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European Commission proposes transfer pricing directive

18 September 2023

On 12 September 2023, the European Commission (“the Commission”) published a “Proposal for a council directive on transfer pricing“ to harmonise rules within the EU as part of its Business in Europe: Framework for Income Taxation (BEFIT) package. Even though many EU member states already to a certain extent apply OECD rules on transfer pricing, the Commission is aiming for a level playing field by requiring member states to apply the same standards. If adopted in their proposed form, the new rules would be implemented by 31 December 2025 and would apply as from 1 January 2026.


In order to guarantee that intragroup transactions are performed under commercial conditions, article 9 of the OECD model treaty determines that these transactions should be priced in the same way as comparable transactions with unrelated parties (the arm’s length principle). This is further elaborated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD TP guidelines”). The OECD TP guidelines provide explanations on the methods used to calculate an arm’s length price. Even though there is political commitment to apply the nonbinding instrument of the OECD TP guidelines, the status of the guidelines and the actual application currently differs between the member states. As such, the Commission is aiming to harmonise the transfer pricing rules of member states and to ensure a common and uniform application of the arm’s length principle across the EU. The overall objective of the proposal is to increase tax certainty for multinational enterprise (MNE) groups within the EU, to mitigate the risk of litigation in relation to transfer pricing arrangements and the risks of double taxation. The Commission considers that this proposal would also reduce the opportunities for MNE groups to engage in "aggressive tax planning” practices through the use of transfer pricing.

Proposal for a transfer pricing directive

The proposal would incorporate the arm's length principle and key transfer pricing rules into the EU legal framework. It is intended to clarify the role and status of the OECD TP guidelines across the EU and would create the possibility of establishing common binding rules on specific aspects of transfer pricing.

The proposed directive would apply to all companies resident in an EU member state, and to permanent establishments located within the EU.

Under the proposals, in the case of a cross-border transaction with an “associated enterprise,” the EU entity would be required to determine the amount of its taxable profits in a manner that is consistent with the arm’s length principle. The proposed directive seeks to introduce a common definition of associated enterprise across the EU as a person who is related to another person in any of the following ways:

  1. A person participates in the management of another person by being in a position to exercise a significant influence over the other person;
  2. A person participates in the control of another person through a holding that exceeds 25 % of the voting rights;
  3. A person participates in the capital of another person through a right of ownership that, directly or indirectly, exceeds 25% of the capital; or
  4. A person is entitled to 25% or more of the profits of another person.

For indirect participations, to fulfill the criteria in 2 and 3 above, the shareholding percentages would be multiplied throughout the successive tiers and a shareholding of more than 50% would be deemed to be 100%.

The concept of the arm’s length principle is defined without explicit reference to the OECD standard.

The correct arm’s length price is to be determined by application of one of five predefined transfer pricing methods:(i) comparable uncontrolled price method; (ii) resale price method; (iii) cost plus method; (iv) transactional net margin method; or (v) profit split method. Only in rare cases could other TP methods be applied. The proposed directive does not prescribe a specific order of application but states that the most appropriate transfer pricing method should be used having regard to the circumstances of the case. Taking into account the definitions and explanations on the five TP methods, some preferential approach of methodology may be assumed.

Besides these more general rules, the directive includes provisions on the comparability analysis, the determination of the arm’s length range, and transfer pricing documentation.

What’s next?

As the BEFIT directive relates to direct taxation, unanimity within the European Council is required since taxation remains an element of the sovereignty of the member states, i.e., each and every EU member state has the power of veto and may block the agreement of the proposal. The experience from previous proposals in the field of direct taxation, especially those aimed at harmonising corporate income taxation rules, is that proposals could stall at the level of the Council for many years in the absence of unanimous agreement and lack of political momentum, given taxation is a sensitive political matter influenced by a myriad of factors. It should be noted in this respect that various political and economic factors could influence the possible adoption of the proposed transfer pricing directive, such as upcoming European elections, the fiscal revenue needs of individual member states, current risks and uncertainty influencing the EU economy as a whole, and the EU’s growth momentum.

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