SWD/2023/302 final

The IA proposes a Head Office Tax system (HOT) for Small and Medium Sized Enterprises (SME). The idea of the initiative is to grant major simplifications to small firms who today shy away from expanding their business to other EU countries as they fear the consequences this may have on where they are taxed. Indeed, today they would need to comply with the rules of all countries where they have a permanent establishment. Through HOT, they would be allowed to apply only one set of corporate tax rules when they wish to expand abroad, namely the tax rules of the country where they have their head office. The initiative would therefore bring more transparency and legal certainty for SMEs. It would ultimately incentivize them to step up cross-border investment.

Cortax was used to quantify the long-term effect of these major simplifications on the economy. It was assumed that a certain share of so-far domestic SMEs would, through HOT, have an incentive to expand into the Single Market. Alternative values were assumed for that share. It was also assumed that cross-border operating firms are more productive than purely domestic firms. In that context, alternative “export premiums” on productivity are used, each based on literature. Cortax was used to simulate the effect of the productivity shock, mainly on tax revenue and GDP.