Brussels announces 15% tax for large multinational groups to finance EU budget

Brussels has proposed a Directive for a minimum effective tax rate on the global activities of large multinational groups.

The swift move comes hand in hand with a recent, historic global tax reform for a 15% effective tax rate that will be also applied in the EU.

The proposed law includes a common set of rules on how to calculate this effective tax rate, across the EU.

Another Commission proposal is against the misuse of shell entities for improper tax purposes, to prevent entities with no or minimal economic activity to be unable to benefit from any tax advantages and do not place any financial burden on taxpayers.

While shell, or letterbox, entities can serve useful commercial and business functions, some international groups and even individuals abuse them for aggressive tax planning or tax evasion purposes.

The proposal will tighten the screws on shell companies, so that the misuse of such entities for tax purposes can more easily be detected. National tax authorities will have to detect firms that exist merely on paper and make them subject to new tax reporting obligations and lose access to tax benefits.  Once adopted by Member States, the proposal should come into force as of 1 January 2024.  

“Shell companies continue to offer criminals an easy opportunity to abuse tax obligations. We have seen too many scandals arising from misuses of shell companies over the years. They damage the economy and society as a whole, also placing an unfair extra burden on European taxpayers,” said Valdis Dombrovskis, EC executive vice-president for the economy.

The other minimum tax rules will apply to any large group, both domestic and international, with a parent company or a subsidiary situated in an EU member state.

If the minimum effective rate is not imposed by the country where a low-taxed company is based, there are provisions for the member state of the parent company to apply a “top-up” tax.

The proposal also ensures effective taxation in situations where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules.

The proposal also provides for certain exceptions. To reduce the impact on groups carrying out real economic activities, companies will be able to exclude an amount of income equal to 5% of the value of tangible assets and 5% of payroll.

The rules also provide for an exclusion of minimal amounts of profit, to reduce the compliance burden in low risk situations. This means that when the average profit and revenues of a multinational group in a jurisdiction are below certain minimum thresholds, then that income is not taken into account in the calculation of the rate.

The tax revenues from these laws will form part of three new sources of EU “own resources” revenue.

Brussels will propose an own resource equivalent to 15% of the share of the residual profits from the world’s largest multinational enterprises to participating countries worldwide. Revenues for the EU budget could amount to roughly between €2.5 and €4 billion per year.

The other two pillars for the revenue sources will be the carbon border adjustment mechanism, which puts a carbon price on imports, corresponding to what would have been paid, had the goods been produced in the EU. Revenues for the EU budget are estimated at around €1 billion per year on average over 2026-2030; and the Fit for 55 changes to EU Emissions Trading System, where 25% of the revenue from EU emissions trading flows into the EU budget. At cruising speed, revenues for the EU budget are estimated at around €12 billion per year on average over 2026-2030.