Most of the rules on corporate taxation are set by national authorities and can be different among the EU member states. New EU rules on taxation in external trade have entered into effect in January 2024 introducing a minimum rate of effective taxation of 15 percent for multinational companies active in the EU member states. The article also provides some basic information on a complicated EU-wide taxation system.
Short history and taxation’s structure
Corporation tax should be paid by various types of companies, clubs, co-operatives and unincorporated associations on profits from doing business.
Every year, about €1 trillion of public money is lost EU-wide due to tax evasion and avoidance: hence, the states and the EU are suffering serious losses of revenues coped with a lack of fairness in the tax systems. Some businesses find themselves at a competitive disadvantage compared to those that find ways to avoid paying their fair share. The cross-border nature of tax evasion and avoidance, along with the EU states’ concerns to maintain competitiveness, make it very difficult for purely national measures to have the full desired effect. Tax evasion is a multi-facetted problem requiring a multi-pronged approach, at national, EU and international level.
The structure of taxation system in the EU includes: a) indirect taxes (VAT, excise duties, consumption taxes, etc.); b) direct taxes (personal income tax and corporate income tax); c) social contribution (by employers, employees and self-employed) and some others. The share of taxes in the EU budget is about 30 percent: they are composed of so-called “EU-own resources”, such as agro-levies (taxation in agro-goods and trade with third countries), customs duties and VAT (about 1.4 percent from national allocation funds).
Main taxation principle in the EU (called “fiscal neutrality”) means that taxation regime in the states “envisages equal treatment for goods and services” from two sides: a) domestically produced goods/products and services, and b) goods/products and services originated from other EU member states. According to the EU basic law (art. 110) “… no member states shall impose on products of other states any internal taxation of any kind in excess of that imposed on similar domestic products directly or indirectly”).
However, tax revenues are different among the EU-28: as a share of national GDP they vary from about 30 to 50 percent. Particularly, corporate income tax rate (CIT) on average varies from 10 to 35 percent among EU states: e.g. CIT rates in the Baltic Sea region are (in %): in Germany- 29,8; Sweden- 28; Finland- 26; Denmark- 25; Estonia- 21; Poland- 19; Latvia and Lithuania – 15. Besides, only indirect taxes (e.g. VAT and excise duties) are harmonised among the EU member states; other direct taxes (personal and corporate income taxes) as well as social contributions are coordinated by the principles of approximation of member states’ laws.
The EU’s initiatives
The Commission has several times tried to elaborate action plans on tax fraud and evasion: e.g. one in 2012 was supposed to provide measures at national, EU and international level to eliminate tax evasion and to increase the fairness of member states’ tax systems, secure much needed tax revenues and help to improve the proper functioning of the Single Market.
Such new factors in global trade as: the increasing mobility of taxpayers, the number of cross-border transactions, the internationalization of financial instruments and the resulting increased risk of tax fraud, tax evasion and aggressive tax planning (mostly beyond the EU borders), adaptations and/or extensions of the EU electronic systems for cooperation with third countries, and others are becoming vital for businesses in the states. In particular, such adaptations or extensions would avoid the administrative burden and the costs inherent in developing and operating similar EU-wide electronic systems and that of international exchanges of tax-information.
Considering the importance of globalisation and the importance of combating tax fraud, tax evasion and aggressive tax planning, the EU relies on external experts representing states’ institutions and governmental authorities of third countries, including least developed countries, as well as representatives of international organisations, economic operators, taxpayers and civil society. The selection of experts is based on the Commission decision adopted in May 2016 establishing horizontal rules on the creation and operation of expert groups. Appointed experts should be impartial, with no possible conflicts of interest with their professional responsibilities; information about their selection and participation is publicly available.
More in the regulation 2021/847 on «fiscalis» adopted in 2021 in https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32021R0847&qid=1522853190180
Taxation’s digital orientation
Generally, the Commission’s site on taxation includes the following issues:
= Double taxation Conventions: the Commission is currently considering closely the possible conflicts between the EC Treaty and the bilateral double taxation treaties that Member States have concluded with each other and with third countries.
= Joint Transfer Pricing Forum: the EU Joint Transfer Pricing Forum (JTPF) assists and advises the European Commission on transfer pricing tax matters.
= Merger Directive: the objective of the Merger Directive is to remove fiscal obstacles to cross-border reorganisations involving companies situated in two or more EU member states.
= Parent companies and their subsidiaries in the EU: in December 2003, the Council adopted Directive 2003/123/ to broaden the scope and improve the operation of the Council Directive 90/435/ on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU states.
= Resolution of tax disputes in the EU: new rules on tax dispute resolution apply since 1 July 2019. They are laid down in Council Directive 2017/1852 of 10 October 2017 and bring a significant improvement to resolving tax disputes.
= Tax Transparency Package: combating corporate tax avoidance is central to the European Commission’s political priority to ensure a fairer Single Market. It is closely linked to the agenda to tackle tax fraud and evasion.
Source: Commission’s website on corporate taxation:
Supporting international business
The Commission assists corporate entities in numerous ways to “make business” abroad: thus, in order to “do business internationally”, there is a specific website Enterprise Europe Network. This site allows companies to scale in the fast-growing markets in Asia, Africa, the Americas, etc. Besides, it helps finding new business partners for joint research and development, assisting in marketing and finding innovative technologies, as well as in securing supply chains and finding new suppliers worldwide.
Generally, the network’s business advisers can help to take advantage of free trade agreements and benefit from reduced tariffs and regulatory alignment.
More in: https://een.ec.europa.eu/about-enterprise-europe-network/advice-support/internationalisation
New EU rules come into effect from 1 January 2024 introducing a minimum rate of effective taxation of 15 percent for multinational companies active in the EU member states. The rules specify taxation of large multinationals making corporate taxation fairer and lower the incentive for businesses to shift profits to low-tax jurisdictions. Besides new rules will help curb the so-called ‘race to the bottom’ on corporate tax rates in the EU and globally. In practical terms, the key reforms have the potential to generate an extra $220 billion annually to help countries around the world to fund crucial investments and high quality public services.
The rules will apply to multinational enterprise groups and large-scale domestic groups in the EU, with combined financial revenues of more than €750 million a year, as well as to large groups – domestic and international – with a parent company or a subsidiary situated in any EU member state.
Legislation includes a common set of rules on optimal calculation and application of the so-called “top-up tax” due in a particular country should the effective tax rate be below 15%. If a subsidiary company is not subject to the minimum effective rate in a foreign country where it is located, the EU state of the parent company will also apply a top-up tax on the latter.
In addition, the rules ensure effective taxation in situations where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules.
Reference to: https://ec.europa.eu/commission/presscorner/detail/en/IP_23_6712