COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a Council Directive establishing a Head Office Tax system for small and medium-sized enterprises, and amending Directive 2011/16/EU
Date: 2023-09-12
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, basis of tax assessment, business tax, corporation tax, head office, right of establishment, single market, small and medium-sized enterprises, tax harmonisation, tax law

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   EUROPEAN COMMISSION  Strasbourg, 12.9.2023  SWD(2023) 303 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a Council Directive establishing a Head Office Tax system for small and medium-sized enterprises,     and amending Directive 2011/16/EU {COM(2023) 528 final} - {SEC(2023) 308 final} - {SWD(2023) 301 final} - {SWD(2023) 302 final}  
 
 
Executive Summary 

Impact  assessment  report  accompanying  the  Proposal  for  a  Council  Directive 
establishing  a  Head  Office  Tax  system  for  micro,  small  and  medium-sized  enterprises, 
and amending Directive 2011/16/EU 
A. Need for Action 
What is the problem and why is it a problem at EU level? 
As the EU celebrates 30 years of the internal market, businesses are still faced with different 
national corporate income tax systems. Beyond tax rates and incentives, each national system 
has  divergent  features.  Businesses  operating  across  the  EU  are  faced  with  different  sets  of 
national tax obligations as soon as they expand and become taxable in another Member State.  

Such tax complexity has consequences for micro, small and medium-sized enterprises (SMEs) 
that operate or wish to operate across borders in the internal market. Compliance with new tax 
obligations comes with fixed costs and therefore creates a higher burden for SMEs with less 
resources.  This  can represent  a  barrier for  SMEs to  expand  their  activities  abroad  and  takes 
particular  relevance  in  the  inception  stage  of  expansion,  when  activities  abroad  are  still 
ancillary  to  the  primary  business  operations  in  the  state  of  origin.  Due  to  this  complexity, 
SMEs  face  an  uneven  level  playing  field  compared  to  larger  cross-border  businesses  and 
purely domestic companies, when they enter new markets.  

These  issues  are  particularly  important  at  EU  level  because  the  EU  has  a  highly  integrated 
internal market. While in many other areas, there is significant progress in EU law to ensure 
that  businesses  can  operate  in  the  internal  market  under  common  standards,  disparate 
corporate  tax  requirements  remain  an  obstacle.  In  an  increasingly  digitalised  and  integrated 
European  economy,  where  many  businesses  are  active  across  borders,  the  internal  market 
cannot achieve its full potential without addressing these problems at EU level.  

What should be achieved? 
The general objectives of the initiative are: (i) to  ensure the good functioning of the internal 
market;  and  (ii)  to  stimulate  growth  and  investment  in  the  EU.  To  achieve  such  general 
objectives,  the  following  specific  objectives  should  be  attained:  (i)  reduce  tax  compliance 
costs  for  SMEs  with  a  taxable  presence  abroad;  (ii)  to  encourage  cross-border  expansion  of 
SMEs;  and  (iii)  to  ensure  a  level  playing  field  for  the  participation  of  SMEs  in  the  internal 
market.  
What is the value added of action at the EU level (subsidiarity)?  
The problems that the initiative will address are common to all Member States and cannot be 
effectively  addressed  by  disparate  actions  at  national  level.  As  the  problems  result  from  the 
fragmentation and diversity of national systems, national uncoordinated measures might have 
undesirable  implications,  by  adding  further  complexity.  In  this  context,  only  an  EU-wide 
initiative  providing  for  a  common  set  of  rules  would  be  effective.  Since  the  problems  are 
primarily of a cross-border nature, they can only be tackled by laying down legislation at EU 
level. This initiative, when undertaken through EU law, therefore includes elements which add 
value in line with the subsidiarity principle. A common approach for all Member States would 
have the highest chances of achieving the intended objectives.  

B. Solutions  
What are the various options to achieve the objectives? Is there a preferred option or 
not? If not, why?  
The  objectives  can  be  achieved  through  an  initiative  designed  for  SMEs  in  the  form  of  a 
Directive  that  provides  tax  simplification  for  SMEs  with  limited  presence  in  other  Member 
States. This initiative is analysed in the impact assessment report.  

The  initiative  is  addressed to  SMEs  which  have a  taxable  presence in  one  or  more Member 
States, in the form of one or more permanent establishment (PE) or subsidiary. It is aimed to 
provide simplification to calculate the tax liability of such PEs or subsidiaries and to comply 
with the administrative requirements. This is achieved by giving eligible SMEs the possibility 
of  computing  the  taxable  base  of  their  permanent  establishments  or  subsidiaries  in  other 

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Member  States  in  accordance  with  the  tax  rules  of  the  head  office,  or  the  ‘Head  Office 
Taxation’ (‘HOT’) rules. The report assesses two options for this approach. The system would 
be the same under both options, but the scope differs. Option 1 would only include standalone 
SMEs  with  permanent  establishments  in  other  Member  States.  Option  2  would  also  cover 
SMEs with subsidiaries in other Member States. The second option would in other words also 
cover groups of companies that are SMEs, or SME groups.  

The preferred option is option 1. The option is most targeted to supporting SMEs in their 
initial  phase  of  international  activity,  to  encouraging  SMEs  to  start  going  abroad,  by 
continuing to apply the tax rules with which they are already familiar. The impact assessment 
concludes  that  this  option  is  therefore  both  effective  and  efficient  in  achieving  the  specific 
objectives  of  the  initiative,  while  also  remaining  proportionate  with  the  potential  costs  of 
implementation and the tax sovereignty of Member States over their resident taxpayers. The 
option  also  appears  most  coherent  with  other  EU  policies,  considering  that  the  Commission 
announced  an  initiative  specifically  designed  to  provide  simplification  for  the  tax  base  of 
groups of companies.  

C. Impacts of the preferred option  
What are the benefits of the preferred option? 
Under the preferred option, less SMEs may be eligible to opt in, but (under both options) the 
exact  number  of  SMEs  that  will  opt  in  and  apply  the  HOT  rules  is  unknown,  as  the 
simplification introduced by the initiative will be  fully optional. To estimate the benefits for 
SMEs, the impact assessment thus provides a possible range with low- and high-end estimates 
(covering both options). Accordingly, it is estimated that the availability of the simplification 
has  the  potential to  reduce  current  tax  compliance  costs  for  SMEs  by  between  EUR  1.3 
(low-end) and 3.4 billion (high-end) yearly. The low-end assumes, as an illustrative example, 
that the initiative reduces CIT compliance costs by 16% and that 5% of domestic SMEs will 
start  operating  cross-border,  while  the  high-end  estimate  is  calculated  under  the  assumption 
that the initiative reduces CIT compliance costs by 32% and that 10% of domestic SMEs will 
start operating cross-border. 

Taking the same low- and high-end assumptions on domestic SMEs crossing borders (5% and 
10%), the impact assessment also estimates the potential increase of GDP and tax revenues 
in the EU. This macro-economic impact is calculated under the assumption that, as explained 
in  the  report,  businesses  experience  a  productivity  boost  as  a  result  of  competing  across 
borders,  assumed  at  4%  for  the  low-end  estimate  and  at  15%  for  the  high-end  estimate. 
Accordingly, the sensitivity analysis yields an EU GDP increase of between EUR 19 billion 
(i.e., +0.08%) and EUR 61 billion (i.e., +0.7%) per year, and between +0.12% and +1% tax 
revenue increase in the EU in the long term, relative to the status quo.  Alternative scenarios 
are possible under different assumptions.  

The impact assessment also outlines potential benefits for tax administrations.  

What are the costs of the preferred option?  
Costs cannot be estimated with any precision because the initiative does not have a precedent 
that  we  can  refer  to.  Furthermore,  there  is  no  dedicated  data  that  one  can  reliably  use  to 
produce very concrete estimates. The impact assessment report attempts to describe some of 
the possible costs.  

Opting-in SMEs will be able to apply tax rules that they are already familiar with and to deal 
with all their tax obligations in one place (one-stop-shop). As such, SMEs will file a new tax 
return, the ‘HOT’ tax return, and tax administrations must implement a system for filing and 
exchanging the returns and for assessing, collecting and transferring taxes of the head office’s 
permanent establishments abroad. This should involve an adjustment and administrative cost 
for SMEs and tax administrations which is substantially lower than the benefits, as explained 
in the report. In total, estimated costs for all SMEs opting into the HOT system range between 
an initial EUR 332 million plus annually EUR 60 million (low-end) and an initial EUR 428 
million plus annually EUR 78 million (high-end). The total cost for all tax administrations to 

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implement the preferred option across the EU is estimated at about an initial EUR 20 million 
plus annually EUR 4 million.   

What are the impacts on SMEs and competitiveness?  
SMEs: Standalone SME entities with permanent establishments (but not subsidiaries) in  one 
or more Member State will be entitled to apply the simplification rules, which will effectively 
mean  that  they  can  expand  abroad  and  still  compute  their  tax  base  in  accordance  with  their 
own  national  rules.  SME  groups  (i.e.,  with  subsidiaries)  would  be  covered  by  another 
initiative,  with  the  possibility  to  opt  in  provided  that  they  file  consolidated  financial 
accounting statements. As such, SMEs would be supported both in their early stages of cross-
border  development  and  when  they  stabilise  or  further  expand  their  cross-border  activities. 
Considering that the rules will remain optional for SMEs, we do not estimate adverse effects. 
Rather, SMEs will enjoy the benefit of choosing the simplest and most cost-efficient solution 
based on their individual needs.  

Competitiveness:  The  initiative  is  expected  to  have  a  positive  impact  on  cost  and  price 
competitiveness.  The  HOT  rules  can  reduce  compliance  costs  for  SMEs  operating  in  all 
sectors  of  the  internal  market  and  support  SMEs  in  order  to  fully  participate  in  the  internal 
market. The initiative facilitates increased cross-border activity and improves the international 
competitiveness of EU businesses.  

Will there be other significant impacts?  
The impact assessment also considered whether the initiative may have environmental or 
social impacts, or an impact on fundamental rights. No particular and direct environmental 
impact is expected. It is also not expected that there would be a significant social impact, 
although freed resources may positively influence employment. The initiative should also not 
have an effect on fundamental rights, which are guaranteed, and personal data will be 
protected.  

Proportionality?  
The preferred option does not go beyond what is necessary to achieve the objectives and 
focuses on elements where the added value of EU action goes beyond what can be achieved 
by Member States alone. 

D. Follow up  
When will the policy be reviewed? 
An evaluation of the initiative should assess the extent to which the outlined objectives have 
been  met  and  will  take  place  five  years  after  the  Directive  starts  to  apply.  It  will  also 
analyse  the  extent  to  which  the  expected  simplifications  for  the  targeted  stakeholders  have 
materialised and assess the related administrative and regulatory burden. The Commission will 
present the evaluation results in the form of a report. The proposal will include a review clause 
allowing the Commission to amend the Directive according to the results of the evaluation. 

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