Transfer Pricing

European Commission proposals: BEFIT and Transfer Pricing Directives

On 12 September 2023, the European Commission (EC) released two legislative proposals. The first, referred to as “Business in Europe: Framework for Income Taxation” (BEFIT), outlines a single set of rules to determine one common corporate tax base for EU-based entities. BEFIT shall apply to EU-based entities that are part of a group that has consolidated global revenues exceeding EUR 750 million (BEFIT group). The second, the Directive on Transfer Pricing (the TP Directive) has the purpose of harmonizing transfer pricing rules for Member States to ensure a common application of the arm’s-length principle within the EU. The TP Directive covers all MNEs operating in the EU.


The BEFIT tax base is calculated similarly as in the Pillar 2 Model Rules: The starting point is the profit in the financial statements that are prepared in accordance with the accounting standard used for consolidation purposes and making upward and downward adjustments in accordance with the BEFIT rules. The tax base shall then be aggregated overall, which enables a cross-border loss compensation mechanism between Member States. Finally, the aggregated profit is allocated to the BEFIT group members, based on the proportionate share of taxable results leaving transfer pricing as still relevant for these entities (at least for a transition period of seven tax years, on this immediately hereinafter).

Regarding transfer pricing, the EC provides for a risk-based approach:

  • Generally, the intra-BEFIT group transactions need to adhere to the at arm’s length principle. BEFIT group members, however, shall benefit from increased tax certainty as, during the transitional period of seven tax years, Member States shall consider intra-BEFIT group transactions as at arm’s length provided that the expense incurred or the income earned from intra-BEFIT group transactions increases in a fiscal year by less than 10% compared to the average expense or income from intra-BEFIT group transactions of the previous three fiscal years. If the increase is higher than 10%or 10%, the intercompany transactions could be disregared by the tax authorities as “high-risk zone” unless counterproof is provided by the taxpayer.
  • Additionally, there is a simplified transfer pricing approach for testing distribution and manufacturing transactions with low-risk for transactions between a BEFIT group member and an associated enterprise outside the BEFIT group. This method is founded on Amount B of Pillar 1 and groups taxpayers as low, medium, or high risk, depending on the outcomes of the tested party compared to a regional benchmark analysis prepared by the EC.
Transfer Pricing Directive

The aim of the TP Directive is to harmonise the transfer pricing rules in the Member States while  providing them a common framework for the application of the arm’s length principle in the EU while eliminating differences in TP compliance, in particular by providing for:

  • A common definition of associated enterprises;
  • A fast track for applying corresponding adjustments to cross-border transactions within the EU, with the aim of eliminating within 180 days any double taxation resulting from transfer pricing adjustments made by an EU Member State;
  • A common framework for the acceptance of a compensating adjustment, in the form of a year-end adjustment initiated by the taxpayer, recognised by both the Member State where the upward adjustment is made and the Member State where the downward adjustment is made;
  • The Commission will be empowered to establish common templates and requirements for TP documentation.
Possible Implications / Aspects for Swiss MNEs

From a corporate tax perspective, BEFIT will enable offsetting losses with profits in different EU member states, if BEFIT will apply for the Swiss MNE. The profits and losses of related parties that are not members of the BEFIT group (e.g. Swiss entities) are not aggregated. This means that their losses would not be relieved across borders. With regarding to transfer pricing, the simplified transfer pricing approach would apply, if applicable.

From a transfer pricing perspective, the proposals offer the potential for harmonisation and simplification for MNEs with operations in multiple Member States.

Next steps

Adoption of these proposals requires the Council’s unanimity. If approved, the BEFIT proposal must be transposed into national law by 1 January 2028 and become applicable from 1 July 2028. The proposal for the TP Directive must be implemented no later than 31st December 2025, and the regulations must take effect from 1st January 2026.On a longer term view, it will be seen whether the EC proposes the change to a formulary apportionment approach after the lapse of the transition period.


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