COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a COUNCIL DIRECTIVE establishing a Head Office Tax system for micro, 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

EN 

  EN 

   EUROPEAN COMMISSION  Strasbourg, 12.9.2023  SWD(2023) 302 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a COUNCIL DIRECTIVE establishing a Head Office Tax system for micro, 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) 303 final}  
 
 
Table of contents 

1. 

2. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 2 

PROBLEM DEFINITION .................................................................................................................... 4 

2.1.  What are the problems? ..................................................................................... 4 
2.2.  What are the problem drivers? .......................................................................... 5 
2.3.  What are the consequences of the problem? ..................................................... 7 
2.4.  How will the problem evolve? ........................................................................ 10 

3.  WHY SHOULD THE EU ACT? .........................................................................................................11 

3.1.  Legal basis ....................................................................................................... 11 
3.2.  Subsidiarity: Necessity of EU action ............................................................... 11 
3.3.  Subsidiarity: Added value of EU action .......................................................... 12 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ................................................................................12 

4.1.  General objectives ........................................................................................... 13 
4.2.  Specific objectives ........................................................................................... 14 

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? .....................................................................14 

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ............................................................17 

6.1.  Scope: how many SMEs could be affected? ................................................... 17 
Impact of the policy options ............................................................................ 18 
6.2. 
Impact on direct corporate income tax compliance costs ............................ 19 
6.2.1. 

6.2.2.  Macro-economic impact .............................................................................. 20 

6.2.3.  Benefits for tax administrations .................................................................. 22 

6.2.4.  Costs for SMEs and tax administrations ..................................................... 22 

6.2.5.  Additional impacts ...................................................................................... 27 

7.  HOW DO THE OPTIONS COMPARE? .............................................................................................27 

8. 

PREFERRED OPTION .......................................................................................................................32 

8.1.  REFIT (simplification and improved efficiency) ............................................ 32 
8.2.  Application of the ‘one in, one out’ approach ................................................. 33 

9.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?...................................33 

9.1.  Monitoring ....................................................................................................... 33 
9.2.  Evaluation ........................................................................................................ 35 

ANNEX 1: PROCEDURAL INFORMATION .............................................................................................36 

ANNEX  2:  FEEDBACK  TO  THE  CALL  FOR  EVIDENCE,  PUBLIC  CONSULTATION  ON  BUSINESS 

TAXATION AND TARGETED CONSULTATION ON SIMPLIFICATION FOR SMES ..............40 

ANNEX 3: WHO IS AFFECTED AND HOW? ...........................................................................................42 

ANNEX 4: ANALYTICAL METHODS ......................................................................................................45 

ANNEX 5: COMPETITIVENESS AND SME CHECK ...............................................................................53 

ANNEX 6: TERRITORIAL IMPACT ASSESSMENT – NECESSITY CHECK ........................................55 

 
 
 
 
 
1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

This  initiative  aims  to  reduce  tax  complexity  and  its  consequences  faced  by  micro,  small  and 
medium-sized  enterprises  (SMEs)1  in  the  EU.  Its  rationale  is  closely  linked  to  the  importance  of 
SMEs for the internal market. SMEs have been the backbone of Europe’s long history of economic 
development and innovation,2 as European SMEs represent a very large share of all businesses and 
provide  two  thirds  of  jobs  in  the  EU.3  In  the  2022  State  of  the  Union  Address,  Commission 
President Ursula von der Leyen acknowledged the importance of making it easier for SMEs to do 
business in the internal  market  and announced an “SME Relief Package”,4 saying that, “We must 
remove the obstacles that still hold our small companies back”.  

In this context, one of the actions linked to the “SME Relief Package” is a proposal for a Council 
Directive aimed at facilitating SMEs to expand abroad and fully participate in the internal market 
through simplification in the area of taxation. The related ongoing initiatives are the replacement of 
the  existing  Late  Payment  Directive5  with  a  regulation  introducing  binding  maximum  payment 
terms,  the  implementation  reports  of  the  Single  Digital  Gateway6  and  the  Platforms  to  Business 
Regulation7, among others.  

In the field of taxation, the initiative assessed here builds on the vision set by the Commission in its 
2021  Communication  “Business  Taxation  for  the  21st  Century”,8  which  in  the  face  of  current 
challenges and future mega-trends puts forward the twin priorities for business taxation: i) enabling 
fair and sustainable growth, including by supporting wider EU policies such as the European Green 
Deal,  the  Commission’s  digital  agenda,  the  New  Industrial  Strategy  for  Europe  and  the  Capital 
Markets  Union,  and  in  line  with  the  principles  of  the  European  Pillar  of  Social  Rights;  and  ii) 
ensuring the effective collection of tax revenue which is vital to fund quality public services and is 
a  precondition  for  a  fair  sharing  of  the  tax  burden  between  taxpayers.  On  SMEs,  the 
Communication  indicates  that  reducing  compliance  costs  for  businesses,  facilitating  cross-border 
investment, and providing the right environment for SMEs and larger enterprises alike is important 
for SMEs to thrive in a green and digital Europe. The initiative complements another proposal put 
forward  in  that  Communication:  a  new  framework  for  income  taxation  for  businesses  in  Europe 

1 As defined in Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual 
financial statements, consolidated financial statements and related reports of certain types of undertakings. SMEs are 
defined at group level, not at entity level, meaning that when a company is part of a group, it cannot be considered an 
SME in itself. The thresholds should be calculated at group level.  
2 Productivity in SMEs and large firms, OECD, 2021, https://www.oecd-ilibrary.org/sites/54337c24-
en/index.html?itemId=/content/component/54337c24-en. 
3  SME  Performance  Review  2023,  https://single-market-economy.ec.europa.eu/smes/sme-strategy/sme-performance-
review_en.  
4 Statement of European Commissioner Thierry Breton on a “Relief Package” to give our SMEs a lifeline in troubled 
waters, 19 September 2022, https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_5653. 
5 Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment 
in commercial transactions. 
6 Regulation (EU) 2018/1724 of the European Parliament and of the Council of 2 October 2018 establishing a single 
digital  gateway  to  provide  access  to  information,  to  procedures  and  to  assistance  and  problem-solving  services  and 
amending Regulation (EU) No 1024/2012. 
7 Regulation (EU) 2019/1150 of the European Parliament and of the Council of 20 June 2019 on promoting fairness and 
transparency for business users of online intermediation services. 
8  See  Commission  Communication  COM(2021)  251  final  https://taxation-customs.ec.europa.eu/system/files/2021-
05/communication_on_business_taxation_for_the_21st_century.pdf  

2 

 
 
 
(Business  in  Europe:  Framework  for  Income  Taxation,  or  BEFIT),  which  is  to  define  a  single 
corporate tax rulebook for the EU, based on the key features of a common tax base.  

The European Parliament in its Resolution of 13 July 20239 welcomed the Commission President’s 
announcement of a proposal for a single set of tax rules for doing business in Europe, BEFIT, and 
called  on  the  Commission  to  make  sure  that  the  specific  demands  of  SMEs  are  met,  by  keeping 
BEFIT always optional for SMEs, especially those not doing cross-border business. 

In addition, this initiative relates to the 2020 “Action Plan for Fair and Simple Taxation Supporting 
the  Recovery  Strategy”  which  is  a  set  of  25  initiatives  to  make  taxation fairer,  simpler  and  more 
adapted to  modern technologies.  One of the areas is  that to  reduce tax obstacles and unnecessary 
administrative burdens for businesses in the  internal market as tax simplification can improve the 
business  environment,  enhance  business  competitiveness  and  contribute  to  economic  growth.  In 
this context, the initiative assessed here can be seen as a complement to the 2021 Value Added Tax 
(VAT)  E-Commerce  initiative,  which  allows  online  sellers,  including  online  marketplaces  and 
platforms to register in one EU Member State and this will be valid for the declaration and payment 
of VAT on all distance sales of goods and cross-border supplies of services to customers within the 
EU. The aim of the e-commerce initiative was to ensure that businesses can see a reduction in red 
tape of up to 95% notably by registering with a new one-stop-shop. The initiative assessed here is 
also  complementary  to  the  2022  Commission  proposal  regarding  VAT  rules  for  the  digital  age 
(ViDA)10 which considers measures to modernise and make the EU’s VAT system work better for 
businesses.  

Currently, SMEs are faced with different sets of national tax obligations as soon as they expand and 
become  taxable  into  another  Member  State.  This  complexity  represents  a  barrier  for  SMEs  to 
expand  their  activities  abroad  and  takes  particular  relevance  in  the  inception  stage  of  expansion, 
when activities abroad  are still  auxiliary to  the  primary business  operations in the state of origin. 
This  is  for  example  shown  in  the  Commission’s  Communication  on  barriers  to  the  internal 
market,11 where national rules and procedures in the area of taxation are consistently highlighted by 
businesses as one of the biggest obstacles they face. 

It could be beneficial for these SMEs to be able to continue to only apply the tax rules that they are 
familiar with to calculate their taxable results (i.e., profits or losses) in the new Member States. If 
and when SMEs can opt for this, the compliance costs that can arise from dealing with diverse tax 
rules and different administrations would  likely be  mitigated and  this could  support SMEs  taking 
business decisions that suit them best in terms of investment and growth. 

Such a simplification  mechanism  would be  aimed specifically at  SMEs with  cross-border taxable 
presence, and in particular, to support SMEs in their early stages of cross-border development. The 
aim is that these SMEs can benefit from applying only one set of tax rules when calculating their 
tax results  as well  as  a  one-stop-shop.  This  means they would only  have to  interact  with  one tax 
administration  through  the  entire  tax  filing  and  collection  process.  The  options  for  possible 
simplification are set out and assessed in this impact assessment report.   

9 European Parliament resolution of 13 July 2023 on the state of the SME Union, P9_TA(2023)0294 
10  Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  as  regards  VAT  rules  for  the  digital  age. 
COM(2022) 701 final. Available here. 
11 COM(2020) 93 final https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0093  

3 

 
 
 
2.  PROBLEM DEFINITION 

2.1.  What are the problems? 

The current systems of business taxation in the EU give rise to high tax complexity, with different 
rules applying in each Member State. Each jurisdiction designs its own rules according to national 
or  regional  circumstances  and  preferences.  As  governments  adapt  to  new  realities  and  to  the 
emergence  of  new  business  models,  individual  Member  States’  responses  have  resulted  in 
increasingly  fragmented  tax  systems  in  the  internal  market.  As  a  result,  tax  compliance  with  tax 
obligations across the EU has become a very complex exercise. Recent research, including the Tax 
Complexity Index, indicates that tax complexity has increased significantly in the past years.12 The 
resulting tax liability computations and the required resources to comply with tax obligations tend 
to vary from one Member State to another. 

All  businesses that operate  in  the internal  market face important  consequences arising  from  these 
diverging national tax systems. Smaller businesses in particular may have difficulties crossing the 
border.  Companies  become  taxable  in  more  than  one  Member  State  as  soon  as  they  have  a 
permanent establishment (PE) or a subsidiary in another Member State.13 Compliance with such tax 
obligations  comes  with  fixed  costs  (e.g.,  administrative,  legal,  consulting  and  time  costs).  This 
creates  a  high  burden  for  SMEs  which  is  proportionately  larger  than  that  of  large  groups  of 
companies, which can leverage economies of scale. Such tax compliance costs can be particularly 
relevant  in  the  inception  stage  of  expansion  of  SMEs,  when  the  extent  of  activities  carried  out 
abroad would only be complementary to the main business operations in the state of origin.   

Tax complexity therefore translates into specific consequences for SMEs, in particular in their early 
development.  As  displayed  in  Figure  1,  it  results  in  disproportionately  higher  compliance  costs, 
presents  a  barrier  to  potential  cross-border  expansions,  and  creates  an  uneven  level  playing  field 
between  smaller  and  larger  businesses  operating  across  borders  and  between  SMEs  with  a 
permanent  establishment  or  subsidiaries  in  foreign  markets  and  between  purely  domestic 
companies.  

These  consequences  for  SMEs  impede  the  proper  functioning  of  the  internal  market  and  hamper 
prospects  for  growth  and  investment  by  a  large  number  of  businesses  in  the  EU.  Hence,  the 
problem that this initiative aims to address is tax complexity and specifically the ensuing costs and 
consequences for SMEs.  

However, businesses should be able to flourish in the internal market beyond their SME status and 
tax  complexity  also  has  important  consequences  for  larger  businesses.  For  this  reason,  the 
Commission  is  also  working  on  other  initiatives.  In  the  above  Communication  on  Business 
Taxation  for  the  21st  Century,  the  Commission  announced  that  it  will  table  a  legislative  proposal 

12  See  for  example,  Hoppe,  Schanz,  Sturm,  Sureth-Sloane  (2021):  The  Tax  Complexity  Index  –  A  Survey-Based 
Country  Measure  on  Tax  Code  and  Framework  Complexity,  European  Accounting  Review,  DOI: 
10.1080/09638180.2020.1852095. 
13 According to the OECD tax treaty model (article 5) the permanent establishment is 'a fixed place of business by 
means of which a company conducts all or a part of its business'. The notion of a permanent establishment includes, 
among other thing, for example, a management head office, a branch, an office. Contrary to subsidiary, a PE does not 
have its own legal personality. 

4 

 
 
 
 
which will be designed specifically for the tax base of groups of companies. This proposal is known 
as  ‘Business  in  Europe:  Framework  for  Income  Taxation’,  or  ‘BEFIT’,  and  will  also  aim  to 
simplify  tax  rules  and  reduce  compliance  costs.  In  addition,  the  Commission  also  envisages  a 
common  EU  approach  to  transfer  pricing,  which  would  provide  groups  of  companies  with  more 
predictability and simplification for their intra-group transactions in the EU. The impacts of these 
initiatives are not assessed in this report but are also part of a broader EU approach to address the 
problem of tax complexity.  

Figure 1 – Problem Tree 

In addition, the problem of tax complexity does not only have consequences for SMEs in the field 
of corporate taxation. More broadly, EU policies aim to simply tax rules and reduce tax compliance 
costs. The ViDA proposal addresses tax complexity in the area of value added taxes and will also 
support SMEs in this regard. This initiative is complementary with this approach and the problem 
addressed here is thus limited to corporate tax complexity.    

2.2.  What are the problem drivers? 

Different national tax systems  

Corporate income taxation in the EU is characterised by 27 different corporate income tax systems 
and 27 distinct tax administrations. Each of these systems provides detailed and possibly different 
specifications  to  compute the national  corporate  income tax base of  SMEs that are established in 
the respective Member State. An SME that operates in other Member States by way of permanent 
establishments (PEs)  or subsidiaries must  therefore  know different  national  tax laws before  filing 
different tax returns in each of the Member States where it operates. In addition, requirements and 
procedures for filing corporate income tax returns vary across Member States. By way of example, 
as  shown  in  the  Annual  Report  on  Taxation  2023,28  statutory  tax  rates  differ  substantially  among 
Member States from 10 % to 31.5%. The model-based effective tax rates which consider, amongst 

5 

 
 
 
other things,  tax support schemes put forward by governments, vary  from  9% to  29%.  The same 
Report shows how various tax incentives vary across countries. 

To  give  an  overview,  all  national  tax  systems  have  one  common  aim,  i.e.,  to  define  the  rules  to 
arrive at the taxable results (profit or loss) for each taxpayer. Gross income (revenues) is generally 
taken  as  the  starting  point,  on  which  tax  laws  allow  certain  expenses  to  be  deducted  or  certain 
income to be exempted. More specifically this includes, for instance, rules for tax depreciation and 
amortisation  of  a  company’s  assets,  inventory  costing,  the  deductibility  of  previous  (or  future) 
losses,  interests,  dividends,  provisions,  bad  debts,  fines,  illegal  payments,  foreign  taxes,  the 
availability  of  relief  in  defined  cases,  or  rules  for  business  reorganisations.  By  way  of  example, 
depreciation  rates  can  vary  significantly  across  countries  by  type  of  asset:  e.g.,  just  for  fixed 
tangible assets it ranges from 2 years to 10 years and  some countries use the so-called useful life 
with minima and sometimes maxima, while others use accelerated methods.   

In  addition,  for  cross-border  businesses,  which  have  income  and  expenses  in  multiple  countries, 
each country also has to apply a method to determine whether the business should be taxable there, 
and  if  so,  which  part  of  the  overall  income  will  be  taxed,  and  whether  foreign  expenses  can  be 
deducted.  

In that respect, a company can become taxable in Member States other than the Member State of its 
head  office  in  multiple  ways.  Firms  can  operate  cross-border  with  or  without  establishing  a 
subsidiary  in  the  other Member  State.  Even  when  there  is  no  subsidiary,  a  company’s  operations 
become  taxable  when  they  are  considered  a  PE  for  tax  purposes.  The  fundamental  difference 
between  expanding  abroad through a PE or by  way of  a subsidiary is  that  the former  remains  an 
extension  of  the  legal  personality  of  the  head  office  beyond  the  origin  Member  State,  while 
subsidiaries  are  separate  legal  entities  incorporated  under  the  company  law  of  another  Member 
State.  

As such, when a Member State taxes a PE, it taxes a non-resident company (the head office), while 
when that Member State taxes a subsidiary incorporated under its own company law, it deals with a 
domestic (resident) taxpayer. In most cases when a country taxes a PE, there is a relief mechanism 
(exemption  or  tax  credit)  in  the  jurisdiction  of  the  head  office  that  takes  the  tax  due  by  PEs  into 
account against any tax due in the hands of the head office. This treatment, however, depends on 
the specific rules of each Member State. For SMEs, this can be a complex and expensive exercise.  

Moreover, mismatches in the interaction between different national tax systems, when dealing with 
cross-border  businesses,  can  result  in  tax  uncertainty,  avoidance  or  double  or  over-taxation. 
Countries  have  adopted  a  range  of  measures  to  address  these  issues,  such  as  bilateral  treaties, 
exchange  of  information,  anti-abuse  measures,  and  dispute  prevention  and  resolution  provisions. 
Despite such efforts, results of the public consultation suggest that a fundamental concern regards 
cross-border  inconsistencies  compared  to  the  consistency  of  tax  regimes  for  purely  domestic 
situations.   

In sum, although each of the national systems may feature similar elements for calculating the tax 
base, the legal qualifications and practical applications can differ widely. National rules have had 
different trajectories, have been subject to frequent changes to address variable political objectives, 
and  although  bilateral  tax  treaties  and  anti-abuse  measures  are  often  comparable  and  based  on 
model  rules,  they  have  resulted  in  a  multitude  of  rules  that  differ  for  each  country.  Hence, 
businesses that operate in a cross-border environment have to comply with a fragmented patchwork 

6 

 
 
of  different  national  requirements.  While  this  affects  all  businesses  that  operate  in  the  internal 
market, such complexity can in particular lead to tax compliance costs that  are disproportionately 
higher  for  SMEs,  preventing  them  from  expanding  abroad,  and  it  affects  the  level  playing  field 
compared to larger cross-border businesses or purely domestic companies.  

2.3.  What are the consequences of the problem? 

There are several negative direct and indirect consequences for SMEs with activities abroad arising 
from  tax  complexity  and  that  act  as  a  barrier  to  SMEs  wanting  to  expand  their  activities  in  the 
internal market.  

2.3.1.  Tax compliance costs disproportionately affect SMEs 

The variety of features that permeate national tax systems, the discrepancies in the application and 
interpretation  of  such  features,  as  well  as  differences  in  general  administrative  procedures  across 
Member  States  have  an  impact  on  the  tax  compliance  burden  for  companies  operating  in  other 
Member States.  

A  taxpayer  has  to  bear  an  overall  burden  from  the  tax  system,  which  consists  of  (i)  the  actual 
amount of tax due, plus (ii) the costs incurred to comply with the applicable tax regulations (e.g., 
costs associated with legal and accounting advice, time to file tax returns which multiply with the 
number  of  countries  where  the  company  has  its  activity).  From  the  economic  perspective  of  a 
taxpayer, administrative costs related to tax compliance can be regarded as an efficiency loss and a 
waste of economic resources. This is because administrative tax compliance costs reduce the profits 
of businesses and increase the costs for tax administrations without leading to higher tax revenues.  

Complex  tax  compliance  also  creates  broader  economic  costs  and  inefficiencies  that  do  not 
immediately  materialise  as  expenses:  legal  uncertainty  and  non-transparent  systems  can  be 
significant  obstacles  to  investment  and  thus  hinder  economic  growth.  Tax  compliance  costs  can, 
therefore, be considered as an inherent waste of resources and a ‘deadweight loss’ and undesirable 
for the entire society.  

Even  if  one  looks  only  at  the  directly-related  expenses,  tax  compliance  costs  for  businesses  are 
found  to  be  high.  A  comprehensive,  survey-based  study  presenting  extensive  analysis  of  the 
administrative costs to comply with tax obligations has been carried out on behalf of the European 
Commission in 2022.14 This study is explained in detail in Annex 4. It estimates the administrative 
burden15 of tax compliance for  both  small  and large businesses in  Member States and the United 
Kingdom. On average, businesses incur an annual cost in meeting their tax compliance obligations 
that amounts to 1.9% of their turnover. Businesses in these 28 countries spend an estimated annual 
amount  of  around  EUR  204  billion  to  comply  with  their  tax  obligations  (for  all  types  of  taxes). 

14  European  Commission,  Tax  Compliance  costs  for  SMEs:  An  update  and  complement”  Final  Report  by  VVA  and 
KPMG, Luxembourg: Publications Office of the European Union, 2022. 
15  The  administrative  costs  consist  of  two  different  cost  components:  the  business-as-usual  costs  and  administrative 
burdens. While the business-as-usual costs correspond to the costs resulting from collecting and processing information 
that  would  even  be done  in  the  absence  of  any  legislation,  administrative  burdens  stem  from  the  part  of  the  process 
which is done solely because of a legal obligation.  

7 

 
 
 
Furthermore,  tax  compliance  costs  have  not  declined  over  time.  Total  enterprise  tax  compliance 
costs increase significantly (i.e., 114%) from 2014 to 2019.  

Importantly,  these  compliance  costs  are  regressive  when  comparing  small  and  large  businesses. 
The relative burden of tax compliance is disproportionately higher for small businesses.16 The 
study above shows that SMEs spend approximately 2.5% of their turnover on compliance with their 
tax obligations (e.g., CIT, VAT, and income taxes) while large enterprises spend 0.7%.   

The  study  looks  specifically  at  the  cost  of  compliance  with  specific  types  of  taxes,  including 
corporate  income  taxation  (CIT).  When  looking  at  such  costs,  the  study  covers  a  population  of 
some 16 million SMEs in the EU, of which 14.5 million enterprises do not (yet) engage in cross-
border  activities.17  The  true  number  is  probably  higher.18  Based  on  the  firm-level  data  from  the 
study, total CIT-related compliance costs in the EU could amount to EUR 54 billion, of which 
very small enterprises with less than 10 employees bear 90%. This means that, while the overall 
amount  may  not  seem  very  high  as  a  share  of  GDP  (0.004%  of  the  EU  GDP),  the  cost  may  be 
significant  for individual companies and especially  for SMEs  and  act as  a barrier to  expand their 
activity.  

Table 1: CIT-related compliance costs: who pays? Cost by firm size 

TAXUD calculations based on VVA/KMPG for European Commission (2022). For more details see Annex 4 and Chapter 6. 

Tax compliance costs are positively correlated with cross-border activities. This is because in 
such a context, two or more different sets of national tax rules would have to be applied in addition 
to  possible  common  EU  and  international  norms.  To  demonstrate  this  effect,  a  multivariate 

at: 

16  European  Commission,  Tax  Compliance  Costs  for  SMEs,  An  Update  and  a  Complement:  Final  Report,  (2022), 
https://op.europa.eu/en/publication-detail/-/publication/70a486a9-b61d-11ec-b6f4-
available 
01aa75ed71a1/language-en. 
17 Structural information from Eurostat’s Structural Business Statistics is used to project (gross up) the sample from the 
KMPG survey. 
18  In  the  study,  cross-border  activities  are  defined  as  “all  activities  which  involve  the  selling  of  goods,  services  or 
intangibles to a country other than the enterprise’s home country”. Foreign direct investment is thus not covered by that 
definition. 

8 

Firm size: employmentTotal CIT compliance cost, EU-27 (bn EUR).. In %From 0 to 9 persons employed48.4                                    90%From 10 to 19 persons employed2.1                                      4%From 20 to 49 persons employed2.7                                      5%From 50 to 249 persons employed0.6                                      1%250 persons employed or more0.1                                      0%Firm size: firm's turnover<1 million EUR39.0                                    72%1-10 million EUR12.4                                    23%10-49 million EUR1.4                                      3%50-249 million EUR1.0                                      2%250-749 million EUR0.0                                      0%>750 million EUR0.0                                      0%Total53.9                                     
 
 
 
regression  analysis  was  carried  out  on  the  above-mentioned  survey’s  firm-level  data.  This  is 
outlined in Annex 4. It shows that, everything else being equal,19 firms crossing borders will have 
significantly  higher  CIT-related  tax  compliance  costs  compared  to  purely  domestic 
companies.  

The  data  analysis  conducted  here  also  shows  that  compliance  costs  strongly  interact  with  the 
availability  of  a  ‘simplified  tax  regime’.  Simplified  tax  regimes  are  tax  rules  which  are  less 
complicated and easier to comply with, relative to regular national CIT rules. Estimates from data 
analysis presented in the aforementioned study and views from SMEs’ representatives indicate that 
cross-border operating firms  could  reduce their  CIT-related  compliance  costs significantly if they 
are  subject  to  a  simplified  tax  framework.  A  regression  analysis  based  on  the  survey  data  above 
suggests  that  compliance  costs  of  cross-border  operating  firms  that  have  access  to  a  simplified 
framework  can  be  one  third  below  the  cost  of  those  firms  which  are  not  subject  to  simplified 
frameworks,  all  other  firm  characteristics  being  the  same.  This  suggests  that  simplified  tax  rules 
therefore offer a significant advantage for firms operating in more than one jurisdiction.  

A  2023  study  analysis  requested  by  the  FISC  subcommittee  of  the  European  Parliament20 
concluded  that  tax  compliance  costs  are  large  enough  to  be  a  concern  for  businesses  and  are 
disproportionally  borne  by  SMEs.  The  study  indicates  that  by  burdening  companies  and 
discouraging investment, tax compliance costs are an obstacle to economic growth. 

2.3.2.  SMEs prevented from expanding cross-border 

The risk of high tax compliance burdens in cross-border scenarios can therefore act as a barrier for 
the  expansion  of  businesses  across  borders  in  the  internal  market.  Businesses  may  for  instance 
decide to concentrate their investment in one jurisdiction only, in order to avoid dealing with more 
than one set of administrative or regulatory rules including tax rules, while economically, it could 
be financially interesting to spread its operations.  

This  may  be  particularly  important  for  SMEs.  Indeed,  55%  of  EU  SMEs  surveyed  said  that 
regulatory  obstacles  or  administrative  burden  were  among  the  biggest  problems  they  face 
(Eurobarometer 486).21 Different tax obligations apply in each Member State, and compliance with 
those  obligations  comes  with  fixed  costs,  making  it  more  expensive  for  SMEs  than  for  larger 
enterprises,22 as seen before.  

This creates a barrier that prevents  SMEs  from  developing their business  cross-border.  Given the 
role of younger firms in spurring growth, innovation and employment, such barriers to the activities 
of  SMEs  may  therefore  impact  negatively  on  a  country’s  competitiveness,23  and  on  the  EU’s 
competitiveness as whole. 

19 The analysis controls for different firm sizes and differences firms’ country- and sector-related specificities. 
20 FISC subcommittee SME tax compliance costs - IPOL_STU(2023)642353_EN.pdf 
21 See Eurobarometer – Public opinion in the European Union (europa.eu) 
22  Marchese,  M. 
(2021).  Preferential 
https://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---
ifp_seed/documents/publication/wcms_803925.pdf  
23 See for example FISC subcommittee SME tax compliance costs - IPOL_STU(2023)642353_EN.pdf 

ILO  Working  Paper 

for  MSMEs. 

regimes 

tax 

33 

-   

9 

 
 
 
2.3.3.  Uneven playing field for SMEs  

A related consequence of complexity that this proposal aims to tackle is the uneven playing field. 
SMEs may be at a comparative disadvantage with respect to MNEs when they enter a new market, 
as  a  result  of  the  disproportionally  higher  costs  they  face  (see  above,  2.5%  vs.  0.7%  of  their 
turnover on tax compliance). This difference could be explained by economies of scale that large 
enterprise  groups  in  particular  are  able  to  leverage.24  As  each  national  tax  system  lays  down 
disparate  administrative  requirements  for  compliance  with  different  interactions  across  Member 
States,  this  places  a  higher  relative  burden  on  SMEs,  which  have  less  resources  than  larger 
businesses  already  operating  across  the  EU.  An  additional  point  is  that  SMEs  with  a  PE  or 
subsidiaries in foreign markets may experience a competitive disadvantage, from the point of view 
of tax compliance costs, when competing with purely national companies. These differences lead to 
an uneven playing field for businesses across the EU.  

2.4.  How will the problem evolve? 

If no action is taken at the level of the EU to bring more simplification in the tax rules, and notably 
those  regarding  the  calculation  of  the  tax  base  for  the  SME  with  taxable  presence  abroad,  the 
situation described above will persist. High tax compliance costs will continue to be an economic 
deadweight loss and can discourage expansion of SMEs within the internal market. Faced with an 
uneven playing field, SMEs may not exploit the full potential of the internal market, which affects 
competitiveness in and of the EU.   

3.  WHY SHOULD THE EU ACT? 

3.1.  Legal basis 

This  proposal  falls  within  the  remit  of  Article  115  of  the  Treaty  on  the  Functioning  of  the  EU 
(TFEU).  The  rules  of  the  proposal  aim  to  approximate  the  laws,  regulations  or  administrative 
practices  of  the  Member  States  as  directly  affect  the  establishment  or  functioning  of  the  internal 
market. It shall therefore be adopted under a special legislative procedure in accordance with this 
article and in the form of a Directive. The competence of the Union in this area is shared with the 
Member States.  

The  current  initiative  introduces,  through  a  directive,  as  prescribed  in  Article  115  TFEU,  a  new 
framework for taxation in the EU with focus on SMEs which operate in another Member State. It 
envisages action to facilitate the cross-border expansion of SMEs and is therefore also linked to the 
enhancement of the internal market. 

3.2. 

Subsidiarity: Necessity of EU action 

In  accordance  with  the  subsidiarity  principle  laid  down  in  Article  5(3)  TFEU,  action  at  EU  level 
should be taken only when the aims envisaged cannot be achieved sufficiently by Member States 
acting  alone  and  when  in  addition,  by  reasons  of  the  scale  or  effects,  the  proposed  action  can  be 

24  European  Commission.  (2022).  Tax  compliance  costs  for  SMEs.  An  update  and  a  complement  :  final  report 
https://op.europa.eu/en/publication-detail/-/publication/70a486a9-b61d-11ec-b6f4-01aa75ed71a1  

10 

 
 
 
better achieved by the EU. This initiative is in line with the principle of subsidiarity laid down in 
Article 5(3) TFEU for the reasons set out below. 

The problems are common to all Member States. SMEs can increasingly operate across borders 
in the internal market, but in the current context they have to deal with 27 different corporate tax 
systems.  This  multiplicity  of  rules  results  in  fragmentation  and  presents  a  serious  impediment  to 
cross-border  business  activity  in  the  internal  market.  This  is  particularly  striking  for  small 
businesses  crossing  or  wishing  to  cross  the  border  as  they  will  be  faced  with  disproportionately 
high tax compliance costs even if in the internal market, other barriers have been removed.   

This  cannot  be  effectively  addressed  by  Member  States  directly.  Complexity  and  the  derived 
consequences  are  the  result  of  having  different  tax  systems  in  the  first  place,  which  results  from 
individual  national  action.  Therefore,  action  at  Member  State  level  would  likely  continue  to 
produce  insufficient  and  uncoordinated  effects.  Similarly,  while  better  cooperation  between 
Member  States  without  EU  action  has  resulted  in  several  beneficial  outcomes,  this  approach  has 
mainly been bilateral, is limited, and has not necessarily resulted in less complexity for SMEs.  

In  this  context,  only  an  EU-wide  initiative  providing  for  simplification  can  be  effective.  The 
complexity  and  its  consequences  would  be  significantly  reduced  if  there  were  a  simplification 
framework  for  SMEs,  allowing  them  to  apply  one  set  of  corporate  tax  rules  when  they  wish  to 
expand abroad. Such a simplification can only effectively work on the basis of mutual recognition 
between the origin Member State and the Member States into which the company expands. Instead 
of  filing  in  each  Member  State  where  an  SME  has  a  taxable  presence,  SMEs  would  be  able  to 
comply with all requirements through their head office and only in the Member State of the head 
office (one-stop-shop). If Member States would establish such a system unilaterally, bilaterally or 
multilaterally, and not at EU level, it would not effectively reduce complexity, as the approach and 
filing obligations would depend on a patchwork of agreements between Member States.  

This  initiative  is  therefore  in  line  with  the  subsidiarity  principle,  considering  that  individual 
uncoordinated  action  by  the  Member  States  would  only  add  to  the  current  fragmentation  of  the 
legal  framework  for  corporate  taxation  and  fail  to  achieve  the  intended  results  notably  from  an 
internal  market  perspective.  A  common  approach  for  all  Member  States  would  have  the  highest 
chances of addressing the problem and its consequences and of achieving the intended objectives. 

3.3. 

Subsidiarity: Added value of EU action 

Action at the EU level would bring significant benefits to both businesses and tax administrations. 
The scope and scale of the initiative is targeted to the particular situation where SMEs would have 
taxable presence in other Member States and in  particular during their initial phase of expansion. 
This  targeted  scope,  combined  with  anti-abuse  rules,  will  ensure  that  the  proposed  simplification 
can only be applied by businesses when there is clear added value.       

What is more, in these cases, the initiative provides SMEs with an opportunity to use one single 
set of tax rules to compute their taxable results abroad and thereby reduce their compliance costs, 
but without prescribing any substantive national tax rules of the Member States. The initiative 
only designates which national tax rules should be used for the computation of the taxable results 
and relies on a mutual recognition among the Member States of each other’s taxation rules. Tax rate 
and enforcement policies remain fully with Member States.  

11 

 
 
 
Moreover, the initiative  assessed here goes  for  voluntary  application  of the proposal by SMEs 
(rather than mandatory application – see Chapter 5). This will bring a definite advantage for SMEs 
because SMEs have less resources to cope with foreign tax systems and SMEs themselves are best 
placed  to  decide  whether,  in  their  specific  case,  such  a  mechanism  can  help  them  reduce 
compliance  costs  and  support  their  expansion.  As  such,  the  common  rules  will  have  added  value 
and are balanced.  

Indeed,  this  initiative  will  also  support  investment  and  capital  mobility  in  the  EU.  By 
simplifying  tax  rules,  it  will  eliminate  tax  regulatory  obstacles  and  SMEs  operating  in  different 
Member  States  will  be  able  to  make  an  improved  use  of  their  freedom  of  establishment  and  free 
movement of capital. 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

This  section  outlines  the  general  and  specific  objectives  that  the  initiative  pursues.  The 
‘Intervention  Logic’  in  Figure  2  presents  these  objectives  jointly  with  the  problem  drivers  and 
problems that the initiative aims to address. 

Figure 2 – Intervention Logic 

4.1.  General objectives 

The  primary  objective  of  the  initiative  is  to  simplify  tax  rules  for  business  in  EU  by  reducing 
compliance costs, in particular for SMEs. This will ensure the good functioning of the internal 
market.  While  in  many  other  areas,  there  is  significant  progress  in  EU  law  to  ensure  that 
businesses  are  not  hampered  by  obstacles  in  the  internal  market,  the  proliferation  of  different 
corporate  tax  systems  can  still  hinder  SMEs  activities  across  the  EU  and  affect  the  level  playing 

12 

 
 
 
field. By providing an option for simplification that reduces these obstacles for the computation of 
the tax base, the initiative will improve the functioning of the internal market.   

The proposal further aims to stimulate growth and investment in the EU by reducing the number 
of  national  sets  of  tax  rules  that  SMEs  must  comply  with  to  be  able  to  expand  and  invest  across 
borders in the internal market. Useful simplification will make the environment for doing business 
in  the internal  market more attractive and  will  untap opportunities.25  In providing SMEs with  the 
option  to  continue  to  comply  with  the  same  tax  obligations  during  their  early  stages  of 
development,  the  proposal  ensures  that  their  business  and  growth  decisions  are  not  distorted. 
Additional  resources  may  also  be  freed  by  reducing  deadweight  costs,  and  can  be  directed  to 
economic activity, investment and growth.  

4.2. 

Specific objectives 

The specific objectives of this initiative contribute to achieving the general objectives. The specific 
objectives link directly to the problem and its consequences, as identified in Chapter 2. The specific 
objectives therefore focus on SMEs, while tax complexity and its broader consequences will also be 
addressed by other EU initiatives with complementary objectives, such as BEFIT.  

The first specific objective is to reduce tax compliance costs for SMEs with a taxable presence 
abroad. As the proposal will provide SMEs operating in the EU with a simplified set of tax rules, 
compared to  the current  environment,  less resources  should be  required  for businesses to  comply 
with tax regulations.  

Secondly,  the  initiative  aims  to  encourage  cross-border  expansion  of  SMEs.  This  specific 
objective  can  be  achieved  for  SMEs  through  this  proposal  as  it  will  provide  simplification  for 
SMEs wishing to expand across borders and is targeted at supporting them in their early stages of 
cross-border expansion. In this way, the SMEs within the scope will not face a cliff effect, i.e., a 
sudden increase in the compliance and other burdens when expanding their operations cross-border. 
SMEs which have crossed the border and wish to stabilise their cross-border operations, are as such 
not the focus of this initiative. It is however important that these SMEs are also supported in their 
further development by a coherent EU approach. This is the objective of other initiatives that the 
Commission will put forward.     

Thirdly, the simplification should ensure a level playing field for the participation of SMEs in 
the internal market. SMEs are the backbone of the EU economy and drive innovation. It is crucial 
that they can grow and scale up, and that possible barriers to their  competitiveness and resilience 
are mitigated so they can fully participate in and benefit from the internal market. As with access to 
financing and market access, it is key to reduce regulatory burdens that come with a fixed cost and 
that  therefore  put  SMEs  at  a  disadvantage  compared  to  larger  businesses  when  they  enter  new 
markets,  on  the  one  hand,  and  at  a  disadvantage  with  purely  domestic  actors,  on  the  other  hand. 
Levelling the playing field can also contribute to reinforcing the EU’s overall competitiveness.    

25 As explained in Annex 3, the objectives of the initiatives also relate to the Sustainable Development Goals (SDGs). 
Notably, the general objective to stimulate growth and investment should translate into a positive impact on SDGs no. 8 
and 9.  

13 

 
 
 
5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

Based on the above problems and objectives, three policy options have been identified. The status 
quo can be maintained  (baseline option), or the initiative can provide  voluntary simplification for 
SMEs  by  allowing  them  to  apply  only  one  set  of  national  tax  rules  when  they  expand  across 
borders.  This  simplification  could  either  be  available  for  only  standalone  SMEs  with  permanent 
establishments  in  other  Member  States  (option  1),  or  for  all  SMEs  with  cross-border  taxable 
presence,  including  both  permanent  establishments  and  subsidiaries  (option  2).  Mandatory 
application of the simplification was also considered but discarded early on.  

Baseline: no policy change  

The baseline scenario is to keep the existing policy framework. This means that the EU continues to 
have  27  different  corporate  tax  systems  and  no  administrative  simplification  is  offered  to  SMEs 
with taxable presence in another Member State. This would result in continued barriers to the good 
functioning  of  the  internal  market,  as  SMEs  will  continue  to  be  faced  with  disproportionately 
higher compliance costs, and face an uneven level playing field which can hinder their growth and 
competitiveness.  

Policy  options:  Simplification  for  SMEs  by  allowing  one  set  of  national  tax  rules  for 
computing their taxable results 

As  explained  in  detail  above,  today,  SMEs  with  taxable  presence  in  other  Member  States  (either 
through  PEs  or  subsidiaries)  are  subject  to  more  than  one  set  of  national  tax  rules  and  must  file 
multiple tax returns in line with the tax rules specific for each Member State. As explained above in 
section 2.2, not only national tax rate policies differ; each Member State also has differing rules to 
calculate the taxable result of businesses. A proposal for simplification can maintain these existing, 
national tax systems and design rules but allow expanding SMEs to continue to apply the tax rules 
of the Member State of their head office or headquarter also for the purpose of determining their 
taxable result in other Member States.  

This  concept  is  not  new.  In  a  2005  Communication,26  the  European  Commission  presented  a 
‘Home State Taxation’ system as a possible solution to the compliance costs and other company tax 
difficulties  of  SMEs.  The  concept  was  based  on  voluntary  mutual  recognition  of  tax  rules  by 
Member States in order to compute the taxable profits of SMEs active in more than one Member 
State according to the national tax rules of one Member State.  

The initiative assessed here also proposes a simplification for SMEs by allowing them to compute 
the taxable results of their PEs or subsidiaries based on only the national tax rules of the Member 
State of the head office (for PEs) or of the headquarters (for subsidiaries), the ‘Head Office 
Taxation’ (‘HOT’) rules. The SME would as such apply these rules to all its operations in the EU 
and would include this information in a single tax return, the ‘Head Office Taxation’ (‘HOT’) tax 
return. This allows SMEs to comply with their tax obligations through a one-stop-shop. The HOT 

26 COM (2005) 702: Communication from the Commission to the Council, the European Parliament and the Economic 
and Social  Committee  - Tackling the corporation tax obstacles of small and medium-sized enterprises in the Internal 
Market - outline of a possible Home State Taxation pilot scheme […] {SEC(2005)1785} 

14 

 
 
 
tax  return  would  be  filed  with  only  the  tax  administration  of  the  Member  State  of  the  head 
office or headquarter.  

That tax administration would have to share with the respective Member State tax administrations 
of the PEs or subsidiaries that the SME has opted for the HOT rules, so that these administrations 
are  aware  that  the  SME  will  not  file  a  tax  return  with  them.  The  HOT  tax  return  would  also  be 
shared  by  that  tax  administration  of  the  head  office  or  headquarter  with  the  other  concerned  tax 
administrations, to ensure full transparency and overview. This could be best achieved by enabling 
automatic exchange of information between Member State tax administrations in the framework of 
the Directive on Administrative Cooperation (DAC)27. 

The tax administration of the head office or headquarter would also be responsible for preparing a 
tax  assessment  for  not  only  the  head  office  or  headquarter  but  also  each  PE  or  subsidiary,  after 
applying the tax rate of the respective Member State. The tax administration of the head office or 
headquarter  would  also  share  these  draft  assessments  with  the  Member  States  of  the  PEs  and 
subsidiaries for review, in the framework of the DAC.  

To ensure that each tax administration fully retains its competence, the tax administrations of the 
other  Member  States  would  have  to  accept  this  draft  tax  assessment  and  may  also  request  joint 
audits. These joint audits would be based on the framework foreseen in the DAC, but it would be 
mandatory for Member  States  to  accept  requests in  application of the HOT  rules. Taken together 
with the required updates to be able to exchange the information as mentioned above (the SMEs’ 
election to apply the HOT rules, the HOT tax returns, and the draft tax assessments), this means the 
proposal would amend the DAC.  

The tax  administration of the  head office or headquarter  would also  be responsible for  collecting 
the taxes due and to transfer the collected revenues to the respective Member States.   

Such solution would be limited to the taxation rules for the computation of the taxable result of PEs 
or subsidiaries and would not touch upon the social security rules applied in the Member State of 
the  PE  or  subsidiary,  nor  would  it  affect  the  existing  bilateral  conventions  on  the  avoidance  of 
double taxation.  

The above features would have to be similar for both proposed policy options. The options differ in 
scope and more specifically on whether the simplification should be provided for only standalone 
SMEs with PEs in other Member States, or also for SME groups with subsidiaries in other Member 
States.  

Option 1: Optional simplification for SMEs with PE(s) (but no subsidiaries) in 
(an)other Member State(s) 

A  first  option  would  be  to  include  in  the  scope  of  the  proposal  only  standalone  SMEs  with 
permanent establishments in other Member States and exclude SMEs with subsidiaries in other 
Member States. SMEs in scope of this option are those who have or wish to have a taxable presence 
in one or more Member State through PEs. Without the proposal, each PE would be subject to tax 

27  Council  Directive  2011/16/EU  of  15  February  2011  on  administrative  cooperation  in  the  field  of  taxation  and 
repealing Directive 77/799/EEC, OJ L 64, 11.3.2011, p. 1–12. 

15 

 
 
 
in  the  respective  Member  State  in  accordance  with  the  domestic  tax  base  rules  of  that  Member 
State.  

This option proposes that the taxable results of each PE of the SME would, instead, be calculated 
according  to  the  applicable  rules  of  the  Member  State  of  the  head  office,  i.e.,  the  HOT  rules  as 
explained above. This means that these SMEs would be able to apply these rules to all their PEs in 
the EU and can make use of a one-stop-shop that allows them to continue to only file one tax return 
with the same tax administration, i.e., of the Member State of the head office.   

SMEs  would  have  to  be  eligible  and  need  to  explicitly  opt  in.  To  determine  whether  an  SME  is 
eligible to opt in, the proposal would have to include eligibility requirements that ensure a clear 
delineation of the scope, i.e., that only genuine standalone SMEs with PEs in other Member States 
can opt in. To this effect, it would of course be required that the SME does not have a subsidiary in 
another  Member  States,  but  also  that  the  joint  turnover  of  the  PEs  does  at  least  not  double  the 
turnover of the head office,  and that the head office has been resident in  its  Member State  for  at 
least two years.   

In addition, to prevent that the voluntary scope of the proposal would be used for circumvention, 
the rules would be coupled with the requirement that an opting-in SME applies the rules of the 
Member State of the head office for a minimum period of time, for example five years. SMEs 
will be entitled to renew their choice every five years without limit as long as they continue to meet 
the above eligibility requirements.  

The proposal must also ensure that the new rules cannot be used for abusive tax planning practices. 
The  proposal  would  thus  have  to  include  termination  provisions  that  allow  Member  States  to 
disapply  the  HOT  rules,  when  this  is  no  longer  appropriate,  such  as  for  instance,  when  the  SME 
deliberately transfers the head office to another Member State for tax purposes.  

Option  2:  Optional  simplification  for  all  SMEs  with  taxable  presence  (PEs 
and/or subsidiaries) in (an)other Member State(s) 

An alternative option would be to allow eligible SMEs to apply the same set of applicable rules to 
compute the taxable results of both PEs and subsidiaries. Similarly, this would then be computed 
using the rules that are applicable in the Member State of its head office or headquarter and there 
would be a one-stop-shop, as explained above. The main difference would be that the scope of the 
proposal is extended to also include groups of companies.  

Hence,  the  analysis  of  the  technical  elements  is  the  same  as  under  the  first  option,  but  the 
implications are different. This is because subsidiaries are separate legal persons established under 
the laws of another Member State, whilst PEs are legally the same legal entity as the head office 
company.  PEs  do  not  have  a  separate  legal  entity  and  are  only  physically  carried  out  in  another 
location. Eligibility  and termination criteria would also  be present  much as above  but  adjusted to 
the new scope notably to now include subsidiaries. The rules on turnover would thus be the same or 
similar, as appropriate, and the head office residency rule would naturally relate to the headquarter. 
The second option would also need to ensure similar rules for the minimum period of application of 
the rules. Termination rules to avoid abuses would also be similar but specific to SME groups.  

Discarded option: Mandatory application  

16 

 
 
Beyond the above two options, a mandatory application of the simplification rules was discarded. It 
would risk leading to discriminatory tax treatment against PEs or subsidiaries in the cases that the 
tax base in the Member State of the head office were wider, compared to that of the Member State 
of the PE or subsidiary. As a result, foreign-held taxpayers would be unequally treated, compared 
to  domestic  taxpayers  in  regard  to  the  freedom  of  establishment.  The  situation  is  different  if  the 
system is designed as optional. In such case, if an unfavourable tax treatment occurred, it would be 
the outcome of an option chosen by the taxpayer and not imposed by EU rules.  

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

6.1. 

Scope: how many SMEs could be affected? 

As explained, the scope of the proposal depends on the chosen policy option. In addition, since the 
proposal would be optional for SMEs, it is not possible to establish the number of companies that 
will choose to apply the new rules with precision.  

Under the first option, the scope would be limited to standalone SME companies with permanent 
establishments in one or more other Member State(s). These SMEs only have one set of financial 
accounts and have no legal personality established under the law of the other Member State(s).  

Under the second option, SMEs with subsidiaries in one or more other Member State(s) would also 
be eligible to opt in. This therefore includes groups of companies. Orbis company data provided by 
Bureau  van  Dijk28  suggests  that  many  subsidiaries  are  located  in  a  different  Member  State  than 
their  headquarter.  Note  in  that  respect  that,  as  set  out  in  Chapter  7  below  on  the  coherence  with 
other EU policies, the Commission is also envisaging a separate initiative aimed at simplification 
for  groups  of  companies.  Groups  that  prepare  consolidated  financial  statements  could  also  be 
eligible  to  opt  into  such  initiative.  As  such,  in  case  two  different  sets  of  EU  simplification  are 
available  for  SMEs  and  groups  of  companies,  this  would  influence  how  many  companies  are 
affected.  

6.2. 

Impact of the policy options 

Quantifying  the  effects  of  a  voluntary  approach  is  difficult.  The  analysis  below  provides  an 
estimation  of  the  possible  benefits  and  costs  of  implementing  the  HOT  system  and  the  one-stop-
shop  for  SMEs.  For  the  benefits,  the  analysis  looks  at  both  the  direct  pecuniary  savings  for  tax 
compliance  costs  of  businesses,  and  the  broader  macro-economic  impact  thereof.  Given  the 
uncertain number of SMEs that would be affected, the analysis will be based on various illustrative 
examples and provides ranges with high-end- and low-end estimates.  

For the benefits, the starting point is an estimate of today’s CIT-related tax compliance costs 
borne by  SMEs in the EU. As indicated in  Chapter 2 and  explained in  more detail  in  Annex  4, 
these costs could today amount to an estimated EUR 54 billion,29 representing a significant 0.4% 

28  Orbis  is  a  global  company  database  comprising  information  about  more  than  400  million  companies  and  notably 
private  companies  worldwide.  It  is  produced  by  Bureau  van  Dijk.  The  system  operates  a  10-year  window  for  listed 
companies and a 5-year window for all other companies. See Orbis (bvdinfo.com) 
29  The  information  is  extracted  from  firm-level  (micro)  data  stemming  from  the  VVA/KMPG  survey  on  compliance 
cost for SME. This survey was done for the European Commission (2022). 

17 

 
 
 
share of the EU’s GDP. The amount includes the cost of both purely domestic and cross-border 
operating firms. The below section 6.2.1 looks at how the initiative could reduce these costs. This 
analysis only  includes  the direct  pecuniary costs  related to  complying  with  existing tax rules  and 
does not include macro-economic costs of investment gaps that may result from these expenses, nor 
does it take account of foregone cross-border expansion as a result of today’s complicated EU-wide 
network  of  different  national  tax  rules.  Hence,  section  6.2.2  also  models  second-round  macro-
economic  effects,  i.e.,  what  if  SMEs  used  the  freed  resources  for  productive  actions  and  what  if 
more  SMEs  go  for  cross-border  activities.  Section  6.2.3  considers  the  benefits  for  tax 
administrations.  

Section  6.2.4  sets  out  a  comprehensive  estimation  of  the  costs  of  implementation  for  businesses 
and tax administrations, to the extent possible. Finally, Section 6.2.5 considers additional impacts 
such as on the environment, employment, fundamental rights, or competitiveness.  

6.2.1.  Impact on direct corporate income tax compliance costs 

Using  firm-level  micro  data  of  the  above-mentioned  survey-study  in  Chapter  2,  one  can  estimate 
how the current CIT-related compliance costs are distributed across businesses with respect to their 
size and whether they operate cross-border. Details can be found in Annex 4. It confirms that the 
bulk  of  CIT-related  compliance  costs  is  borne  by  SMEs.  Moreover,  the  study  captures  only  a 
limited  number  of  companies  operating  in  a  state  other  than  their  home  state  (N.B.  cross-border 
activities in the definition of the study consider selling across borders). Today, EUR 6 billion CIT-
related compliance costs out of the EUR 54 billion are borne by SMEs operating across the border.  

This amount probably underestimates true compliance costs of internationally active companies. In 
addition to the potential savings associated with reducing purely pecuniary costs of tax compliance 
for  firms  already  involved  in  international  business,  the  potential  cost  savings  for  today’s  purely 
domestic firms that may feel motivated to expand their cross-border activity (via the simplification 
proposal) can be even more significant. 

Table  2:  Number  of  firms,  absolute  and  average  CIT  compliance  costs  (CC),  cross-tabulated  by 
firm size and cross-border activity, 2019 

Source: Commission services, based on data from VVA/KMPG (2022).  

Calculating a high-end estimate: Using a regression analysis, Annex 4 shows that the availability 
of a simplified tax system has the potential of reducing  current  CIT-related compliance costs per 
firm  by  32%  for  cross-border  operating  firms.  Therefore,  if  we  apply  cost  savings  of  32%  to  the 

18 

noyesTotalCIT CC (bn EUR)46.9                        5.9                          52.8                        .. per enterprise3,223                     3,308                     3,232                     Number of enterprises14,566,027           1,784,673             16,350,700           CIT CC (bn EUR)0.8                          0.3                          1.0                          CIT CC per enterprise9,929                     8,266                     9,436                     Number of enterprises77,939                   32,824                   110,763                 CIT compl. Costs (bn EUR)47.7                        6.2                          53.9                        .. per enterprise3,259                     3,398                     3,274                     Number of enterprises14,643,966           1,817,497             16,461,463           TotalSMELarger Enterpr.Operating cross-country? 
 
 
firms in the sample that are already operating across the border, we can estimate overall potential 
savings of EUR 1.9 billion for these firms.30 Moreover, a certain percentage of enterprises which 
are so far not operating cross-border would be incentivised to do so as this regulatory barrier and 
the  associated  costs  would  be  mitigated.  They  would  also  benefit  from  the  32%  reduction  on 
potential compliance costs when initiating their cross-border activity. As explained in Annex 4, if, 
as a purely illustrative example, 10% of the so-far domestic SMEs (i.e., 14.6 million firms, see first 
row of Table 2) started operating cross-border those would correspond to savings of an additional 
amount  of  CIT-related  compliance  costs  of  EUR  1.5  billion  when  conducting  cross-border 
activities. Total savings could amount to EUR 3.4 billion per year.31  

The  10%-assumption  is  an  illustrative  scenario  showing  the  magnitude  of  potential  cost  savings. 
The assumption is applied in the absence of any reliable information about cross-border investment 
behaviour following the initiative. If we keep assuming 32% savings on compliance costs, but only 
5%  of  the  so-far  domestic  firms  starting  to  operate  cross-border  (i.e.,  364  000  firms),  then  total 
savings could amount to about EUR 2.3 billion. 

Calculating a low-end estimate: The number of eligible SMEs will depend on the policy option 
and the new rules would be optional for eligible SMEs. This means that it is difficult to predict the 
exact number of companies that will opt-in. Also, the 32% is proxy and as such it is possible that 
the reduction in  tax compliance costs  via this mechanism would be  lower than the one used  as a 
proxy.  Therefore,  a  more  cautious  estimate  –  i.e.,  a  lower-end  estimate  –  is  also  warranted, 
assuming a lower cost reduction and that fewer SMEs will develop cross-border operations. We can 
consider  that  having  access  to  simplification  reduces  tax  compliance  costs  by  16%  (instead  of 
32%). Moreover, one can also assume that only 5% of the so-far domestic SMEs opt in (instead of 
10%). This would result in savings of about EUR 0.9 billion for those already operating across the 
border and EUR 0.4 billion for those starting to cross borders. Total savings would then amount to 
EUR 1.3  billion  per  year.  Furthermore,  if  we  were  to  assume  that  only  1.25%  of  the  so-far 
domestic SME (instead of 5%) would start operating cross-border, then total savings would amount 
to EUR 1 billion per year if firms save 16% compliance costs. 

These calculations show us the potential in savings that could be generated for SMEs with cross-
border  activity  or  wanting  to  expand  their  activity  across  the  border  in  the  internal  market.  They 
provide an estimated range for the potential savings that the proposal could achieve through the two 
options. They show a potentially significant positive impact of the proposal. 

Note that the granularity of the available data from the survey on SMEs does not allow to calculate 
with  precision  how  much  savings  option  1  (voluntary  simplification  only  for  those  with  PEs)  or 
option 2 (voluntary simplification for SMEs with PEs and subsidiaries) would generate. The survey 
data does not  distinguish between cross-border activity via a PE or a subsidiary.  A look  at  Orbis 
data suggests that the sample would be larger for option 2 than for option 1, with the caveat that 

30 Note that to avoid a possible double counting with the impact assessment on BEFIT, we have reduced the number of 
SMEs with cross-border operations by 5373 times 2 (assuming each SME group has on average one subsidiary) which 
can be seen as the proxy for the number of MNEs with a turnover of less than EUR 50 million and therefore considered 
SME  groups.  The  overall  rounded  amount  does  not  change  even  if  we  consider  that  SMEs  have  two  subsidiaries  on 
average and we reduce the sample by 16,119.  
31  These  estimates  are  based  on  information  from  the  VVA/KMPG  survey  to  above  and  in  Annex  4.  For  several 
reasons, the true pecuniary savings on CIT compliance costs could be higher. Those reasons are explained in Annex 3. 

19 

 
 
 
Orbis  data  is  not  specific  to  SMEs.  Potential  tax  compliance  cost  savings  in  option  2  would 
therefore be  expected to be higher in total, while at firm level, the benefits may not be higher on 
average.  Some  of  these  SMEs  with  subsidiaries  may  already  be  larger  in  size.  They  may  benefit 
from  economies  of  scale,  and,  just  as  with  larger  MNEs,  they  may  be  able  to  wear  off  such  tax 
compliance costs more easily.   

6.2.2.  Macro-economic  impact  of  companies  crossing  borders  within  the  EU  and  using 

freed resources for investment 

As  mentioned,  complex  tax  laws  can  create  barriers  to  cross-border  expansion,  thus  depriving 
SMEs from fully participating the internal market. Indeed, the impact of potential new cross-border 
activities motivated by the initiative is a multiple of the savings on the purely pecuniary amounts 
paid  on  CIT-related  compliance.  Accordingly,  this  section  looks  at  second-round  effects  using  a 
more comprehensive model-based analysis.  

The current complicated set of CIT requirements may dissuade domestically operating SMEs from 
expanding  into  other  Member  States,  even  in  case  of  small  geographic  distances.  Simplification 
through the new initiative may be an incentive to extend their business to other Member States, and 
thereby  further  accelerate  EU-wide  productivity,  growth  and 
the  strengthening  of  EU 
competitiveness (see also Annex 4). 

To  assess  the  macro-economic  impact,  we  use  the  Joint  Research  Centre’s  Cortax  Model,  a 
general-equilibrium tool with a focus on taxation. A simulation with Cortax looks at the effect of 
the simplification of the HOT system on GDP via productivity effects (see Annex 4 for more 
details). As a result of  the proposed  HOT rules, more purely  domestic SMEs will be expected to 
cross borders and start  operating in  other Member States. There is  strong empirical  evidence that 
international companies are more productive than their non-multinational counterparts,32 implying 
the  potential  of  a  significant  productivity  boost  for  those  going  international  (i.e.,  those  that  will 
start to operate cross-border). We look at what happens as a result of assuming a high productivity 
boost  of  15%  and  a  low  productivity  boost  of  about  4%.  There  is  empirical  evidence  for  both 
assumptions.33  

As it is impossible to predict the number of companies that may decide to expand cross-border, we 
look  at  the  above-introduced  assumption  that  considers  that  10%  of  currently  domestic  SMEs 
would  expand  their  business  into  another  Member  State.  From  Table  2,  one  can  deduce  that  this 
assumption could bring the share of cross-border operating SMEs from today’s (estimated) 11% to 
20%,  which  would  represent  an  optimistic  scenario.34  Applying  the  assumption  of  a  high 
productivity  boost  of  15%  would  lead  to  an  overall  increase  in  GDP  of  +0.7%  in  the  long  term, 
with  a corresponding increase in  total  tax  revenue of  around  +1%,  relative to  the status  quo.  We 
can see this as the high-end estimate in terms of growth impact via productivity. To put this in 

32 For example, in the context of exporting vs. non-exporting firms: Bernard A. B., Jensen J. B., Exceptional exporter 
performance: cause, effect, or both? Journal of International Economics 47 (1999), pp. 1–25. 
33 According to the 2020 CompNet Firm Productivity Report, the current exporters’ labour productivity premium could 
be around 15% on average (p. 38). Other studies show a lower productivity boost of around 4%  (see e.g., de Loecker, 
2013). 
34 This information is extracted from firm-level (micro) data stemming from the  VVA/KMPG survey on compliance 
cost for SME, European Commission (2022). 

20 

 
 
 
perspective, consider that these 1% of the EU’s total tax revenue corresponds to 0.39% of EU GDP, 
or EUR 61 billion per year –  more than the amount  of today’s  compliance costs altogether. As a 
low-end  estimate,  if  we  were  to  use  a  4%  productivity  boost  on  the  5%  of  currently  domestic 
SMEs that would expand their business into another Member State, we would see an increase in EU 
GDP of around +0.08% while tax revenue would increase by +0.12% (some EUR 19 billion).  

Since the final effects also largely depend on the number of firms extending their businesses abroad 
thanks to the simplification, the following scenarios have been estimated, as indicative examples.  

Keeping the high-end estimate of 15% productivity gains for international firms, the increase on 
EU  GDP  could  range  from  +0.90  to  +0.16%  if  12.5%  and  2.5%  of  so-far  domestic  firms  go 
international,  respectively.  In  the  same  vein,  the  EU  tax  revenues  will  increase  by  a  range  from 
+1.32% to +0.24%.  

For  the  low-end  estimate  of  a  productivity  premium  for  going  international  of  only  4%,  the 
increase  on  EU  GDP  could  range  from  +0.21  to  +  0.04%  if  12.5%  and  2.5%  of  so-far  domestic 
firms  go  international,  respectively.  In  the  same  vein,  tax  revenues  in  the  EU  will  increase  by  a 
range from +0.32% to +0.06%.  

Moreover,  these  estimates  do  not  include  some  other  positive  macro-economic  second-round 
effects.  Due  to  simplified  tax  compliance,  resources  so  far  bound  to  tax  compliance-related 
activities will become available for productivity-enhancing investment. Annex 4 outlines the results 
of a simulation with a labour market model in which it is assumed that companies use the additional 
resources to step up investment in the formation of human capital (company-sponsored training). It 
is shown that every euro redirected to be spent on investment in human capital because of savings 
on tax compliance costs could return up to three euros. 

When comparing the two options, the second option can be expected to generate higher savings 
in total than the first option, given that the second option would be open to more SMEs. In addition, 
the increase in cross-border operations may be higher, and as a result, this could also lead to more 
productive investment, generating a higher positive macro-economic impact in total. Note that all 
these are estimates on the basis of model analysis and as such need to be taken with caution.  

6.2.3.  Benefits for tax administrations  

While the initiative is aimed at reducing compliance costs for SMEs crossing borders in the internal 
market, it will also impact tax administrations and brings clear advantages. Firstly, the introduction 
of HOT tax returns will reduce the total amount of tax return filings at EU level. The costs for tax 
administrations  in  accommodating  and  exchanging  the  HOT  tax  returns  are  discussed  in  section 
6.2.4 below but, in any case, for each HOT tax return there will be at least one filing less in another 
Member State. Although the tax administrations of these other Member States would still have to 
dedicate some resources to receiving the HOT tax return and accordingly reviewing the proposed 
tax  assessment  for  approval,  the  initiative  can  therefore  be  expected  to  free  up  resources  for  tax 
administrations.  

Currently, the complexity and lack of transparency also creates opportunities for irregularities and 
fraud. Businesses with  PEs in  several  Member States may exploit  such possibilities, for instance, 
because  their  operations  are  controlled  by  different  administrations.  If  SMEs  would  interact  with 
only one Member State tax administration for all their activities in the EU, the risk for irregularities 

21 

 
 
and  fraud  due  to  mismatches  or  lack  of  overview  will  be  considerably  reduced.  Hence,  the  HOT 
system should facilitate anti-fraud policies and should contribute to the tax administrations’ efforts 
to reduce the tax gap for corporate income taxation.  

6.2.4.  Costs for SMEs and tax administrations 

The  analysis  above  has  shown  the  impact  from  a  benefit  point  of  view,  including  in  terms  of 
potential  cost  savings  in  complying  with  tax  requirements,  improved  cross-border  activity  for 
SMEs,  and  its  macro-economic  impact.  These  overall  benefits  are  now  compared  with  possible 
costs that SMEs and tax administrations may incur.  

Such  compliance  costs35  could  be  adjustment  costs,  which  encompass,  for  example,  investments 
and  expenses  linked  to  the  requirements  contained  in  a  legal  rule,  and  administrative  costs  as  a 
result of administrative activities performed to comply with administrative obligations included in 
legal rules.  

These costs cannot be estimated with precision because the initiative does not have a precedent and 
there is no dedicated data that one can reliably use to produce precise estimates. Below, we attempt 
to  describe  some  of  the  possible  costs,  noting  that  these  are  likely  to  be  relatively  small  when 
compared  to  the  potentially  large  savings  derived  from  simplification  and  the  macro-economic 
impact of simplification.  

SMEs 

SMEs that wish to opt in and apply the HOT rules would be required to notify this. As explained 
above,  opting-in  SMEs  would  need  to  prepare  a  specific  tax  return,  the  ‘HOT  tax  return’,  which 
will include information for all their permanent establishments and/or subsidiaries, and file this in 
the Member State of their head office or headquarter.  

This  one-stop-shop  with  one  single  tax  return  is  expected  to  significantly  reduce  tax  compliance 
costs  for  SMEs  as  discussed  above,  but  there  will  also  be  some  costs:  a)  some  initial  adjustment 
cost for IT updates/investments and limited costs for getting familiar with the HOT procedure; and 
b) additional (recurrent) administrative cost to collect the relevant information and to file them in 
the new HOT tax return, though companies would always have to submit a tax return.  

No  other  additional  costs  are  expected  for  those  joining  the  optional  simplification  framework. 
SMEs  with  cross-border  presence  already  have  all  information  concerning  their  subsidiaries  and 
PEs,  and  they  will  compute  such  tax  result  by  continuing  to  apply  the  same  set  of  corporate  tax 
rules that they are already familiar with.  

Tax administrations 

Concerning  tax  administrations,  a  holistic  picture  is  hard  to  obtain.  There  are  differences  in 
capacity  and  expertise  between  Member  States,  and  the  additional  workload  will  depend  on  the 
number of SMEs that have their head office in the Member State and that opt into the system.  

35 To not be confused with the tax compliance cost, that refers to the cost to comply with the national tax requirements. 

22 

 
 
 
Tax administrations would not be required to apply a whole new set of tax rules but would need to 
integrate new features in their existing systems. They need to implement a procedure for SMEs to 
opt in and cross-check that they are eligible. They also need to accommodate the filing of the HOT 
tax returns so that it that now also includes tax-related information for all permanent establishments 
and/or subsidiaries of the SME. The tax administrations of the head office would now also need to 
prepare the tax assessments and collect tax revenues accordingly for the whole SME. This would 
require  knowledge  of  the  tax  rates  of  other  Member  States.  The  implementation  will  therefore 
require an initial investment from tax administrations, although useful elements may already be in 
place,  for  instance  because  foreign  permanent  establishments  are  most  likely  already  taken  into 
account in tax returns. In general, information regarding eligibility requirements is also available to 
tax administrations so that any related administrative costs associated would be very limited.  

Tax assessments must also be communicated by the Member State of the head office with the other 
concerned Member States for review and Member States can request joint audits. This will likely 
require some resources and  increase interactions between Member States. While  existing  systems 
for the exchange of information such as for the DAC, are already in place and widely used, this will 
need to be upgraded. Finally,  the tax administration of the head office would also be tasked with 
transferring the collected tax revenues to the Member States of the permanent establishments and/or 
subsidiaries. This will also require Member States to have a system in place. 

Otherwise, the same tax rules which the SMEs already apply for their head office would now also 
be applied to their permanent establishments and/or subsidiaries. These would be the domestic rules 
which  the  tax  administration  already  knows  and  applies,  and  there  would  already  be  personnel 
dealing with the head office itself. It should therefore require limited additional resources, and, at 
the same time, less staff would be dealing with permanent establishments (as those would be dealt 
with by other Member States of the respective head offices).  

Furthermore,  the  infrastructure  for  exchanging  information  is  already  in  place  as  Member  States 
engage in exchanges of information, including automatic exchanges, in a variety of fields under the 
DAC.  

Quantification of costs  

Based on the above, the required adjustments for tax administrations and SMEs should be limited 
and will likely be linked to the phasing-in of IT solutions or upgrading of existing systems, but the 
absence of any comparable precedent leaves little room for solid cost-estimation based on historical 
data.  What  is  more,  the  nature  of  the  initiatives  is  cost  reduction  through  simplification.  Costs 
linked to its introduction are therefore mostly transitional in nature when both tax administrations 
and some SMEs will have to adjust to the new rules.  

SMEs 

To estimate the costs for businesses to comply with the HOT rules and submit HOT tax returns, a 
point of orientation may be the supporting study to the impact assessment report of the ViDA 
proposal (hereafter: ViDA IA36 and ViDA study37). This proposal includes a new EU-wide digital 

36 Impact assessment report - SWD(2022)393. Available here. 

23 

 
 
 
 
 
reporting requirement (DRR) for VAT in order  to standardise the information to be submitted by 
taxable persons on their transactions. While the nature of ViDA is different, there are similarities to 
the envisaged initiative.  In both  cases, there are  administrative costs of implementation  and  costs 
linked  to  running  a  more  standardised  system  that  enables  the  exchange  of  information  between 
businesses and authorities.  

The ViDA study outlines implementation and recurrent costs required for DRRs. Implementation 
one-off  costs  include  acquiring  physical  and  intangible  capital  and  know-how.  Recurrent  costs 
mainly  cover  recurrent  expenses  for  personnel  running  the  system  (i.e.,  filling-in  the  reports). 
Already  today,  there  are  a  number  of  different  DRR  systems  in  the  EU.  Among  those,  SAF-T 
(Standard  Audit  File  for  Tax)  is  a  file  containing  reliable  accounting  data  exportable  from  an 
original accounting system, for a specific time period and easily readable due to its standardisation 
of layout and format that can be used by authority staff for compliance checking purposes. One of 
its possible uses is the reporting of transaction data. Therefore, while of course not tailored to the 
envisaged initiative, SAF-T can be compared to what is needed, i.e., the exchange of information 
based on a standardised file that can be read by businesses and authorities across the EU.  

SAF-T today is  in  place in  Lithuania, Poland and Portugal.38  Based on the existing  evidence, the 
ViDA  study  has  come  up  with  an  estimation  of  the  implementation  costs  (one-off  costs)  and 
recurrent costs imposed by the application of SAF-T per company and year. In the ViDA study, the 
(annualised) one-off costs for all SMEs (3,2 million SMEs) are estimated at EUR 0.57 billion per 
year,  and  the  recurrent  costs  at  EUR  0.31  billion  per  year.  Yearly  costs  per  firm  are  on  average 
about EUR 176 one-off (annualised over three years, i.e., expenses of EUR 528 per firm) and EUR 
96 recurrent.39  

However, compared to the ViDA proposal, the HOT tax return may not be so different from what 
SMEs and tax administrations currently have to file and process for their corporate tax returns (the 
so-called business-as-usual). The tax  results of  PE and/or subsidiaries would  need to  be added to 
the information that the head office already reports today for its own tax results. As said, there may 
be  some  initial  adjustment  costs  regarding  the  adjustment  of  the  layout  of  the  tax  return,  for 
example,  and  then  recurrent  administrative  costs.  Note  though  that  many  Member  States  already 
require  head  offices  to  include  tax  information  on  PEs  in  their  tax  returns,  as  they  receive  tax 
credits  for  taxes  paid  by  the  PEs  abroad.  Also,  as  said,  the  information  regarding  eligibility 
requirements is available. The additional compliance costs stemming from the present initiative are 
therefore significantly lower than for the DRR in the ViDA proposal. In addition, the frequency of 
reporting  corporate  tax  information  to  tax  authorities  under  this  initiative  will  be  lower  than  for 
transaction-based information exchanges for VAT purposes.  

This means that, while the two are similar,  a direct comparison with the cost estimates for ViDA 
may overestimate the implementation costs of this initiative. For this reason, if we were to consider 
that only one fourth of the costs estimated in relation to SAF-T would be required for the HOT tax 

37 European Commission, Directorate-General for Taxation and Customs Union, Luchetta, G., Giannotti, E., Dale, S. et 
al.,  VAT  in  the  digital  age  –  Final  report.  Volume  1,  Digital  reporting  requirements,  Publications  Office  of  the 
European Union, 2022, https://data.europa.eu/doi/10.2778/541384. 
38 ViDA IA, p. 14. 
39 ViDA Study, p. 43. 

24 

 
 
 
return, the costs per firm  would be an annualised one-off of EUR 44, i.e., setup  expense of EUR 
132 annualised over three years, plus EUR 24 recurrent costs per year.   

Taking  these  costs  per  firm  as  a  reference,  one  can  multiply  them  by  the  number  of  firms 
potentially affected by the present initiative. Those are taken from the analysis presented in Table 2 
above, namely: 1.8 million SMEs with taxable cross-border presence already today; and around 1.5 
million SMEs which may start cross-border operations due to the major simplifications of the HOT 
rules, if 10% of so-far domestic SMEs (i.e., 10% of 14.5 million SMEs – high-end estimate) would 
make that decision. Correspondingly, if only 5% make that decision (low-end estimate), there will 
be  only  0.75  million  additional  SMEs  operating  cross-border.  As  above,  these  are  illustrative 
examples.   

Multiplying these amounts of SMEs by costs per firm and year results in the following respective 
estimates  for  costs  of  implementing  and  running  a  system  for  the  HOT  rules.  For  the  high-end 
estimate, there are one-off costs of EUR 428 million and recurrent costs of around EUR 78 million 
per year. For the low-end estimate, there are one-off costs of EUR 332 million and recurrent costs 
of around EUR 60 million per year. 

In addition, eligible SMEs are offered the opportunity to opt into the system but are not required to 
do so. Depending on the number of SMEs opting in, the number of firms for which the costs related 
to the HOT system would apply could thus be even lower.  

Tax administrations 

For  tax  administrations,  the  annual  costs  for  implementing  and  running  the  HOT  system  are 
estimated to be much lower than for businesses. To estimate these costs, a difference could be made 
based  on  whether  the  tax  administrations  only  need  to  put  in  place  a  new  system  for  resident, 
standalone  SMEs  with  permanent  establishments  in  other  Member  States  (option  1),  or  also  for 
subsidiaries which are resident companies of another Member State (option 2).  

For this purpose, the same high- and low-end estimates are not used, because while the workload 
would also depend on the number of eligible SMEs that voluntarily opt in, this would always result 
in a net decrease of tax return filings across the EU and should therefore not be a main cost driver 
for tax administrations. Instead, both options could be assessed based on their comparison with the 
implementation of DRR in the ViDA proposal.   

Indeed, while the initial IT investment for setting-up the DRR system may be more complex, the 
costs  linked  to  the  exchange  of  information  between  Member  States  could  be  comparable. 
Moreover,  the  tax  administration  of  the  head  office  will  be  in  charge  of  preparing  the  tax 
assessments,  communicating  to  the  concerned  Member  States  for  review,  and  transferring  the 
collected  tax  revenues.  This  will  also  require  Member  States  to  have  an  ad-hoc  system  in  place. 
Finally, any of these Member States can request joint audits.  

The HOT system therefore seems comparable to some extent, but comparing the two options, the 
recurrent  cost  for  tax  administrations  for  option  1  is  expected  to  be  significantly  lower  than  for 
option 2, as the level of legal complexity is lower and the sample of firms smaller. Moreover, many 
national tax returns of head offices already include tax information on permanent establishments, in 
order to take taxes paid into account. This is not the case for subsidiaries, and as such, the HOT tax 
return  would  involve  less  administrative  changes  for  permanent  establishments  compared  to  the 

25 

 
 
 
 
current situation and to option 2. The administrative costs are therefore expected to be lower under 
option 1 than under option 2.  

Consequently, taking the estimates for introducing DRR in the ViDA proposal as a proxy for option 
2 of the present initiative, where SMEs with PE and/or subsidiaries can opt-in, the costs would be 
an  estimated  one-off  cost  of  EUR  1.5  million  per  Member  State  and  recurrent  costs  of  EUR  0.3 
million  per  year  and  Member  State,  based  on  a  consultation  amongst  tax  administrations  where 
SAF-T is in place.40 For all 27 Member States, that translates to a total of EUR 41 million one-off 
and recurrent costs of EUR 8 million per year. If we approximate costs for option 1 as half of those 
incurred if subsidiaries were included in the scope, that would imply a total of EUR 20.5 million 
one-off  and  recurrent  costs  of  EUR  4  million  per  year  for  all  27  Member  States.  As  above,  this 
assumption is an illustrative example.  

6.2.5.  Additional impacts 

No particular and direct environmental impact is expected. Indirectly, one could perhaps consider 
that the resources freed from tax compliance costs could be used by companies to invest in more 
environmentally sustainable production methods if companies wished.  

Regarding employment and social impacts, resources  freed from tax  compliance costs  could  be 
used in productive activities. These in turn could mean hiring new staff and/or training new staff. 
Alternatively, companies could choose to use the extra resources, in order to pay higher wages. In 
both  cases,  this  could  have  a  potential  positive  employment  and  social  impact.  Additional 
resources,  either  as  savings  or  generated  via  investment  could  also  be  distributed  among 
shareholders.  It  is  however  difficult  to  estimate  such  impacts  with  precision  since  they  would 
depend on the decision of each company on how to use its additional spare resources.  

Fundamental  rights  are  not  expected  to  be  affected.  The  initiative  would  contribute  to  levelling 
the  playing  field  and  removing  cross-border  barriers.  While  it  is  not  implied  that  the  problems 
identified in Chapter 2 lead to any discrimination or unjustified restriction, this could be beneficial 
for equal treatment and the freedom to conduct a business. Given that SMEs are more often family 
businesses or led by women when compared to MNEs, the initiative may also contribute indirectly 
to family life, equality, and fairness. The proposal will also ensure that the protection of personal 
data is guaranteed.  

The impacts  on  competition  have also  been taken into account,  as described, for instance, in  the 
competitiveness  check  in  Annex  5.  Such  impact  may  depend  on  the  options  for  the  scope.  Both 
options do not consider differences in size and activities but look at the legal structure of the SME. 
Including SMEs that have subsidiaries in other Member States may result in more cost savings, as 
more SMEs could benefit from the simplification, but as explained also in Chapter 7, this may be 
less effective in levelling the playing field and providing a coherent approach with other policies. 
Such  SME  groups  may  also  benefit  from  an  initiative  designed  for  groups  of  companies,  which 
creates an overlap. It would also imply that companies (subsidiaries) that are established under the 
law of one Member State would be taxed according to the tax laws of another Member State. In the 

40 ViDA Study, p. 33. 

26 

 
 
 
case of permanent establishments, however, the entity is taxed by both Member States but only has 
legal personality in the Member States of its head office.  

7.  HOW DO THE OPTIONS COMPARE? 

In  this  chapter,  the  options  are  compared  against  the  criteria  of  effectiveness,  efficiency, 
proportionality,  and  their  coherence  with  other  EU  policies  and  initiatives.  The  below  tables 
indicate  to  what  extent  each  of  the  options  perform  well  against  these  criteria  based  on  the 
following scaling: from (0) irrelevant/no change, (+) limited contribution, (++) partial contribution, 
and (+++) substantial contribution.  

7.1.1 

Effectiveness 

The effectiveness of the policy options is tested against the specific objectives of the initiative to 
reduce  tax  compliance  costs  for  SMEs,  encourage  cross-border  expansion,  and  ensure  a  level 
playing  field  for  the  participation  of  SMEs  in  the  internal  market.  These  objectives  contribute  in 
turn  to  the  two  general  objectives  to  ensure  the  good  functioning  of  the  internal  market  and  to 
stimulate growth and investment in the EU (Chapter 4).  

Option 1 

For  SMEs  that  may  have  cross-border  activities  or  are  planning  to  expand  across  the  border  and 
may have been held back by the perspective of high compliance costs, the HOT rules for standalone 
SMES with a PE would broadly address the objectives. The rules are optional and therefore, can be 
used by those who can benefit. This ensures effectiveness for those SMEs within scope. It follows 
from the analysis in Chapter 6 that the impact would be positive.  

Option 2 

As  above,  applying  the  HOT  rules  to  both  standalone  SMEs  with  PEs  and  SME  groups  with 
subsidiaries  in  other  Member  States  would  broadly  address  the  objectives  for  SMEs.  A  larger 
number  of  SMEs  that  may  be  planning  to  expand  across  the  border  or  that  already  have  activity 
abroad would be eligible to opt in. This option may therefore potentially reduce compliance costs 
for a higher number of opting-in SMEs. The broader scope of this option could therefore translate 
into an effective means of achieving the objective of reducing compliance costs in total.  

Table 4: Effectiveness to achieve the objectives of the initiative  
Source: TAXUD  
Criteria 
Reducing tax compliance costs for SMEs 

Baseline 
0 

Option 1 
++ 

Option 2 
+++ 

Encouraging cross-border expansion of SMEs 

Ensuring a level playing field for the 
participation of SMEs in the internal market 

OVERALL SCORE 

0 

0 

0 

++ 

++ 

++ 

++ 

++ 

+++ 

27 

 
 
 7.1.2 

Efficiency 

In  addition  to  effectiveness,  the  policy  options  are  also  assessed  on  their  efficiency,  i.e.,  for 
achieving the benefits in a cost-efficient manner.  

Option 1 

The  first  policy  option  appears  efficient  in  achieving  the  objectives  of  the  initiative.  From  the 
perspective of SMEs, option 1 focuses on a key aspect for cross-border expansion: PEs can allow 
SMEs  to  start  operating  across  borders  without  already  setting  up  a  subsidiary  i.e.,  a  legal  form 
under the company laws of the other Member State. Indeed, the latter would come with additional 
initial costs, as it also engages non-tax administrative and legal compliance. Starting off with only a 
PE  may  therefore  be  especially  useful  for  SMEs  with  limited  resources  and  that  previously  may 
have held back from expanding abroad. This would be made simpler under option 1 while costs are 
also  kept  lower,  as  many  Member  States  for  instance  already  require  taxpayers  to  include 
information  on  PEs  on  their  corporate  income  tax  returns,  as  explained  above.  Also  including 
subsidiaries in other Member States, would involve more changes.  

As explained in section 6.2.3, tax administrations would benefit from dealing with all operations 
of  businesses  with  PEs  through  one  administration,  as  there  are  risks  of  irregularities  and  fraud 
associated  with  companies  that  have  PEs  in  multiple  countries.  In  addition,  with  a  view  to 
implementing a new system, the legal complexity burden is lower and the sample of eligible SMEs 
is smaller. Similarly as for SMEs, the HOT tax return would involve less administrative changes for 
PEs compared to option 2. 

For these reasons, this option has clear advantages in proportion to the costs of implementing a new 
system.   

Option 2 

The second option, on the other hand, appears less efficient when comparing costs and benefits. As 
said, for SMEs, the HOT tax return may require more changes than under option 1. Furthermore, 
evidence  from  Orbis  data  suggests  that  many  subsidiaries  are  located  across  borders  from  their 
headquarters, which is  much less the case for PEs. It  follows that the scope of the second option 
would  include  many  SME  groups  that  are  already  operating  across  borders.  The  potential  extra 
benefits  for  encouraging  SMEs  to  expand  abroad  and  start  developing  their  operations  across 
borders could therefore be less outspoken.  

Although those benefits could nonetheless be larger in total for option 2, as more SMEs would be 
eligible, the HOT rules may not be the most efficient way to reduce compliance costs for businesses 
that already operate cross-borders with subsidiaries (see below, the Commission is also proposing 
an initiative specifically to simplify the tax base for groups of companies). The main advantage of 
the HOT rules is that SMEs can continue to apply the national tax rules with which they are already 
familiar for a time. This may be less relevant for cross-border SMEs and for SMEs that decide to 
cross borders by directly setting up a company under the company laws of the other Member State.    

Potential benefits should also be weighed against the higher complexity for tax administrations to 
implement the second option, not just because they would, in turn, indeed be dealing with a larger 
sample of eligible SMEs but also different types of SMEs, since subsidiaries have a legal form that 

28 

 
 
is different from PEs. Both the initial cost of implementation of the system and the recurring cost 
for exchanging, coordinating, and interacting between Member State tax administrations  could be 
higher.  

As such, while the second policy option involves more eligible SMEs within its scope and therefore 
has  a  higher  potential  to  reduce  total  compliance  costs  in  the  EU  overall,  the  first  option  would 
provide a more targeted solution. Under this option, the benefits would be similar but focusing on 
the most relevant parts, and at lower costs. Hence, when comparing the benefits with the costs, the 
first option seems the most cost-efficient.   

Table 5: Efficiency  
Source: TAXUD  
Criteria 
Costs and benefits for SMEs 

Costs and benefits for tax 
administrations 

OVERALL SCORE 

7.1.3  Proportionality of the intervention  

Option 1  

Baseline 
0 

Option 1 
+++ 

Option 2 
++ 

0 

0 

+++ 

+++ 

++ 

++ 

The first option does not require significant changes to tax regulatory systems in any Member State 
and can strongly support the use of PEs as a first step into expanding the company’s activity across 
the border.  In view of the legal differences  and  implications between operating  abroad through  a 
(separate)  subsidiary  company,  or  an  (ancillary)  permanent  establishment,  this  first  option  has 
higher  chances  to  be  deemed  proportionate  with  the  tax  sovereignty  of  Member  States.  The  first 
option should therefore also be more politically acceptable.  

In addition, the HOT rules can encourage firms to go abroad and ‘test the ground’ in other Member 
States  without  having  to  incur  in  additional  significant  costs  associated  with  having  to  know 
different tax rules and complying with those. It is more limited and targeted in scope, which avoids 
potential risks, related for instance to the cost of implementation or the effect of many SMEs opting 
in  for different  purposes. This  option is therefore closer to  what  is  strictly  necessary to  attain the 
objectives of the initiative. 

Option 2 

The extension of the HOT rules to also include subsidiaries, which are separate domestic taxpayers 
of the other Member State, would more strongly relate to the tax sovereignty of the Member States. 
Member State would have to accept that the tax rules of the Member State of the headquarter apply 
to its own companies, when those companies are subsidiaries of SMEs. This option could therefore 
be interpreted as an extraterritorial application of national tax rules to foreign companies that may 
interfere  with  domestic  tax  policies.  The  readiness  to  endorse  this  policy  option  is  therefore 
expected to be significantly lower.  

Table 6: Proportionality  
Source: TAXUD  

29 

 
 
Criteria 
Tax sovereignty of Member States 

Baseline 
0 

Option 1 
+++ 

Option 2 
+ 

Cost of implementation 

OVERALL SCORE 

0 

0 

++ 

++ 

+ 

+ 

7.1.4 

Coherence with other EU policies 

SME Relief Package 

The need to simplify rules and reduce compliance costs for all businesses operating in the EU is a 
priority across EU policies. To achieve this, it is important that policies are tailored to the specific 
needs of companies and designed in the most effective manner for each business. Notably, this tax 
initiative  complements  the  “SME  Relief  Package”,  which  aims  to  make  it  easier  for  SMEs  to  do 
business in the internal market by simplifying rules and reducing compliance costs. The HOT rules 
are designed for SMEs specifically and both policy options are in line with this goal.   

Direct business taxation 

This  should  be  coherent  with  other  EU  policies  to  simplify  tax  rules  and  reduce  tax  compliance 
costs.  In the area of  direct taxation, existing  EU policies such as the Parent-Subsidiary Directive, 
the  Interest  &  Royalty  Directive,  the  Merger  Directive41,  the  ATAD,  and  the  Pillar  2  Directive, 
mostly  concern  cross-border  groups  of  companies.  As  mentioned  above,  the  Commission  also 
envisages  a  ‘BEFIT’  initiative  specifically  for  the  tax  base  of  groups  of  companies  in  order  to 
simplify  tax  rules  and  reduce  compliance  costs.  Feedback  on  this  has  been  sought  from 
stakeholders,42  and  it  has  been  included  in  the  Commission  Work  Programme  2023.43  Moreover, 
groups of companies would also be provided more predictability and simplification for their intra-
group transactions in the EU by a common EU approach to transfer pricing.  

Relevant to the HOT rules, SMEs which have subsidiaries also constitute groups of companies. As 
envisaged, these SMEs would be able to opt into the BEFIT rules. In this light, the present initiative 
considers two options. The first excludes SMEs with subsidiaries from its scope, while the second 
also  includes  these  SME  groups.  It  would  thus  seem  that,  under  the  second  option,  these  SME 
groups  would  also  be  covered  by  other  initiatives.  This  may  create  inconsistencies  and  result  in 
complexity.  From  a  coherence  point  of  view,  it  is  therefore  preferable  to  take  one  approach  to 
SMEs with subsidiaries, i.e., groups of companies. Taken together, these different initiatives would 
then  form  a  coherent  approach  to  simplifying  tax  rules  and  reducing  compliance  costs  for  both 
smaller and larger businesses operating across the internal market.    

41  Council  Directive  2009/133/EC  of  19  October  2009  on  the  common  system  of  taxation  applicable  to  mergers, 
divisions,  partial  divisions,  transfers  of  assets  and  exchanges  of  shares  concerning  companies  of  different  Member 
States and to the transfer of the registered office of an SE or SCE between Member States.  
42 Business in Europe: Framework for Income Taxation (BEFIT) (europa.eu).  
43https://commission.europa.eu/strategy-documents/commission-work-programme/commission-work-programme-
2023_en. This proposal is also relevant from an own resource perspective, as set out in the 2021 Communication on the 
next generation of own resources for the EU Budget, see COM(2021) 566 final. 

30 

 
 
 
 
Indirect business taxation 

The  initiative  is  also  coherent  with  other  EU  tax  policies  in  the  area  of  taxation.  Reducing 
compliance costs for businesses is a common objective with the  above-discussed ViDA proposal, 
which also  aims  to  improve  reporting requirements and minimise the need to  register in  multiple 
Member States. The proposal also reduces the multiplicity of the existing national frameworks and 
increases legal certainty by harmonising administrative requirements.  

Most notably, the proposed Union One Stop-Shop is  also an optional  simplification measure that 
businesses can use to declare and pay their taxes (in this case, VAT) without having to register in 
each  Member  State  where  they  are  active.  Similarly,  the  HOT  rules  will  allow  cross-border 
businesses to only interact with one tax administration for the purpose of their corporate tax returns. 
Also  more  generally,  the  approach  taken  in  the  field  of  direct  taxation  follows  this  logic,  as  a 
BEFIT framework would also allow to centralise filing requirements for groups of companies.  

Regardless  of  the  policy  option  chosen,  EU  policy  is  therefore  consistent  in  trying  to  provide  all 
cross-border businesses with simplification and a one-stop-shop to the extent possible. Both policy 
options  appear  coherent  with  EU  tax  policy  generally,  while  the  first  option  does  not  have  an 
overlap with other potential initiatives in the area of corporate taxation.  

Table 7: Coherence  
Source: TAXUD  
Criteria 
SME Relief Package 

EU policies on direct business 
taxation 

EU policies on indirect business 
taxation  

OVERALL SCORE 

8.  PREFERRED OPTION  

Baseline 
0 

Option 1 
+++ 

Option 2 
+++ 

0 

0 

0 

+++ 

+++ 

+++ 

+ 

+++ 

++ 

Option  1 (optional for standalone SMEs, operating  only with PEs in  other Member States) is  the 
preferred option based on the assessment above. Option 1 strikes a balance between effectively and 
efficiently supporting SMEs that are most likely to be affected by the current fragmentation in the 
internal  market,  and  ensures  greater  coherence  with  the  treatment  of  groups  of  companies  and 
proportionality with implementation costs and national tax sovereignty. The approach does not go 
beyond what is strictly necessary and does not pre-empt upon a possible future proposal for groups 
of companies. 

8.1.  REFIT (simplification and improved efficiency) 

All  SMEs  which  have  cross-border  activities  via  a  PE  and  which  envisage  to  grow  and  expand 
across the border through PEs will be able to opt in to use the HOT rules and in doing so, benefit 
from tax simplification by continuing to apply the tax rules that they are familiar with to calculate 
the taxable result of their PE(s) in other Member States.  

31 

 
 
 
This  simplification  will  reduce  tax  compliance  costs  (e.g.,  administrative,  legal  and  time  costs), 
because standalone SMEs with PEs will no longer be required to prepare and compute their taxable 
results according to different sets of national tax rules but, rather, be able to file a single tax return 
and  pay  all  their  taxes  with  the  same  tax  administration  (one-stop-shop).  It  also  entails,  for 
example, no additional learning costs to familiarise with unknown corporate tax rules, as the SME 
will already be applying the tax rules of its Member State of the head office. Finally, by allowing 
this  system  to  be  optional,  SMEs  will  be  given  the  opportunity  to  reach  a  business  decision  that 
suits best, namely after assessing the compliance costs and administrative complexity that can arise 
from dealing with distinct tax rules. 

8.2.  Application of the ‘one in, one out’ approach 

The  ‘one-in,  one-out’  approach  consists  of  offsetting  any  new  burden  for  citizens  and  businesses 
resulting  from  the  Commission’s  proposals  by  removing  an  equivalent  existing  burden  in  the  same 
policy area. As noted above, the preferred option has the potential to significantly reduce the cost to 
comply  with  tax  rules  for  companies  with  a  taxable  presence  in  other  Member  States.  Estimated 
savings  could  range  from  EUR  1.3  billion  per  year  to  EUR  3.4  billion  per  year,  according  to 
different scenarios. While it is difficult to identify the precise nature of such costs savings, one can 
assume  that  the  great  majority  are  related  to  administrative  activities  and  reporting  obligations 
linked to national tax rules, rather than adjustment costs. On the other hand, the additional costs for 
SMEs that will decide to opt-in for the HOT tax return and the additional costs for tax authorities 
could  be estimated on the range of  half a  billion  euro (high-end estimation): EUR  332 million  to 
EUR  428  million  one-off  costs  and  recurrent  costs  on  the  range  of  EUR  60  million  to  EUR  78 
million per year. 

9.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?  

Monitoring and evaluation are key constituents of this initiative, regardless of the policy options to 
be  finally  selected.  The  introduction  of  the  new  rules  requires  tax  administrations  to  introduce  a 
new system, which will be voluntary for SMEs and can cover different realities. The actual impacts 
of the initiative and reactions from stakeholders will therefore be closely monitored and evaluated 
on the basis of the data and other information. This will allow the Commission to determine if the 
Directive must be reviewed in order to better achieve the intended objectives.  

9.1.  Monitoring 

The European Commission will periodically monitor the implementation of the legal proposal and 
its  application  in  close  cooperation  with  the  Member  States.  Monitoring  in  a  continuous  and 
systematic way will allow the Commission to identify whether the policy proposal is being applied 
as expected and to address implementation problems in a timely manner. Collection of factual data 
on the suggested monitoring indicators will also provide the basis for the future evaluation of  the 
simplification for SMEs.  

In  terms  of  objectives  to  be  monitored,  as  described  in  Chapter  4,  the  general  objectives  of  the 
proposal are to ensure the good functioning of the internal market and have the effect of stimulating 
growth  and  investment.  The  specific  objectives  that  have  to  be  materialised  to  set  the  path  for 
achieving  this  are  to:  (i)  reduce  tax  compliance  costs  for  SMEs,  (ii)  encourage  cross-border 

32 

 
 
 
expansion  of  SMEs,  and  (iii)  ensure  a  level  playing  field  for  the  participation  of  SMEs  in  the 
internal market.  

Below, indicators are suggested to measure the success of the initiative, in light of these objectives. 
The  measurement  tools  in  Table  4  are  targeted  to  specific  objectives,  which  are  more  suited  for 
concrete monitoring.  

•  A  decrease  in  tax  compliance  costs  for  SMEs,  relative  to  their  turnover,  which  could 

indicate that the initiative has reduced these costs;    

•  An increase in the number of SMEs that expanded cross-border by setting up permanent 
establishments,  which  could  indicate  that  the  initiative  has  supported  SMEs  in  their  cross-
border expansion and participation in the internal market;  

•  An  increase  in  the  number  of  SMEs  having  applied  the  simplification  and  moving  from 
having only permanent establishments to setting up subsidiaries, which could indicate that 
they have grown significantly and are ready to structure their business in a more stable manner 
across  borders,  and  therefore  that  the  initiative  has  furthered  cross-border  expansion  and 
thereby effectively enhanced the good functioning of the internal market and stimulated growth 
and investment.  

•  A positive evolution of the turnover of SMEs that are in scope, which could indicate that the 
initiative  has  increased  the  participation  of  these  SMEs  in  the  internal  market  and  therefore 
effectively  enhanced  the  good  functioning  of  the  internal  market  and  stimulated  growth  and 
investment; 

•  A positive evolution of private investment and, in turn, EU GDP, which could indicate that 
the  initiative  has  not  only  supported  in-scope  SMEs  as  such,  but  that  this  has  also  been 
beneficial for the EU in general, by enhancing the good functioning of the internal market and 
stimulating growth and investment. 

Table 4: Objectives, Monitoring Indicators and Measurement Tools 

Specific Objectives 

Indicators 

Measurement Tools 

Reduce  tax  compliance  costs 
for SMEs  

Encourage cross-border 
expansion of SMEs 

•  Compliance  costs 

for  SMEs, 
relative  to  their  turnover  and  to 
comparable  SMEs  that  do  not 
apply the proposed simplification  

•  Number of SMEs that opted in  

•  Number  of  SMEs  that  expanded 
cross-border by setting up a PE 

•  Number  of  SMEs  leaving  the 
scope by setting up a subsidiary 

•  Feedback  from  stakeholders  on 
the practical use and effects of the 
HOT rules  

33 

•  Survey  on  tax-related  issues 
for  SMEs,  carried  out  by  DG 
with 
TAXUD, 
external 
in 
cooperation  with  Member 
State tax authorities 

possibly 
assistance, 

Study 

•  Using  an  updated  version  of 
SMEs 
the 
Performance  conducted 
for 
the  European  Commission  to 
include  questions  that  deliver 

on 

 
 
 
Ensure a level playing field 
for the participation of SMEs 
in the internal market 

•  Number  of  SMEs  that  expanded 
cross-border by setting up a PE 

data on these indicators 

•  Turnover  of  SMEs  that  are  in 
to  comparable 
the 

relative 
that  do  not  apply 

scope, 
SMEs 
proposed simplification  

•  Feedback  from  stakeholders  on 
the practical use and effects of the 
HOT rules  

•  Survey  on  aggregated  data 
circulated  by  DG  TAXUD  to 
Member  State  tax  authorities, 
this 
which  would 
information available  

have 

•  Data received by DG TAXUD 
tax 
from  Member  State 
authorities 

•  Using  various  EU  fora 

to 
obtain feedback from national 
authorities 
SMEs 
representatives 

and 

As for the sources of information that will be used, the official Balance-of-Payment statistics take 
stock of the Foreign Direct Investment (FDI) flows and income streams  thereof. From the macro-
economic  perspective,  this  will  also  be  a  crucial  publicly  available  indicator.  Regarding  other 
administrative  information,  considering  that  the  Commission  is  not  a  tax  authority,  it  does  not 
possess  primary  sources  of  information.  The  main  sources  that  TAXUD  could  make  use  of,  to 
derive  useful  and  comprehensive  information  will  be  the  tax  administrations  themselves  and  the 
SMEs in scope of the rules. It will be important that Member States provide useful numerical data, 
including  data  that  they  will  have  collected  from  the  SMEs,  to  allow  TAXUD  to  come  to 
conclusions  on  the  above  topics.  For  this  purpose,  the  proposal  will  lay  down  an  obligation  for 
Member  States  to  report  to  the  Commission  all  requisite  aggregated  information  for  a 
comprehensive assessment. 

The monitoring framework will be subject to further adjustments in accordance with the final legal 
and implementation requirements and timeline.  

9.2.  Evaluation  

The  Commission  would  have  an  evaluation  after  five  years  of  application  of  the  new  rules. 
After establishing a first picture at that point in time, the evaluation of the initiative should assess 
the extent to which the outlined objectives have been met. 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  clarify  which  data  and  other 
information will be needed from the tax administrations and stakeholders in order to carry out the 
evaluation.  

The Commission will communicate the evaluation results in the form of a report, and the proposal 
will include a review clause allowing the Commission to amend the Directive according to the 
results of the evaluation. When the evaluation report will be adopted, the Commission will indeed 
have closely monitored the above indicators, including feedback and reactions from stakeholders. 
This information will allow the Commission to usefully revise and further tailor the HOT rules, if 
necessary.  

34 

 
 
35 

 
 
 
 
 
ANNEX 1: PROCEDURAL INFORMATION 

1.  LEAD DG, DECIDE PLANNING/CWP REFERENCES 

The lead Directorate General is the Directorate General for Taxation and the Customs Union (DG 
TAXUD).  

2.  ORGANISATION AND TIMING 

An interservice steering group was set up to steer and provide input to the impact assessment report 
that included this initiative and was assessed by the Regulatory Scrutiny Board. The steering group, 
led by the Secretariat-General, met on: 2 September 2022, 18 November 2022, 6 March 2023 and 
11 April 2023. The following Directorates General were invited to the Inter-Service Steering Group 
(ISSG):  AGRI,  BUDG,  CNECT,  COMM,  COMP,  ECFIN,  EEAS,  EMPL,  ESTAT,  FISMA, 
GROW, INPTA, JRC, JUST, REGIO, SJ, OLAF, TRADE. In addition to the meetings of the Inter-
Service  Steering  Group,  DG  TAXUD  met  in  bilateral  meetings  with  representatives  of  the 
following  Directorates  General  to  discuss  the  analysis  in  the  impact  assessment,  the  design  of 
options,  and  other  policy  issues:  COMP,  FISMA,  GROW,  JRC.  The  report  was  submitted  to  the 
Regulatory Scrutiny Report on 26 April 2023. 

3.  CONSULTATION OF THE RSB  

This impact assessment report was scrutinised by the Regulatory Scrutiny Board and discussed in 
the relevant meeting on 24 May 2022. In the opinion dated 26 May 2023, the Regulatory Scrutiny 
Board outlined recommendations which were integrated in the impact assessment.  

It was found necessary that the initiatives assessed in the report that received the positive opinion 
with reservation from the Regulatory Scrutiny Board will be presented as separate proposals. For 
this  reason,  this  impact  assessment  report  only  assesses  the  impact  of  the  proposal  for  a  Council 
Directive  establishing  a  Head  Office  Tax  system  for  small  and  medium-sized  enterprises.  This 
represents  faithfully  the  analysis  on  SMEs  contained  in  the  scrutinised  impact  assessment  and 
integrates the recommendations of the Regulatory Scrutiny Board in that regard. The main changes 
to the document are summarised in Table A1.  

Table A1: TAXUD revisions following the RSB positive opinion with reservations 

Comments of the RSB 

How and where comments have been addressed 

(C) What to improve 

from 

learned 

(1)  The  report  should  elaborate  on  the 
the  previous 
lessons 
corporate  tax  initiatives.  It  should  better 
explain  how  the  initiative  fits  with  the 
OECD Pillar I and Pillar II work. It should 
also  summarise  the  main  features  of  the 
national tax frameworks. 

This  comment  mainly  relates to  the proposal  on 
large  corporates,  now  included  in  a  separate 
impact assessment report. For the present report, 
section 2.2 ‘What  are the problem  drivers’ now 
summarises  main  features  of  the  national  tax 
frameworks.  In  particular,  it  explains  that  all 
systems  have  a  common  aim  and  include  rules 
on income, deductible expenses, adjustments, the 

36 

 
 
It 

(2)  The  report  should  better  discuss  the 
robustness  of  the  Corporate  Income  Tax-
related  compliance  cost  estimates  under 
the  baseline. 
should  also  better 
substantiate,  with  further  evidence,  the 
description  of  the  consequences.  It  should 
clarify  the  causal  link  between  the  design 
of  a  particular  tax  system  and  business 
decisions  and  discuss 
the  available 
evidence  on  the  magnitude  of  double 
taxation  and/or  over-taxation.  It  should 
explain  how  the  problem  will  evolve 
a 
without  EU 
consideration  of  relevant  ongoing  and 
existing legislation (including international 
policies).  

intervention,  with 

information,  anti-abuse 

interactions  between  systems 

allocation of income of  cross-border businesses, 
and  common  features  to  deal  with  mismatches 
(treaties, 
and 
exchange  of 
rules, 
disputes).  This  section  has  also  been  extended 
with  elements  from  the  Commission’s  most 
recent  Annual  Report  on  Taxation  (ART)  of 
2023, which includes a comprehensive overview 
of the different features of the tax systems of the 
Member States.  

The robustness of the Corporate Income Tax-
related  compliance  cost  estimates  under  the 
baseline  are  set  out  in  greater  detail  in  section 
6.2.1  and  Annex  4.  The  report  acknowledges 
limitations of the available data in this regard. It 
also clarifies that the assumptions are illustrative 
scenarios  to  be  able  to  estimate  the  effects,  in 
absence  of  reliable  information  about  cross-
border investment  behaviour following  a reform 
of  this  nature.  Annex  4  also  provides  more 
explanation  for  the  assumptions  for  the  survey-
based  projection  of  compliance  cost  reduction 
and for the regression results.  

the  description  of 

the 
The  elements  of 
consequences  which  should 
improve  partly 
related to the part on BEFIT and transfer pricing 
in  the  initial  draft  impact  assessment  (distortion 
of  business  decisions,  double  and/or  over-
taxation).  A  separated  description  of 
the 
consequences has been included in Chapter 2 of 
this  impact  assessment.  In  addition,  the  part  on 
subsidiarity  in  Chapter  3  has  been  reviewed  to 
tax 
clarify 
administrations  cannot  solve 
the  problems 
through  bilateral  agreements.  More  generally, 
the document has been verified for consistency.   

that  better  cooperation  between 

(3)  The  report  should  better  explain  the 
analysis  of  benefits.  It  should  clarify  the 
validity  of  the  cost  saving  estimates.  It 
should  better  explain  the  ‘simplified  tax 
regime’  variable  used  in  the  regression 
analysis  and  clarify  whether  this  is  a 
reasonable  representation  of  the  options 
proposed  in  this  initiative.  The  report 
should better discuss the likely uptake (and 

Chapter  6,  as  well  as  Annex  4,  have  been 
updated  to  better  explain  the  analysis  of  the 
benefits.  The  assumptions  and  method  behind 
the  broader  macro-economic  estimates  are 
further  explained 
in  Annex  4.  The  annex 
provides additional explanation of the long-term 
simulations,  in  particular  Cortax.  This  includes 
the  assumptions  made,  which  is  also  why  it  is 
complemented by a series of sensitivity analyses: 

37 

 
 
presenting 

hence  aggregate  cost  saving  potential)  of 
the  option  packages  with  voluntary 
elements.  When 
the 
macroeconomic benefits, the report should 
explain 
the  assumptions  and  method 
behind  the  estimates.  It  should  strengthen, 
with  further  evidence, 
that 
international 
are  more 
companies 
productive  than  their  non-multinational 
counterparts. 

the  claim 

the  long-term  effects  on  GDP  and  tax  revenues 
are  set  out  for  different  hypotheses.  It  also 
discusses  the  country-by-country  reporting  data 
that  is  used  for  the  analysis.  Annex  4  also 
clarifies the validity of the cost saving estimates 
and  includes  a  more  detailed  explanation  of  the 
‘simplified  tax  regime’  variable  in  Box  1  and 
why 
the  HOT  rules  can  be  considered  a 
simplified  tax  regime  for  the  simulations.  It 
provides  literature/studies  as  evidence  on  the 
point that cross-border businesses would be more 
productive than businesses which do not expand 
across  borders.  In  addition,  a  section  on 
additional 
for 
impacts  has  been 
fundamental rights and competition.  

added 

(4)  The  report  should  quantify  the  costs 
introduced  by  this  initiative.  The  analysis 
should  build  on  relevant  examples  as  well 
as stakeholder views.  In line with this, the 
report  should  strengthen  the  presentation 
of the one in, one out approach and revise 
the  presentation  of  costs  and  benefits  in 
Annex 3.  

(5)  The  report  should  better  present  and 
discuss  the  distributional  impacts  of  the 
initiative.  It  should  provide  the  estimates 
of the GDP and tax revenue % increases in 
absolute (EUR) terms. 

and  SAF-T 

Chapter  6  has  been  elaborated  to  include  a 
dedicated  sub-section  on  estimating  transition 
costs.  This  part  explains  why  it  is  difficult  to 
quantify  the  costs  and  it  considers  the  ViDA 
for 
proposal 
comparison.  The  same  chapter  provides  a  more 
detailed  explanation  of 
tax 
administrations.  We  have  also  revised  Annex  3 
to  include  benefit  and  costs  estimates  and  to 
address comments as best as possible. However, 
the  report  also  affirms  that  it  is  difficult  to 
estimate as BEFIT has no precedent.  

the  costs  of 

examples 

as 

This  comment  relates  to  the  proposal  on  large 
corporates.  This  is  difficult  to  estimate  in  the 
current  circumstances  with  the  available  CbCR 
data  and  while  the  implementation  of  Pillars  1 
and 2 is pending. The BEFIT proposal therefore 
only  includes  a  transition  allocation  rule  which 
refers  to  the  average  of  the  tax  results  of  the 
previous  three  fiscal  years,  with  the  purpose  of 
ensuring 
the  BEFIT 
framework can be assessed more accurately once 
the  effects  of  implementing  Pillars  1  and  2 
materialise. 

impacts  of 

that 

the 

(6)  The  report  should  present  a  consistent 
description of the monitoring arrangements 
with  indicators  that  more  clearly  outline 
what  success  would  look  like  for  this 
initiative.  

Chapter  9  has  been  revisited  to  provide  a 
consistent description and factor in more targeted 
monitoring  for  the  initiative.  It  now  includes 
more  indicators  and  the  description  of  the  tools 
that  will  be  used  for  measurement  are  more 
detailed. We also clarified where the information 

38 

 
 
could  be  gathered,  and  that  evaluation  would 
require  cooperation  from  the  Member  States. 
This has also been added in the proposal.  

39 

 
 
ANNEX 2: FEEDBACK TO THE CALL FOR EVIDENCE, PUBLIC 
CONSULTATION ON BUSINESS TAXATION AND TARGETED 
CONSULTATION ON SIMPLIFICATION FOR SMES 

Feedback to the Call for Evidence published on the Commission website on 13 October 2022 

The consultation period through this feedback mechanism took place between 13 October 2022 and 
26  January  2023  via  the  Commission  website.  46  contributions  were  submitted  during  this 
consultation  period  from  companies,  NGOs,  citizens,  researchers,  trade  unions,  business 
associations.  Overall,  respondents  confirmed  existing  challenges  for  the  internal  market.  It  was 
recognised that businesses face complexity and high costs in order to comply with the rules of 27 
different national corporate tax systems. Most respondents preferred that the rules to be optional for 
SMEs and supported a ‘one-stop-shop’ mechanism. In general, business associations welcomed an 
initiative  that  could  reduce  administrative  burden  and  compliance  costs  and,  additionally, 
strengthen competitiveness within the EU. 

Public consultation and position papers 

A public consultation on a framework for business taxation  was launched on 13 October 2022. It 
remained open until 26 January 2023 for a total of 12 weeks. The consultation questionnaire was 
first published in English. Two weeks later it was published in the other 22 official EU languages. 
There  were  77  respondents  again  from  companies,  NGOs,  citizens,  researchers,  trade  unions, 
business associations and public authorities. 

Several  respondents  highlighted  the  high  tax  compliance  costs  due  to  complexity  and  several, 
notably researchers, pointed to the problem that businesses pursuing cross-border activities can face 
inconsistencies compared to the consistency of tax regimes for those in purely domestic situations. 
50 respondents (65%) agreed, or partly agreed, that the current situation with 27 different national 
corporate tax systems in the Member States gives rise to problems in the internal market. 

All respondents did, in general, acknowledge the idea of introducing a proposal that would remove 
obstacles related to corporate income taxation and distortions in the internal market. To reduce the 
administrative  burden,  most  respondents  strongly  supported  filing  simplifications,  e.g.,  through  a 
“One-Stop-Shop”.  

There  were  30  position  papers  submitted  in  complement  to  the  public  consultation.  6  position 
papers  came  from  respondents  in  the  area  of  tax  consultancy.  From  this  category,  most  of  the 
respondents  argued  that  they  are  in  favour  of  addressing  the  issues  related  to  the  existence  of  27 
different  corporate  tax  systems  in  the  internal  market.  13  position  papers  were  received  from 
respondents qualified as business associations. Respondents of this category argued that the current 
EU tax framework is inadequate for taxpayers. In addition, most of the respondents underlined that 
the  removal  of  (corporate)  income  tax  obstacles  in  the  internal  market  would  be  essential  to 
enhance  growth  and  competitiveness  in  the  EU.  Removing  such  obstacles  could  also  foster 
innovation and support the creation of jobs. All of them saw the harmonisation and streamlining of 
tax rules as a way forward to facilitate cross-border trade and activities. Respondents also stressed 
the need for a reduction of compliance costs for businesses operating in the internal market. Several 
respondents favoured the proposed “One-Stop-Shop” solution, which would allow groups in scope 
to settle all filing issues with only one tax authority. In their view, this would effectively reduce the 
administrative burden and limit tax disputes.    

 
 
Commission/ DG GROW Expert group - SME Envoy Network – Sherpa meeting 
29.03.2023: Physical meeting 
Participants: Various stakeholders 

In the framework of the regular meetings that DG GROW organises with one of its Expert groups –
the SME Envoy Network - TAXUD presented and exchanged views on the solutions envisaged for 
SMEs in the upcoming SME simplification proposal. This was not a tax-oriented event, but more 
DG GROW – SME exchange of views on internal marker barriers, reporting obligations etc. 

There were a handful of questions on technical details, mainly from 3 participants, and these were 
very general. Importantly, there was a large support for some main aspects: 

- the optionality nature for SME - Opt-in for standalone SME with a PE in another Member State; 
they would not welcome anything mandatory;  

- and if possible to  follow a one-stop-shop principle as  much as  possible, to  reduce the reporting 
obligations and administrative burden for SME.  

Finally,  one  idea  put  forward  regarding  the  optionality  and  its  implementation  –  find  a  way  to 
ensure clear access to information for the SME taxpayers that may wish to use the options in SME 
simplification  proposal,  to  provide  a  sort  of  Guidance  and/or  explanatory  steps  how  that  would 
work. 

41 

 
 
 
 
 
 
ANNEX 3: WHO IS AFFECTED AND HOW? 

1.  SUMMARY OF COSTS AND BENEFITS  

As explained in section 6.2.3 and 6.2.4, it has not been possible to estimate costs and benefits with 
any precision because the proposal does  not have a precedent and there  is  no dedicated data that 
one  can  reliably  use  to  produce  very  concrete  estimates.  Below,  an  attempt  is  made  to  describe 
some of the possible benefits and costs, under different assumptions. 

Quantification  of  benefits  and  costs  is  then  presented  as  range  from  high-end  and  low-end 
depending  (1)  on  the  potential  of  reducing  current  CIT-related  compliance  costs  for  cross-border 
operating firms (32% or 16%); (2) on the potential SMEs’ productivity growth (15% or 4%) and (3) 
on the number of purely domestic firms that will expand their operation cross-border, incentivised 
by the HOT rules (from 12.5% to 1.25%). In order to make the costs and benefits comparable, the 
table below shows the high/low ends under the assumption that 10% and 5% of SMEs will decide 
to expand abroad, respectively. 

It is important to underline that the available data does not allow to  calculate with precision how 
much benefits and costs would be generated in the case of option 1 (voluntary simplification only 
for  SMEs  with  PEs)  or  in  the  case  of  option  2  (voluntary  simplification  for  SMEs  with  PEs  and 
subsidiaries).  

Description 

Amount 

Comments 

–  I. Overview of Benefits  

Direct benefits 

Reductions of CIT-
related compliance 
costs for cross-border 
operating SMEs  

–  1. High-end estimate: EUR 3.4 billion per 

year 
2. Low-end estimate: EUR 1.3 billion per 
year 

EU GDP and tax 
revenue increase driven 
by companies’ higher 
productivity. 

1. High-end estimate: EUR 61 billion per 
year (EU GDP could be higher by +0.7%, tax 
revenue by +1%, relative to the status quo) 
2. Low-end estimate: EUR 19 billion per year 
( EU GDP could be higher by +0.08%, tax 
revenue by +0.12%, relative to the status 
quo). 

1. Under the assumption of 32% reduction 
of CIT compliance costs and 10% of 
additional domestic SME going abroad. 
2. Under the assumption of 16% reduction 
of CIT compliance costs and 5% of 
additional domestic SME going abroad. 
Alternative scenarios are possible under 
different assumptions.  

1. Under the assumption of 15% 
productivity boost and 10% of additional 
domestic SME going abroad. 
2. Under the assumption of 4% productivity 
boost and 5% of additional domestic SME 
going abroad. 
Alternative scenarios are possible under 
different assumptions. 

Indirect benefits 

Reduction  of  the  CIT 
tax  gap  and  freed-up 
resources  thanks  to  a 
reduced overall number 
of 
tax  return  filings 
across the EU. 

The  HOT  system  should  facilitate  anti-fraud 
policies  and  should  contribute  to  the  tax 
administrations’ efforts to reduce the tax gap 
for  corporate  income  taxation.  The  initiative 
is expected to reduce the amount of tax return 
filings across the EU on average. 

42 

 
 
 
 
Improved efficiency for 
tax administrations 

for 

tax 

administrations 

Resources 
are 
expected  to  be  put  to  more  efficient  use  due 
to  the  overall  reduced  number  of  tax  returns 
EU-wide. 

Administrative cost savings related to the ‘one in, one out’ approach” 

Recurrent 
(direct/indirect)  

From  EUR  1.3  billion  per  year  to  EUR  3.4 
billion per year (*) 

According to the different scenarios 

One-off 

(*) While it is difficult to identify the precise nature of the costs savings, one can assume that the great majority are 
related to administrative activities/reporting obligation, rather than adjustment costs.   

•  II. Overview of costs (total for both options, except for costs for administrations)  

Citizens/Consumers 

Businesses 

Administrations 
(preferred option) 

One-off 

Recurrent 

One-off 

Recurrent 

One-off 

Recurrent 

N/A 

N/A 

Direct 
adjustment 
costs 

EUR 20 
million 

•  High-end 
estimate: 
EUR 428 
million  
Low-end 
estimate: 
EUR 332 
million 

Direct 
administrativ
e costs 

Simplificatio
n for SMEs 
with taxable 
presence in 
(an)other 
Member 
State(s) 

Direct 
enforcement 
costs 

Direct and 
indirect 
adjustment 
costs  

Administrati

Total   

N/A 

N/A 

N/A 

N/A 

• 

 EUR 4 
millionper 
year 

High-end: 
EUR 78 
million per 
year  
Low-end: 
EUR 60 
million per 
year 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

Costs related to the ‘one in, one out’ approach 

EUR 20 
million 

•  High-end 
estimate: 
EUR 428 
million  
2. Low-end 
estimate: 
EUR 332 
million 

43 

High-end: 

 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ve costs (for 
offsetting) 

•  EUR 4 

million per 
year 

EUR 78 
million per 
year  
Low-end: 
EUR 60 
million per 
year 

44 

 
 
 
 
The table below provides an overview of the Sustainable Development  Goals (SDGs) that  can be 
related to this initiative.   

Overview of relevant Sustainable Development Goals – Preferred Option  
Relevant SDG  

Comments   

SDG no. 8 – Promote sustained, 
inclusive and sustainable economic 
growth, full and productive 
employment and decent work for all.  

SDG–no. 9 – Build resilient 
infrastructure, promote inclusive and 
Sustainable industrialization and foster 
innovation.  

Expected  progress  towards  the 
Goal  
The initiative will reduce tax 
compliance costs, have a positive 
effect on cross-border investment and 
tackle distortions in the market, 
thereby stimulates economic growth 
and investment in the EU.  
Although not possible to quantify, the 
overall reduction in compliance costs 
may indirectly contribute if the freed 
resources are used by businesses to 
invest in innovation.    

See above for the impact on GDP 

 
 
  
 
 
 
  
 
 
 
ANNEX 4: ANALYTICAL METHODS 

1. 

Assumptions for the survey-based projection of compliance cost reduction 

A  company  survey  for  the  European  Commission  on  tax  compliance  costs,  conducted  by 
VVA/KPMG  and  published  in  January  2022,  is  the  major  source  of  analysis  in  the  impact 
assessment report.44 It looks at firms’ tax compliance costs caused by specific types of taxes. Apart 
from Corporate Income Tax (CIT), the survey also covers administrative burdens caused by Value 
Added  Tax,  wage-related  taxes,  property  and  real  estate  tax  and  local  taxes.  The  sample  covers 
around 2.400 firms, and the dataset also provides weights for each firm, needed to project the total 
firm population represented by the sample. Survey questions refer to the situation of the respective 
firm in the year 2019.  

The  compliance  cost  projections  in  Chapter  6  take  into  account  both  outsourced  and  internalised 
compliance activities. If internalised, the survey asks for frequency of data collection as well as the 
hours spent on data collection, preparation, review, submission and other related activities. It is thus 
possible  to  calculate  total  hours  internally  spent  within  the  firm  on  the  different  CIT-related 
compliance  activities.  These  hours  were  then  multiplied  by  average  hourly  labour  costs  for 
administrative and support activities.45 Total CIT compliance costs are then the sum of outsourced 
and internalised compliance costs. 

The survey information also includes relevant firm characteristics:  

the size of the firm (turnover, number of employees);  

• 
•  whether not the firm operates cross-border46; 
•  whether  or  not  the  firm  is  subject  to  ‘regular’  CIT  or  to  some  kind  of  ‘simplified  tax 

regime’.  

A  simplified  tax  regime  could  be  a  lump-sum  tax  for  SMEs,  the  filing  of  simplified  tax  return 
requirements, simplified accounting rules, balance sheet or income statement requirements, or other 
simplified documentation rules. Stakeholders interviewed for the study tend to have a positive view 
on simplified tax systems, considering them as a solution for reducing administrative burdens for 
SMEs. This is a relevant variable to estimate the impact of the SME simplification of this initiative, 
because while SMEs would remain subject to the regular national corporate tax rules of a Member 
States,  they  would  no  longer  be  subject  to  multiple  national  sets  of  CIT  rules.  This  substantially 
reduces  the  amount  of  tax  rules  that  SMEs  need  to  know  and  comply  with.  In  fact,  where  other 
simplified tax regimes bring simplification by moving from a more complex set of rules to a simple 
set of rules for taxation, the HOT rules will thus eliminate the need to consider one or more sets of 
rules  altogether,  and  henceforth  only  comply  with  one  set  of  rules,  which  the  SME  is  already 

for 

the  European  Commission 

44  VVA/KMPG 
/publication/70a486a9-b61d-11ec-b6f4-01aa75ed71a1/language-en 
45 Source: Eurostat, series Labour cost levels by NACE Rev. 2 activity [LC_LCI_LEV__custom_5553786]. 
46  In  the  study,  cross-border  activities  are  defined  as  “all  activities  which  involve  the  selling  of  goods,  services  or 
intangibles to a country other than the enterprise’s home country” (European Commission, 2022, p. 11). In other words 
the definition is quite broad and not necessarily just about what we consider foreign direct investment. 

(2022).  See  https://op.europa.eu/en/publication-detail/-

46 

 
 
 
applying. For the purpose of this analysis, the HOT rules are therefore considered a simplified tax 
regime.  

What  is  the  current  level  of  CIT-related  compliance  costs,  and  to  what  extent  are  SMEs 
concerned? 

The corresponding dataset from the VVA/KPMG survey represents a firm population of some 16.4 
million in the EU-27. The amount of CIT-related compliance costs these firms paid in 2019 is an 
estimated  EUR  54  billion,  representing  a  significant  0.4%  share  of  the  EU’s  GDP.  The  vast 
majority  of  these  firms  (14.6  million  firms)  do  not  (yet)  engage  in  cross-border  activities.  These 
have combined compliance costs of EUR 48 billion (89%).  

For the analysis, a new binary variable is constructed which indicates whether a certain firm falls in 
the  category  ‘Micro,  Small  and  Medium-Sized  Enterprises’  (SME).  Following  a  Commission 
Recommendation,  those  are  defined  as  ‘enterprises  which  employ  fewer  than  250  persons  and 
which  have  an  annual  turnover  not  exceeding  EUR  50  million’47.  All  other  firms  are  treated  as 
‘Larger Enterprises’. Table A3.1 informs that 98% of all CIT-related compliance costs are borne 
by  SMEs  (around  EUR  6  billion  per  year).  Using  this  information,  we  can  compute  CIT 
compliance costs per company size, distinguishing between those with a cross-border activity (i.e., 
sales, PEs, subsidiaries abroad) and those without.  

Table  A4.1  (replicated  Table  2  of  Chapter  6):  Number  of  firms,  absolute  and  average  CIT 
compliance costs (CC), cross-tabulated by firm size and cross-border activity, 2019 

Source: Commission services, based on data from VVA/KMPG (2022).  

What is the potential of reducing CIT related compliance costs through simplifying corporate 
taxation? 

To approximate the potential decline of CIT-related compliance costs through reduced complexity 
of a tax system, a linear regression analysis was performed. The model explains total (logarithm of) 
CIT-related compliance costs, calculated as explained above, on a set of explanatory variables that 
include:  

• 
• 

the (log) number of employed workers (in quintiles),  
the (log) turnover (in quintiles), 

47 C (2003) 1422. Information about the balance sheet total is not given in the survey. 

47 

noyesTotalCIT CC (bn EUR)46.9                        5.9                          52.8                        .. per enterprise3,223                     3,308                     3,232                     Number of enterprises14,566,027           1,784,673             16,350,700           CIT CC (bn EUR)0.8                          0.3                          1.0                          CIT CC per enterprise9,929                     8,266                     9,436                     Number of enterprises77,939                   32,824                   110,763                 CIT compl. Costs (bn EUR)47.7                        6.2                          53.9                        .. per enterprise3,259                     3,398                     3,274                     Number of enterprises14,643,966           1,817,497             16,461,463           TotalSMELarger Enterpr.Operating cross-country? 
 
 
 
•  a binary dummy CROSS, informing whether the firm operates cross-border, 
•  a binary dummy SIMPL informing whether the firm is subject to a ‘simplified tax regime’ 

or CIT, 

•  an  interaction  term  CROSS  x  SIMPL  informing  whether  the  impact  of  operating  cross-

border is moderated by the availability of a simplified tax regime, 
fixed effects controlling for the sector and the jurisdiction in which the firm operates. 

• 

The table below shows to what extent the CIT-related compliance costs would decline, relative to 
the respective reference category. For Model 2, which contains the interaction term, the reference 
category  are  purely  domestic  firms  not  subject  to  simplified  tax  rules.  All  coefficients  are  highly 
statistically significant (p<.001). 

Table A4.2: Explaining CIT related CC, regression analysis, selected coefficients 
Variable 

% change relative to reference 
Model 1 
+2% 
+30%   

CROSS 
SIMPL  
CROSS x SIMPL 
Source: Commission services, based on data from VVA/KMPG (2022).  

Model 2 
+10% 
+35% 
-25% 

Both models are controlled for firm size, the number of employees, the firm’s turnover as well as 
country and sector specificities. The simple model without interaction term (Model 1) reveals that 
operating cross-border increases CIT-related compliance costs overall. However, if the interaction 
term is included in the model, it becomes clear that the availability of simpler tax rules matters a 
lot  for  the  level  of  compliance  costs.  If  a  simplified  tax  regime  is  not  available,  cross-border 
operating  firms  have,  on  average,  10%  higher  CIT  compliance  costs  than  domestic  firms  not 
subject  to  a  simplified  tax  regime  (the  reference  group).  By  contrast,  if  there  are  simplified  tax 
rules,  cross-border  operating  firms  have  25%  lower  compliance  costs  than  the  reference  group. 
Therefore, the  regression analysis suggests that the  simplification of tax  rules has a very positive 
effect on cross-border operating firms in the sense that they are able to reduce compliance costs 
very  substantially:  by  32%,  relative  to  cross-border  operating  firms  with  no  access  to 
simplified rules.48  

The  below  chart  illustrates  these  regression  results,  normalising  the  CIT  compliance  costs  of 
domestic firms without simplified tax regime to a value of 100. This is the reference situation. The 
CC for cross-border operating firms without simplified regime would be 110 (+10% higher than in 
the reference situation), while with simplified regime they would amount to 75 (25% lower than in 
the reference). For cross-border operating firms, simplified schemes would then make a difference 
of 35, corresponding to 32% of 110. 

48 That is: (100%-25%)/(100%+10%)=(100%-32%).  

48 

 
 
 
 
 
 
 
 
 
 
 
 
 
Chart A4.1: Illustration of the regression results: CIT compliance costs by firm type 

Source: Commission services, based on data from VVA/KMPG (2022).  

The findings strongly support the introduction of new, simpler rules for corporate tax systems in the 
EU.  

What is the potential reduction of CIT-related compliance costs in the short term, per cross-
border operating firm?  

Applying  a  reduction  of  32%  on  current  CIT  compliance  costs  of  cross-border  operating  firms 
(EUR 6.2 billion as shown in Table A4.1 which replicates Table 2 of Chapter 6) would reduce these 
costs  by  EUR  2  billion.  Existing  simplified  tax  regimes  tend  to  reduce  complexity  of  tax  rules 
significantly,  so  that  in  terms  of  simplicity,  ‘simplified  tax  regimes’  as  defined  in  the  underlying 
study, could indeed be equivalent to SME simplification high-end estimates for cost saving due to 
simplification.  

Moreover, there are further savings that should be taken into account for a high-end estimate. SME 
simplification  rules  will  also  incentivise  so-far  purely  domestically  working  firms  to  extend  their 
business, crossing EU borders, thereby reaping the benefits of the internal market. However, in the 
absence  of  a  precedent  for  SME  simplification  it  is  impossible  to  calculate  an  exact  elasticity 
informing about how much additional investment will be triggered. It is therefore assumed that 
10% of today’s 14.64 million domestic firms (see Table A4.1) will expand and start to operate 
in another Member State. It implies that those firms have seen complicated national tax rules as 
an obstacle to extending their business beyond Member State borders. In economic terms, as CIT-
related  compliance  get  reduced,  this  would  lower  the  threshold  of  extending  business  to  other 
countries.  This  is  because  a  32%  CIT-related  compliance  cost  reduction  is  very  significant.  For 
many firms, the expected profits from going international would now exceed costs, inducing firms 
to start operating cross-border.  

This would affect another 1.5 million firms, i.e., 10% of the 14.6 million so-far domestic firms not 
operating cross-border (see Table A3.1) which would save an amount of EUR 1.5 billion as they 
also benefit from the 32% decline in CIT-related compliance cost (i.e., 32% of 10% of EUR 47.7 
billion). Total savings would then amount to EUR 3.5 billion per year.  

In  the  case  of  low-end  estimates,  savings  per  firm  could  amount to  only  half  of  32%,  i.e.,  16%, 
relative to cross-border operating firms without access to simplified systems. For those, they could 
then amount to EUR 1 billion (half the high estimate). Moreover, if only 5% (instead of 10%) of 

49 

10011075020406080100120Domestic firmsCross-border operatingfirmsCross-border operatingfirmsWITHOUT simflified schemeWITH simflified schemeNormalised to a value of 10035 (32% of 110) 
 
 
so-far domestic firms  felt  incentivised to  extend business  cross-border, their savings amounted to 
EUR 0.4 billion (i.e., 16% of 5% of EUR 47.7 billion). Total savings were then EUR 1.4 billion p.a. 

These short-term estimates have to be interpreted with due care. It obviously depends on an array of 
assumptions,  each  of  them  having  a  decisive  impact  on  the  outcome.  This  affects,  first  and 
foremost,  the  assumption  that  10%  of  so-far  domestic  firms  take  up  cross-border  business, 
incentivised  by  simplifications  that  come  with  this  proposal.  Empirical  evidence,  however,  is 
lacking. It would also not be accurate to draw on (1) investment-tax elasticities or (2) investment-
compliance cost elasticities from literature. In the first case, the level of taxes in a country says little 
about foregone investment due to complex tax rules. In the second case, direct expenses linked to 
activities for tax compliance are only  a very small  proportion of compliance costs, given that the 
latter  includes  future  profits  foregone  as  SMEs  may  refrain  from  crossing  of  borders  due  to 
uncertainties and thresholds. Indeed, with a view on the driving factors, what counts more than the 
short-term  savings  on  compliance  expenses  is  the  long-term  economic  prospect  of  better  legal 
clarity  and  better  transparency  of  the  tax  system.  Concretely,  if  SMEs  can  continue  to  apply  the 
same  tax  rules  when  they  first  expand  across  borders,  the  thresholds  are  lowered  and  the  new 
markets  will  appear  much  more  accessible.  This  is  why  we  extend  the  analysis  by  model-based 
long-term simulations. 

What effect can we expect in the medium to long term? A simulation with Cortax 

Cortax  is  a  multi-country  general  equilibrium  model  run  by  the  European  Commission’s  Joint 
Research Centre, covering households, firms and governments. It includes all Member States, plus 
the United Kingdom, Japan, the United States and low-tax jurisdictions. Cortax models the tax base 
explicitly,  taking  account  of  tax  depreciation,  (non)  deductibility  of  interest,  and  allowance  for 
corporate  equity.  It  also  embeds  the  feature  of  loss  carry-forward  and  distinguishes  between 
domestic  and  multinational  firms.  For  the  latter,  it  allows  for  cross-border  aggregation.  Cortax 
explicitly  takes  account  of  compliance  costs,  i.e.,  workers  in  firms  absorbed  by  compliance 
activities.  

One  important  point  to  understand  is  that,  in  the  short-term,  the  effects  outlined  in  the  previous 
sections only cover the reduction of (immediate) expenses that firms may have due to compliance 
to CIT rules. They do not include second-round macro-economic effects of more CIT transparency 
and better legal certainty. Those are a high multiple, relative to its short-term impact, and especially 
relative to the transitory investment that becomes necessary with the introduction of the HOT rules.  

There are several ways of demonstrating the long-term benefits. One is to look at resources freed-
up as firms save on compliance costs. For example, due to the savings on compliance costs outlined 
in  the  previous  sections,  firms  would  have  more  resources  available  for  investment  in  firm-
sponsored  training  (see  next  section’s  simulation  with  the  Labour  Market  Model).  Another, 
different source of higher labour productivity is that SMEs in particular can better capitalise on the 
internal  market.  This  is  because  the  simplification  introduced  by  the  proposal,  enables  firms  to 
extend their businesses to countries from which they have abstained so far. In that context, it was 
shown with Cortax, that the productivity shift resulting from better tax transparency would have a 
decisively positive impact on economic activity.  

The productivity shift would come from so-far domestic firms extending their businesses into other 
Member  States  as  tax-related  obstacles  are  reduced  for  SMEs.  There  is  plenty  of  evidence  that 
firms  exposed to  international  competition  are more productive than purely  domestic firms.  Most 

50 

 
 
relevant in the context of SME simplification, Mikić et al. (2016)49 find that internationalisation has 
a positive impact on business performance of SMEs. Bellak (2004)50 finds that performance gaps 
arise in such fields as productivity, technology, profitability, wages, skills and growth and that the 
multinational aspect of the company, more than the nationality of the firm, seems to explain these 
gaps.  Helpman  et  al.  (2001)51  see  productivity  differentials  between  international  and  domestic 
firms as a result of choice: low-productivity firms may not even try to engage on foreign markets at 
all, while the most productive firms engage not only by exporting but also through Foreign Direct 
Investment. Markusen and Trofimenko (2009)52 see that FDI, through foreign experts working in a 
country, are a channel of knowledge transfer and push productivity. Indeed, the positive impact of 
internationalisation  on  a  firm’s  performance  seems  to  increase  with  the  extent  of  a  firm's  FDI 
activity (Lu and Beamish, 2001)53. We used the 2020 CompNet Firm Productivity Report54 which 
reckons that exporters’ labour productivity premium over non-exporters could amount to 15%.   

Re-iterating the assumption that 10% of so-far domestic firms would expand their business cross-
border (previous section), the shock introduced into the Cortax model is thus a 15% productivity 
shift, applied  to 10% of domestic firms in the EU. Technically, in  model terms,  the exogenous 
productivity shift thus implies that firms will be able to produce more with  a given factor (labour 
and capital) input.  

Apart from the pure model technique, what happens in reality is that firms can better foresee what 
the crossing of borders means for them: in what countries (and to what extent) are they present for 
the purpose of taxation; what effort would they have to make in order to comply with EU-wide tax 
rules;  and  ultimately:  what  effective  tax  rate  would  they  have  to  factor  in  for  future  investment. 
They will thus expand their business to other Member States. As they get exposed to international 
competition, they become more efficient in production, so that total factor productivity increases.   

The long-term effect on GDP (+0.7% in the long run) and on tax revenue (+1%) indicate that the 
macro-economic  impact  is  very  significant  for  the  entire  economy.  The  results  stem  from  the 
illustrative  assumption  that  10%  of  so-far  domestic  firms  will  become  active  across  borders  as 
administrative burden reduces and transparency and legal clarity about international CIT improves. 
As this is a rather optimistic scenario, it is complemented by a series of sensitivity analyses.  

Keeping  the  high-end  estimate  of  15%  productivity  gains  for  international  firms  found  by 
CompNet(2020), the link between the share of firms going international, on the one hand, and the 

49  Mikić,  M.  &  Primorac,  D.  &  Kozina,  G.  (2016).  Determining  the  link  between  internationalization  and  business 
performance of SMEs. Tehnicki vjesnik - Technical Gazette. 23. 1201-1206. 10.17559/TV-20150701204258. 
50 Bellak, C. (2004). How Domestic and Foreign Firms Differ and Why Does It Matter?. Journal of Economic Surveys. 
18. 483-514. 10.1111/j.0950-0804.2004.00228.x. 
51  Helpman,  E.,  Melitz,  M.  J.,  Yeaple,  S.  R.  (2004).  Export  Versus  FDI  with  Heterogeneous  Firms.  American 
Economic Review, 94 (1): 300-316. DOI: 10.1257/000282804322970814 
52  Markusen,  James  &  Trofimenko,  Natalia.  (2007).  Teaching  Locals  New  Tricks:  Foreign  Experts  as  a  Channel  of 
Knowledge Transfers. Journal of Development Economics. 88. 120-131. 10.1016/j.jdeveco.2008.02.002. 
53 Lu, J. & Beamish, P. (2001). The Internationalization and Performance of SMES. Strategic Management Journal. 22. 
565 - 586. 10.1002/smj.184. 
54 CompNet, The Competitive Research Network, Firm Productivity Report, May 2020. 

51 

 
 
 
impact  on GDP and tax  revenue, on the other hand, is  a bit stronger than linear.55  The following 
relation holds: 

•  2.5% of so-far domestic firms go international: EU GDP increases by +0.16% , EU tax 

revenues increase by +0.24%. 

•  5% of so-far domestic firms go international: EU GDP increases by +0.32% , EU tax 

revenues increase by +0.48%. 

•  7.5% of so-far domestic firms go international: EU GDP increases by +0.50% , EU tax 

revenues increase by +0.75%. 

•  10% of so-far domestic firms go international: EU GDP increases by +0.70% , EU tax 

revenues increase by +1.03%. 

•  12.5% of so-far domestic firms go international: EU GDP increases by +0.90% , EU tax 

revenues increase by +1.32%.  

For the low-end estimate of a productivity premium for going international of only 4% (de 
Loecker, 2013), the following holds: 

•  2.5% of so-far domestic firms go international: EU GDP increases by +0.04% , EU tax 

revenues increase by +0.06%. 

•  5% of so-far domestic firms go international: EU GDP increases by +0.08% , EU tax 

revenues increase by +0.12%. 

•  7.5% of so-far domestic firms go international: EU GDP increases by +0.12% , EU tax 

revenues increase by +0.19%. 

•  10% of so-far domestic firms go international: EU GDP increases by +0.17% , EU tax 

revenues increase by +0.25%. 

•  12.5% of so-far domestic firms go international: EU GDP increases by +0.21% , EU tax 

revenues increase by +0.32%.  

55 For example, 12.5% is 5 times 2.5%. But the GDP-increase +0.9% for 12.5% of domestic firms going international is 
5.8 times the +0.16% increase for 2.5% going international. 

52 

 
 
 
 
 
ANNEX 5: COMPETITIVENESS AND SME CHECK 

1.  OVERVIEW OF IMPACTS ON COMPETITIVENESS  

Dimensions of 
Competitiveness 

Impact of the initiative 
(++ / + / 0 / - / -- / n.a.) 

References to sub-sections of the 
main report or annexes 

Cost and price competitiveness  ++ 

International competitiveness  

Capacity to innovate 

SME competitiveness 

+ 

+ 

++ 

Synthetic assessment 

Chapters 3, 4, 6, 7 

Chapters 3, 4, 6, 7 

Chapters 3, 4, 6, 7 

Chapters 3, 4, 6, 7 

By  introducing  a  simplification  framework  for  SMEs  operating  cross-border,  the  proposal  is 
expected  to  have  a  positive  impact  on  cost  and  price  competitiveness.  The  main  purpose  is 
simplification regarding application of the current corporate tax rules which will reduce compliance 
costs for SMEs operating in all sectors in the internal market. The possibility of developing activity 
across  the  border  through  one  or  more  permanent  establishment  while  continuing  to  calculate  the 
taxable result in line with the corporate tax rules of the Member State of origin is expected to reduce 
SMEs’ international expansion costs. 

SME simplification is also expected to establish a level playing field, break down barriers to cross-
border  expansion  and  trade  and,  as  such,  improve  the  international  competitiveness  within  the 
SMEs  businesses.  Helping  SMEs  to  first  grow  in  the  internal  market  would  subsequently  allow 
them to expand even outside the EU. 

SME simplification does not directly touch upon SMEs capacity to innovate as such. Though, the 
overall reduction in compliance costs may, indirectly, have an impact as it will release an amount 
that can be used on a number of activities, including investing in innovation. 

2.  THE SME TEST   

Step  1/4  Identification  of  SMEs:  The  present  initiative  is  considered  highly  relevant  for  SMEs 
insofar  all  SMEs  with  a  head  office  in  the  EU  are  the  (only)  direct  beneficiary.  The  SME 
simplification framework offers to eligible SMEs - standalone entities, i.e., one single legal person 
without  subsidiaries  optional  rules  that  will  enable  them  to  choose  the  simplest  and  most  cost-
efficient option based on their individual needs.  

Step 2/4 Consultation of SME stakeholders: See Annex 2. 

Step 3/4 Impacts: As explained above and in Chapter 6, eligible SMEs will highly benefit from the 
tax compliance cost reduction when going abroad that, in turn, will improve the level playing field. 
Considering that the system is optional for SMEs, we do not estimate adverse effects. In addition, 

 
 
 
the fact that the simplification is not available to SME groups but only to standalone entities, should 
not bring forth negative impacts.  

Consultation  of  alternative  options:  It  was  considered  to  entitle  not  only  standalone  entities,  but 
also SME groups up to a certain ceiling of revenues. This option is assessed in the main report, and 
it is explained why it was not retained.  

Step 4/4. Minimising negative impact on SMEs. Policy options in this proposal have been designed 
with SMEs in mind. Additional adjustment and compliance costs have been kept to the minimum 
and the net benefits for the SME are very important. 

54 

 
 
 
 
 
 
 
 
ANNEX 6: TERRITORIAL IMPACT ASSESSMENT – NECESSITY 
CHECK 

The  problem  and  its  consequences  that  this  initiative  aims  to  address  (complexity  and  high 
compliance costs) are spread across the Union evenly, indeed they are a product of the existing of 
many systems. The initiative itself will not impact regions differently.