On 12 September 2023, the European Commission adopted a key package of initiatives to reduce tax compliance costs for large, cross-border businesses in the European Union. For companies operating across the EU, it can be stated that – beyond corporate income tax rates and domestic incentives – each national system has its own variety of features, practices, interpretations and administrative requirements. The high level of complexity entails high tax compliance burdens and – in the bigger picture – an uneven playing field for those companies operating in the internal market.

With the proposed harmonized corporate income tax base and simplified transfer pricing administration under the so-called “Business in Europe: Framework for Income Taxation (BEFIT)”-proposal, the Commission aims to reduce the administrative burden on tax authorities and taxpayers. The new, simpler rules could reduce tax compliance costs for businesses operating in the EU by up to 65%.

So, if you are in the business of managing the tax compliance of large property portfolios on an international level, the following could very well be of interest in the long run.

Who is in scope?

The new rules will apply – in general – to EU-based companies and permanent establishments that are part of a multinational group or a sizeable domestic group with a consolidated turnover of at least €750 million.

For those groups with headquarters in third countries, their EU group members may also be required to apply the rules provided that certain thresholds are met (an annual combined revenue of at least €50 million in at least two of the last four fiscal years or at least 5% of the total revenues of the group). This would ensure that the requirements of the proposal are proportionate to its benefits.

Groups with a lower turnover than €750 million, may – under certain conditions – choose to apply the BEFIT rules instead of the “regular” corporate tax regime. This choice applies for five years. After that, these groups can choose to go back to the regular regime.

What is the idea?

These BEFIT rules broadly entail the following. Companies belonging to the same BEFIT group will calculate their tax base in accordance with the common BEFIT rules (i.e. general adjustments to the accounting results). The tax base of all group members is aggregated into a single tax base, enabling the cross-border loss compensation. For each BEFIT group member, a percentage of the aggregated tax base is calculated based on the average contribution to the taxable results in the previous three tax years.

Where lies the benefit?

After all BEFIT companies have calculated their stand-alone tax base in accordance with the BEFIT rules (step 1), their net income or loss shall then be subject to several adjustments. We believe that some of these rules and adjustments to be of interest for those real estate companies that are required to adopt these new rules and those real estate companies that voluntarily opt for the application of the BEFIT regime. In the below section, we will add-on to these relevant adjustments in the context of managing your international property portfolio.

• Fixed tangible assets with a value below €5000 are to be depreciated within one year;
• Fixed tangible assets with a value higher than €5000 are to be depreciated individually over their useful life on straight-line basis;
• The above does not apply directly to the real estate sector, as immovable property is deemed to have a fictional useful life of 28 years, over which the property will have to be depreciated. It even seems to be the case that the costs related to the improvement of immovable property have to be depreciated over the same 28-year time period.

As a general rule in several jurisdictions, including the Netherlands, the minimum depreciation period of real estate is limited by its useful life. In practice this often means that real estate is depreciated over 30+ years. Therefore, the new depreciation rules introduced by the BEFIT proposal may allow for higher yearly depreciation. If desired, this can prove useful in bringing forward the depreciation of the property. This could be interesting to property investment funds aimed at maximizing direct cash returns for distribution to its investors.

• The proposed directive contains rules with regards to determining the depreciation base;
• Also, the directive aims to set rules that ensure that the depreciation costs are claimed by only one entity of the group, per fiscal year.
• The proposed directive aims to the set rules which would require entrepreneurs to maintain a fixed asset register. We assume this requirement would also apply with regards to real estate.

The asset register may prove to increase the administrative burden of some property companies. Especially for those companies managing an extensive real estate portfolio, if their administration happens to be lacking compared to the rules of this EU regime. However, harmonizing the requirements for a fixed asset register may be beneficial for real estate companies that operate in multiple jurisdictions, as opposed to having different sets of rules in each jurisdiction.

• The proposed directive will introduce the possibility of cross-border compensation of losses.
• Under the proposed directive no withholding tax may be levied with regard to intra-group transactions.

These final two features of the proposed directive are very welcome and may have a far-reaching positive impact on the tax compliance burden and the profitability of real estate companies. BEFIT groups will be allowed to set off losses across borders. Today, this is only rarely possible, which can result in over-taxation of the profits of the group and disincentivize businesses from operating across borders.  Additionally, eliminating many withholding taxes with regard to intra-group transactions may allow for new and more profitable structures.  

Final comments

In conclusion, the proposed BEFIT directive introduces new rules for internationally operating groups. With regard to property companies some of these new rules may prove to be beneficial. Especially the shortening of the obligatory depreciation period of real estate and the possibility for cross-border loss compensation. However, it is uncertain how certain depreciation parameters will eventually be determined under the new rules. The tax advisors with BDO Real Estate & Construction industry group are closely monitoring the developments in the near future.