    2. Be subject to one of the corporate taxes listed, or to a similar tax subsequently introduced
    3. Be the ultimate parent entity (UPE) or their assets, liabilities, income, expenses, and cash flows must be consolidated on a line-by-line basis by the ultimate parent entity 
  3. Permanent establishments must also:
    1. Be subject to one of the corporate taxes listed or to a similar tax subsequently introduced
    2. Be a permanent establishment of the UPE or of a company whose assets, liabilities, income, expenses and cash flows shall be consolidated on a line-by-line basis by the UPE

In addition, there is a carve-out for entities belonging to non-EU headquartered MNEs, if either the combined revenues of the group in the EU do not exceed 5% of the total combined revenues of the group or the amount of €50 million in at least two of the last four fiscal years.

Entities belonging to MNEs that do not meet the turnover criterion or are carved-out as per the above provision may still opt into the new regime on a voluntary basis.

Although the Directive is explicitly inspired by work on BEPS 2.0, the definition of “group” is not completely aligned with that contained in the Minimum Tax Directive, as BEFIT requires a 75% ownership threshold for entities to be considered in the BEFIT group.

Computation of the tax base

Each entity of the BEFIT group will determine its preliminary tax results starting from its financial statements prepared in accordance with the accounting standard used for consolidation purposes and making upward or downward variations in accordance with the rules of the Directive. Although the mechanism looks similar to the Minimum Tax Directive, BEFIT applies fewer adjustment;  therefore compliance should, in principle, be easier for in-scope MNEs, even though duplication of calculations may arise if companies would be asked to separately ensure compliance with both regimes.

Tax bases are then aggregated into the BEFIT tax base and (i) if the BEFIT tax base is positive, the profit shall be allocated among entities; (ii) if the BEFIT tax base is negative, the loss shall be carried forward and shall be set-off against the next positive BEFIT tax base. The aggregation and loss carryforward mechanisms are relevant as they introduce cross-border loss compensation mechanisms within the EU, which in the view of the Commission should avoid over taxing the profits of the group and incentivize businesses to operate across borders in the internal market.

Allocation of the BEFIT tax base

The BEFIT tax base is finally allocated to the BEFIT group members in accordance with the baseline allocation percentage, in turn determined as follows (ratio of a/b):

  1. The average of the taxable results in the three previous fiscal years
  2. The addition (sum) of taxable results determined in point (a) above

Negative taxable results would be considered as zero for determining the baseline allocation.

To simplify the transition to the new system, in the first three years of the Directive’s application the average taxable results in point (a) above should be determined starting from the domestic tax rules progressively introducing BEFIT-determined results.

Taxation by the Member States

The Directive leaves Member States free to increase or decrease the allocated part of the tax base through domestic provisions, with the purpose of allowing the system to meet specific tax-policy objectives of each Member State; examples of such cases could be local tax incentives or deductions, as long as they are aligned with Pillar Two requirements. Tax rate and enforcement policies will fully remain with Member States.

Although there is not a carveout from BEFIT for financial services institutions, ad hoc rules apply for upstream extractives activities, international shipping not covered by a tonnage tax regime, inland waterways transport and air transport. With respect to upstream activities, the Directive states that revenues, expenses and other deductible items that stem from extractive activities shall be attributed to the BEFIT group member(s) located in the Member State where the extraction takes place, unless the Member State contains associated group entities that are not part of the BEFIT group or the extraction takes place in a third country jurisdiction.

Revenues and costs relating to (i) the operation of ships in international traffic where the taxable result is not covered by a tonnage tax regime, (ii) the operation of aircraft in international traffic and (iii) the operation of boats engaged in inland waterways transport are excluded from the BEFIT tax base. These shall be attribute to a BEFIT group member on a transaction-by-transaction basis and subject to the arm’s-length principle.

Simplified approach to TP

Because BEFIT takes the financial results of individual group entities as a point of departure for tax-base calculation and apportionment, pricing of transactions between these entities will remain relevant as this impacts profits. For BEFIT, the Commission proposes a risk-based approach to TP for intra-BEFIT-group transactions; increases by more than 10% in the amount of intercompany transactions would be seen as high-risk and could be disregarded by tax administration unless counterproof is provided by the taxpayer.

Moreover, following an approach inspired by Amount B of Pillar One, a simplified approach to TP has been proposed for testing intercompany transactions involving low-risk distribution and low-risk manufacturing activities; comparing the results achieved by the tested party with a regional benchmark analysis prepared by the Commission, taxpayers will be classified as low/medium/high risk and this should influence the likelihood of tax audit or inquiries by the involved tax authorities. This simplified approach applies to transactions between a member of the BEFIT group and an associated enterprise outside the BEFIT group.

Although similar to the approach contained in Amount B of Pillar One for baseline distribution activities, the BEFIT Directive differs in that it has a wider scope and also includes (i) retail distribution activities and (ii) manufacturing activities.

Note too that, although Pillar Two obligations will apparently still apply to the entities involved, the TP obligations under these rules must nonetheless be respected.

Administration and procedures

The fiscal year of all BEFIT group members must be aligned, as one BEFIT information return must be filed for the entire group by the filing entity (either the UPE or a designated entity). A BEFIT team shall be composed of one or more representatives of each relevant tax administration per Member State. This team must then examine the return and, once consensus is reached on the content, the team informs the filing entity that the process is complete.

Each BEFIT group member must then file an individual tax return in its jurisdiction, including the information used to determine the local corporate tax.

Member States will undertake tax assessments for each BEFIT group entity resident in their territory, but where the assessment would affect the BEFIT tax base, they shall notify the other authorities to ensure the BEFIT tax base is amended accordingly.

Audits may be undertaken individually by Member States or jointly and, if the results would cause a change in the BEFIT tax base, the BEFIT team shall be notified and a revised BEFIT information return should be filed to allow other Member States to adjust their tax assessments accordingly.

Appeals against the BEFIT information return must be made in the Member State of the filing authority, whereas appeals against the individual tax assessment are made in the Member State where the BEFIT entity is resident. Appeals shall be made to an administrative body or, if no such body exists, to the competent judicial authority directly.

In any event, no amended tax assessments shall be issued where the difference between the initially declared BEFIT tax base and the revised BEFIT tax base does not exceed the lower of €10,000 or 1% of the BEFIT tax base.

The draft TP Directive


The Directive applies to all taxpayers that are registered or subject to tax in one Member State, with the purpose to harmonize transfer pricing rules of Member States and to ensure a common application of the arm’s-length principle within the EU.

The Directive essentially ensures that the arm’s-length principle and its interpretation in the OECD Transfer Pricing Guidelines (2022) become part of the legislation of all EU Member States. Beyond this codification, the Directive aims to achieve more consistent application and interpretation of these rules within the EU, by providing:

  • A common definition of associated enterprises (and therefore the transactions covered)
  • A process for applying corresponding adjustments on cross-border transactions within the EU that aims at resolving, within 180 days, any double taxation that follows from TP adjustments made by an EU Member State
  • A framework through which year-end adjustments on associated transactions within the EU are recognized both by the Member State where the upward adjustment is made and the Member State where the downward adjustment is made (compensating adjustments)

Definition of associated enterprises

For the purposes of the Directive, “associated enterprise” means a person who is related to another person in any of the following ways:

  1. Participates in the management of another person by being in a position to exercise a significant influence over the other person
  2. Participates in the control of another person through a holding that exceeds 25% of the voting rights
  3. Participates in the capital of another person through a right of ownership that, directly or indirectly, exceeds 25% of the capital
  4. Is entitled to 25% or more of the profits of another person

Permanent establishments shall be considered associated enterprises of the enterprise of which they are a part.

The 25% threshold, in particular, establishes another criterion for defining a group from those contained in BEFIT and Pillar Two, with coordination issues potentially arising.

Corresponding and compensating adjustments

When one Member State makes a primary adjustment, the counterparty’s Member State should ensure that a corresponding adjustment is performed (subject to identified circumstances) to prevent double taxation or, in any case, that double taxation can be relieved in application of a double tax convention, the Arbitration Convention or the Directive (EU) 2017/1852.

The BEFIT Directive also introduces a term of 180 days for the completion of the procedure to eliminate double taxation when a primary adjustment is made by a Member State.

Compensating adjustments (i.e., adjustments performed by a taxpayer at year-end to correct the results of intercompany transactions) shall also be accepted if the following conditions are met:

  1. Before recording the relevant transaction, or series of transactions, the taxpayer made reasonable efforts to achieve an arm's-length outcome.
  2. The taxpayer makes the adjustment symmetrically in the accounts in all Member States involved.
  3. The taxpayer applies the same approach consistently over time.
  4. The taxpayer makes the adjustment before filing the tax return;
  5. The taxpayer is able to explain why its forecast did not match the result achieved.

Determination of the arm’s-length range and TP adjustments by Member States

With respect to the arm’s-length range, the Directive adopts a stricter approach than the OECD Guidelines when the application of a TP methodology produces a range of values. In particular, it mandates the use of the interquartile range as a reference, whereas the OECD Guidelines (§3.57) refer to central tendency measures only when comparability defects remain in the set of comparable entities/transactions.

In addition, the TP Directive prescribes that Member States may only make adjustments if results fall outside the (interquartile) arm’s-length range, unless there it is proven that a different positioning within the range is justified by the facts and circumstances of the specific case. If an adjustment is made, it should be made to the median, unless it is proven that a different positioning in the range is justified by the facts and circumstances of the specific case.

Future work

The Directive also provides also that the Commission shall be empowered to further supplement the rules of the Directive with regard to documentation by laying down common templates, setting linguistic requirements, and defining the type of taxpayer to complete these templates and the timeframes to be covered, further harmonizing the applicable TP rules throughout the EU.

In addition, the Directive establishes that the Commission may advance a future proposal on the application of the arm’s-length principle and other rules of the Directive, particularly with respect to certain transactions or dealings – specifically: (a) transfers of intangible assets or rights in intangible assets between associated enterprises, including hard-to-value intangibles; (b) the provision of services between associated enterprises, including the provision of marketing and distribution services; (c) cost contribution arrangements between associated enterprises; (d) transactions between associated enterprises in the context of business restructurings; (e) financial transactions; (f) dealings between the head office and its permanent establishments.

Next steps

Article 115 of the Treaty on the Functioning of the EU forms the legal basis for both draft Directive Proposals. Therefore, the proposals are subject to the Council’s unanimity for adoption, while the European Parliament only has an advisory role. The next step will be for the 27 EU Member States to discuss the proposals.

As with previous Directives on direct taxation, changes likely will be made to the proposals during the negotiation process. Consequently, the final Directives, if adopted at all, could differ significantly from the current proposals.

Once unanimity is achieved, the next step would be the publication of the Directives in the Official Journal of the European Union. The Commission proposes that the Member States transpose the BEFIT Directive by 1 January 2028 and that they apply these provisions from 1 July 2028. The Commission proposes that the Member States transpose the TP Directive by 31 December 2025 and apply these provisions from 1 January 2026.


Adoption of the proposed BEFIT Directive would mark a significant step toward the harmonization of corporate tax rules within the EU, even though additional costs for taxpayers for the compliance and the adaptation to the new regime should be taken into account. The BEFIT’s simplifications under the Directive are limited, as the regime would still largely apply on a country-by-country basis, including TP obligations. Also, the combination of per-entity calculations, aggregation of the profits/losses into a single tax base, subsequent allocation of this tax base to Member States and allowing additional local adaptations and deductions reflect design choices that depart from the earlier CCCTB proposal. These choices also rule out more fundamental simplifications, such as a consolidated tax base, cross-border EU tax incentives and an application of Pillar Two at an EU level, instead of at a Member-States level.

On one hand, the TP Directive would benefit businesses in the internal market by adopting a common standard to address intercompany transactions, thus (i) reducing situations where peculiarities in Member States’ legislation could harm the functioning of the internal market and lead to double-tax situations and (ii) providing certainty on some important sources of disagreement between EU Member States. Codifying TP guidelines into EU law could eventually increase tax certainty, including through the case law of the European Court of Justice. On the other hand, in some respects the rules would be stricter than the OECD Transfer Pricing Guidelines and Member States would be required to depart from some of their existing practices, which may impact their support to this proposal.

Although it is not yet known whether Member States will embrace the Commission’s proposals, businesses should closely monitor the adoption process for any changes or clarifications to the proposals. In-scope businesses should carry out an initial analysis of their corporate structures based on the current draft, begin simulating the effects that the new proposals may have on their business and consider engaging with EU policy makers.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

EY Studio Legale Tributario (Italy), Treviso

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young LLP (United Kingdom), London

EY Société d’Avocats, Paris

Ernst & Young LLP (United States), Global Tax Desk Network, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 See EY Global Tax Alert, European Commission publishes Communication on Business Taxation for the 21st century, dated 18 May 2021.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more