One-stop shop for EU SMEs with EU permanent establishment

On 12 September 2023, the European Commission proposed a Directive establishing a Head Office Tax (HOT) system for micro, small and medium sized enterprises (SMEs) and amending Directive 2011/16/EU on administrative cooperation.

Under the HOT system, SMEs can opt to file a single tax return, apply their domestic tax rules to compute their PEs’ taxable basis, and pay the tax liability to their domestic tax authorities (filing authority). PEs’ domestic tax rate would continue to apply together with double tax treaties rules allocating taxing rights.

Scope of application

SME definition: reference is made to Directive 2013/34/EU. Legal form and taxation: the SME must be formed under the laws of an EU Member State, have a legal form listed by the Directive and be subject, directly or at the level of its owners, to a tax listed by the Directive. Tax residency: the SME must be resident for tax purposes in an EU Member State. Stand-alone status: the SME is not part of a consolidated group for financial accounting purposes and is an autonomous enterprise. PE’s turnover: joint turnover of the PEs shall not exceed the double of the head office’s turnover. Exclusion: head offices deriving shipping income subject to a tonnage tax are not eligible. The above-mentioned SMEs are eligible where during the last two fiscal years the conditions pertaining to the PEs’ turnover, SME’s tax residency and SME qualification are met. The regime applies to all PEs of the SME.

Mechanics of the HOT system

Opting in: the head office notifies its domestic tax authorities which in turn inform the tax authorities of the PE’s Member State. Tax return filing: the head office files, locally, a single tax return computing its taxable result with the one of its PEs based its domestic tax rules and applies each Member State’s tax rate to determine the tax liability. Tax assessments: the filing authority issues a tax assessment to the head office and draft tax assessments to the PEs which are reviewed by local tax authorities. Relevant documents are exchanged through automatic exchange of information. Tax collection: the tax liability of the PEs and the head office is paid by the latter to its domestic tax authorities which in turn transfer the relevant amounts to the PE’s Member States.

Duration, renewal, and termination of the option

The HOT system applies for a five-year period (renewable subject to notification).

The mechanism ceases to apply where the head office transfers its tax residency outside the Member State or the PEs’ joint turnover exceeds three times the head office’s turnover for at least two fiscal years.

Transposal and application

Based on the current proposal, Member States must implement the Directive by 31 December 2025 and apply the HOT system as from 1 January 2026.

For any further information, visit the BSP on .

Authors: , Senior Counsel in the Tax department, , Partner in the Tax department