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Brussels, 10 January, 2006

Company taxation: Commission proposes "Home State Taxation" for SMEs

(see also MEMO/06/4)

The European Commission has adopted a Communication that presents a possible solution to the compliance costs and other company tax difficulties that Small and Medium Enterprises (SMEs) face when doing business across borders. The Commission suggests that Member States allow SMEs to compute their company tax profits according to the tax rules of the home state of the parent company or head office. An SME wishing to establish a subsidiary or branch in another Member State would as a result be able to use tax rules and file tax returns in a country with which it is familiar. The "Home State Taxation" system would be voluntary for both Member States and companies and would run for a five-year pilot phase. The Commission's 2004 European Tax Survey (see IP/04/1091) showed that cross-border activity leads to higher company tax and VAT compliance costs for companies and that costs are proportionately higher for SMEs than for large companies.

"Heads of Government and Member States last March highlighted the important role of SMEs in the economic development of the European Union" said László Kovács, EU Commissioner for taxation and customs. "I urge Member States, therefore, to take this opportunity to eliminate some of the tax complications that inhibit SMEs from participating in the Internal Market".

The concept of Home State Taxation presented by the Commission is based on the idea of voluntary mutual recognition of tax rules by EU Member States. Under this concept, the profits of a group of companies active in more than one Member State would be computed according to the rules of one company tax system only, i.e. the system of the Home State of the parent company or head office of the group.

An SME wishing to establish a subsidiary or permanent establishment in another Member State would therefore be able to use only the tax rules with which it is already familiar.

The definition of an SME would be that commonly used in the EU – companies with less staff than 250, with a turnover of €50 million or less and/or with a balance sheet total of €43 million or less.

The Home State Taxation scheme would not mean taxation in the Home State only. It would simply mean that an SME's tax base (i.e. taxable profits) would be calculated in accordance with the rules of the Home State. Each participating Member State would then tax at its own corporate tax rate its share of the profits determined according to its share of the total payroll and/or turnover.

Introducing the scheme on a pilot, time-limited, basis would test the practical merits of the concept for SMEs and its broader economic benefits for the EU while limiting the administrative costs and potential risks for Member States.

The Commission's Communication provides detailed elements of such a Home State Taxation pilot scheme.

Member States that agreed to introduce this scheme could do so via a bilateral or multilateral agreement, by temporarily supplementing existing double taxation treaties or multilateral conventions, or by concluding a new multilateral convention.

In the Commission's opinion, the concept of Home State Taxation appears to be a very promising way of tackling the tax problems that hamper SMEs when they are expanding across borders. The most common problems are compliance costs and absence of relief for cross-border losses.

The potential overall economic benefit for the Internal Market from such a measure could be considerable. The Commission has in its Lisbon Action Plan (see IP/05/973) given a new impetus to achieving the Lisbon objectives, including in the tax field. It has repeatedly highlighted the important role of small and medium-sized enterprises in the EU's economic development and has called for broad policy actions in favour of SMEs. The European Council of 23 March repeated this call.
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