EU Parliament agrees on common system to calculate corporations’ taxable income

The European Union has moved closer to a fundamental change in how multinational companies are taxed. On 13th November 2025 (Friday), MEPs adopted their position on proposed legislation to establish a single, harmonised method for calculating corporate taxable income across the EU, under the Business in Europe: Framework for Income Taxation (BEFIT) initiative.

The reform is designed to replace today’s patchwork of national tax rules with a more streamlined and predictable system.

What Is BEFIT?

BEFIT stands for Business in Europe: Framework for Income Taxation. It was introduced by the European Commission to address the complexity and fragmentation of corporate tax systems across the EU, where businesses currently navigate 27 different national rules to calculate taxable profits. Under BEFIT, multinational groups would compute a single, common taxable income base using harmonised rules, and then allocate that profit among EU member states according to predefined criteria.

The European Parliament’s recent vote endorses key elements of this framework, while introducing a number of amendments — including a clause to better identify when companies have a “significant economic presence” in a member state and anti-profit-shifting provisions aimed at stopping companies from allocating income to subsidiaries in low-tax jurisdictions without real economic activity.

How the Common Tax Base Would Work

Under the BEFIT model, companies that are part of a multinational group operating in the EU would:

• Calculate their taxable base using a common set of rules derived from consolidated financial statements rather than national tax books.
• Aggregate this common tax base for the entire group.
• Allocate portions of that base to each member state where the group operates, with each state applying its own corporate tax rate to its share.

This harmonised calculation stops divergent national tax rules from creating double taxation or undue compliance burdens for cross-border companies. It also aims to simplify reporting and strengthen legal certainty for businesses with EU operations.

Timeline and Next Steps

The European Parliament’s position is non-binding, but represents a significant step forward. The BEFIT directive will now enter negotiations with the Council of the European Union, where unanimous agreement from all member states is required before it can become law. This means Malta — along with other member states — will have a say in the final shape of the legislation.

The proposal is expected to be phased in over several years and could be implemented in full by the end of this decade, though precise timing will depend on political consensus.

Implications for Malta

For Malta, the shift toward a common taxable income system carries both opportunities and challenges:

1. Simplification for Multinational Operations

Malta’s economy is relatively open and increasingly integrated with EU and global supply chains. A common tax base could reduce compliance complexity for Maltese subsidiaries of multinational groups, lowering administrative costs and legal barriers to cross-border investment.

2. Impact on Malta’s Tax Revenue Structure

Malta relies heavily on corporate taxation, which represented a significant share of total tax revenue in recent years — substantially above the EU average for corporate tax contribution to GDP and overall revenues. BEFIT’s harmonised base might change how taxable profits are apportioned across member states, potentially altering Malta’s tax take from multinational groups. Revenue impacts will depend on how profits are shared under the final allocation rules and how Malta’s national tax policies interact with the common base.

3. Enhanced Transparency and Anti-Avoidance

The Parliament’s amendments to BEFIT include measures to discourage shifting profits to low-activity or low-tax jurisdictions — a practice critics say erodes tax bases and undermines fair competition. For Malta, which historically positions itself as a competitive business location, these provisions could require more rigorous substance requirements and documentation to demonstrate genuine economic activity in the jurisdiction.

BEFIT forms part of a wider international effort to reform corporate taxation. It builds on global agreements such as the OECD/G20 Pillar Two rules, which set a 15 per cent minimum effective tax rate for large multinationals – already transposed into EU law through recent directives on administrative cooperation and tax reporting.

Taken together, these developments signal a shift toward greater harmonisation and transparency in corporate tax systems – balancing national tax autonomy with a coordinated framework that seeks to prevent aggressive tax avoidance and improve the functioning of the internal market.