The Comprehensive Solution as proposed by the EU Commission

By Rik van de Meerendonk


The Comprehensive Solution as now proposed was also the preferred approach for more than half of the respondents to the stakeholder consultation (which can be divided into a public consultation open from October 2017 to January 3, 2018 and a targeted survey sent to the different tax administrations of EU Member States).

The proposal for the Comprehensive Solution (a) introduces the criteria based on which a taxable nexus for digital businesses without any physical commercial presence can be recognized (the so-called "significant digital presence") and (b) provides the principles for allocation of profits to such significant digital presence.

Criteria for the significant digital presence

The significant digital presence should be regarded as an addition to the existing concept of permanent establishment. A company is considered to have a significant digital presence in a Member State if one (or more) of the following criteria is met:

  • Its revenues from digital services in a Member State in a tax period exceeds EUR 7 million;
  • The number of users of the digital services in a Member State in a tax period exceeds 100,000;
  • The number of business contracts for the supply of digital services concluded in a Member State in a tax period exceeds 3,000.

The proposal provides further clarification on several definitions and for instance what falls within the scope of digital services, whereas it is relevant to note that the scope of services is wider compared to the Interim Solution. The annexes to the proposal provide lists of examples of services within the scope as well as outside the scope of digital services. 

Principles for allocation of profits to the significant digital presence

Same as in current applicable principles, the rules for profit allocation should be based on a functional analysis taking into account the functions performed, assets used and risks assumed by the significant digital presence for the performance of its digital activities through a digital interface. In this regard it should be taken into account that a substantial part of the value of digital activities is created where users are located, data related to the users is collected and processed, and where the digital services are provided. The proposal recommends the profit split as the method to be used in order to arrive at a fair allocation of profits (whereas of course a taxpayer can use alternative methods, in case it can be substantiated that the outcome of such functional analysis using the alternative method (in line with internationally accepted principles) is more appropriate.     

Application of the Directive once implemented

Once implemented in national legislation of the Member States, the Directive applies to cross-border digital activities within the European Union (even in case treaties between relevant Member States are not adjusted accordingly) and to business established in third countries that are considered to operate a significant digital presence in a Member State, where no double taxation treaty has been concluded between the Member State and such country. 

Moreover the EU Commission recommends Member States to adapt their double taxation treaties in place to introduce the concept of significant digital presence as well as the allocation of profits to such presence. In that regard the EU Commission can assist in identifying third countries that should be prioritized in the negotiations.