On March 21, 2018, the European Commission proposed new rules for the taxation of digital activities and digital business models in the EU (‘digital tax package’).

If these rules are implemented, numerous European and non-European companies would have to pay a 3% tax on all their European revenue from digital services (‘digital services tax’). Furthermore, the advanced long-term plan of the EU is to tax all profits generated from a company’s digital activities in Europe conducted through a ‘virtual permanent establishment’. This new concept of a permanent establishment would especially affect European corporations, but, under certain circumstances, also would affect non-European corporations.

Basically, the proposals of the European Commission aim to adapt the current EU tax rules to the digital developments of the 21st century and the different ways to create profits in the digital world. According to the Commission, these changes shall ensure that digital companies are captured by taxation in the EU and “contribute their fair share of tax” like other companies with traditional business models. Furthermore, the Commission’s intention behind these suggested measures is to prevent a fragmentation of the EU and damaging of the Single Market to ensure an even and common taxation among all enterprises in the EU.

These new tax rules, if implemented, would have an impact on many companies that generate their profits through digital user participation or digital activities in the EU, such as social media companies, online content providers, collaborative platforms, online marketplaces and streaming services, as well as companies that receive revenues from the placement of online advertising or the sale of collected user data.


The European Commission considers the current tax rules in the EU to be partially outdated in terms of digital-based enterprises. For historic reasons, current corporate tax law of the EU Member States generally relies on a company having a physical presence in that country. Thus, digital business activities (such as e.g. selling user-generated data and content) are not taxable if the respective company is only virtual or has little or no physical presence at all in the users’ residence country.

The Commission states that, as a result, such digital companies might either not be captured by today’s tax rules properly or even escape the current tax framework of the EU entirely. Although such companies have significant economic relevance and grow faster than traditional companies (according to the Commission, the average annual revenue growth of top digital firms is about 14 %, compared to between 0.2% and 3% annually for other multinational firms), they pay on average only half the effective tax rate of traditional companies.

Therefore, in order to adapt taxation to the realities of the modern global economy, the Commission has now presented two distinct legislative proposals that, if implemented, will substantially change the taxation of the digital economy in the EU.


The first proposal (COM (2018) 147 final) is meant as a long-term solution. The Commission suggests a reform of corporate tax rules that allows Member States to tax profits generated in their territory even if the respective company has no physical presence there. For that purpose, in addition to the existing concept of a permanent establishment, the concept of a ‘significant digital presence’ (also referred to as ‘virtual permanent establishment’) shall be implemented into corporate tax law of the Member States.

The second proposal (COM (2019) 148 final) is meant as an interim solution until the first proposal is implemented completely. The Commission proposes the adoption of a new tax of 3 % on certain revenues made from digital activities (‘digital services tax’).

Both proposals are only draft directives that – in order to be legislation – in a first step need to be passed by the European institutions. In a second step, they need to be transferred into domestic law by each Member State. Therefore, they have no effect at the moment. However, it is important to keep an eye on the ongoing discussions and to be prepared.

Highlights of the Digital Tax Package

  • First Proposal (Implementation of a ‘significant digital presence’ into corporate tax law)

This draft directive requires each Member State to amend their legislation in a way that profits can already be taxed if a corporation has a ‘significant digital presence’ (‘virtual permanent establishment’) in that Member State. It shall be decisive for the taxation where the company has significant interaction with users through digital channels and where digital profits are generated. As a result, a physical presence of this company shall not be required for taxation anymore.


A company will be deemed to have a ‘significant digital presence’ in a Member State if it reaches one of the following thresholds:

  • € 7 million in annual revenues in a Member State;
  • more than 100,000 users in a Member State in a taxable year; or
  • over 3,000 business contracts for digital services that are created between the company and business users in one taxable year.

These new rules shall apply to all companies which supply digital services through a digital interface. This includes explicitly e.g. cloud computing, the use of search engines and internet directories, the accessing or downloading of films, the supply of online news, traffic information, and weather reports, and the placement of online advertising and streaming services.

  • Second Proposal (‘Digital Services Tax’)

The second draft directive suggests a new tax of 3% on revenues made from certain types of digital services, which, therefore, resembles the Value-Added-Tax. Taxation shall take place where users play a major role in value creation. Thus, tax revenues shall be collected by the Member State in which the users are located and will thereby generate immediate tax revenue for this Member State. The Commission estimates annual tax revenues of about € 5 billion.


This tax would be applicable to revenues created from the following three types of digital services:

  • the sale of online advertising space on a digital interface targeted at users of that interface;
  • the provision of a multi-sided digital interface that allows users to find other users and to interact with them and that may also facilitate the sale of goods and services directly between users; and
  • the sale of data collected and generated from users’ activities on digital interfaces.

Since the Commission wants to spare start-ups and scale-up businesses, this new tax shall only be applicable if the following revenue thresholds are exceeded:

  • Total annual worldwide revenues of above € 750 million; and
  • Total annual EU revenues of € 50 million.

Consequences for European and Non-European Companies

While these new rules would apply to all European taxpayers, non-European taxpayers should note that the first directive will not affect them if their country of residence has a Double Taxation Treaty (DTT) with the European country in question. As long as this DTT is not amended in a way that it matches the directive and contains the concept of a significant digital presence, the respective European country does not have the right to impose that tax on the taxpayer.

In contrary to that, the second directive (‘digital services tax’) would affect every service provider independently of his country of residence and whether or not there is a DTT with that country, since this is a tax that does not rely on the taxpayers’ residence but rather on the provided service. The Commission has stated that the implementation of the second directive does not breach DTTs with third countries or any WTO rules. The United States has already shown a different view on that issue.

Perspective and next steps

The point of time from which these directives would apply, should they be passed, is momentarily uncertain. Their wording indicates that it is planned for them to be effective from January 1st, 2020.

As a next step, the European Commission will submit these legislative proposals to the Council for adoption and to the European Parliament for consultation. Additionally, the Commission has announced that the EU will continuously push for ‘ambitious’ international solutions in that matter. The proposals need to be decided unanimously.

Therefore, at this moment, it is still uncertain whether the proposals will become effective, since several Member States, such as Ireland, Malta, and Luxembourg, have already declared to be opposed towards these proposals. The German Federal Council (Bundesrat) also stated that it is opposed to the creation of the concept of a significant digital presence on a European level alone.

The Commission’s proposals are available at the webpage of the European Commission: https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en