On 12 September 2023, the Commission adopted a proposal to establish a Head Office Taxation System to allow SMEs operating cross-border by way of permanent establishments the option to interact with only one tax administration: that of its Head Office.
On 17 April 2024, the Commission held a live webinar explaining the HOT proposal.
How will it work?
SMEs would calculate their taxable result for their head office and all their branches, using only the tax rules of the Member State where their Head Office is located.
They file one single tax return with the tax administration of that Member State.
The head office tax administration shares this return with the other Member States where the SME maintains a presence.
The Member State of the head office applies the tax rate of the other Member States to the taxable profits accrued by the SMEs permanent establishment there and the head office tax administration transfers any tax revenues to the other Member State.
Why this proposal?
There are 27 different taxation systems in the EU and compliance with business taxation rules can be complex. If SMEs wish to operate cross-border, they become taxable in more than one EU country as soon as their activity abroad creates a permanent establishment.
Compliance with several different obligations can create fixed costs, which may create barriers for SMEs wishing to develop into other markets.
Eligibility, termination and anti-abuse
Once an 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.
Next steps
The Commission’s proposal must be agreed unanimously by all EU Member States in the Council before it can become law.
Documents and legal texts
- Proposal COM (2023) 528 for a Council Directive establishing a Head Office Tax system for micro, small and medium sized enterprises, and amending Directive 2011/16/EU
- Impact Assessment Report SWD (2023) 302 accompanying Proposal COM (2023) 528
- Executive Summary of Impact Assessment Report SWD (2023) 302
- Subsidiarity Grid SWD (2023) 301 accompanying Proposal COM (2023) 528
Promotional materials
- Infographic | How will the Head Office Taxation system work? (EN)
- Infographic | How will the Head Office Taxation system work? (All EU languages except Maltese and Irish)
- Press release | Championing Europe's SMEs: Commission provides new relief to boost the competitiveness and resilience of SMEs
- Q&A | Establishing a Head Office Tax System for SMEs (HOT)