SME Relief Package – The Commission Proposal on the SME Head Office Tax System (HOT)

• Jurisdiction: European Union
• Year: 2024

Speaker

Paul Leyder is a Partner at BDO Luxembourg, leading the Direct Tax Advisory Services team. With over 25 years of experience, Paul advises Luxembourg-based and multinational businesses, as well as individuals, on national and international tax matters. His expertise includes investment structuring, business reorganization, tax due diligence, and fund structuring, primarily for clients in real estate, private equity, renewable energies, telecommunications, manufacturing, and utilities.

Prior to joining BDO in 2017, Paul was a tax partner at a Big 4 firm and HRT. He is a member of the Ordre des Experts-Comptables and frequently lectures on tax-related topics.

Topic

The Head Office Tax (HOT) system for SMEs is an EU Commission proposal aimed at simplifying tax processes for small and medium-sized enterprises operating across EU borders. Part of the SME Relief Package, the initiative aims to reduce tax compliance complexity and costs, foster cross-border expansion, and level the playing field with larger enterprises.

To qualify, SMEs must be established and tax-resident in an EU Member State and operate in other Member States through permanent establishments (PEs). They should not be part of a consolidated group and must meet the criteria of micro, small, or medium-sized enterprises under Directive 2013/34/EU. The system allows taxable profits for PEs to be determined based on the head-office Member State’s tax rules. Income tax rates apply according to the PE's location, but tax returns are filed in the head-office Member State. Taxes are paid to the head-office Member State's tax authorities, which transfer the relevant amounts to the PE Member States.

SMEs must apply to their head-office Member State's tax authorities three months before the fiscal year to access the HOT system. Exclusions include SMEs with shipping income or those under tonnage tax regimes unless PEs derive income from non-shipping activities. The HOT system can be terminated if the SME transfers its tax residence or if PE turnover exceeds specific thresholds. Renewal requires an application six months before the end of the five-year period, provided SMEs meet the eligibility criteria. The...