European Union: European Commission Presents Digital Tax Package

Last Updated: 1 June 2018
Article by Jens-Uwe Hinder and Jenny Broekmann

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The European Commission considers the current tax rules in the EU to be partially outdated in terms of digital-based enterprises.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:

Keywords: Federal Tax

Mofo Tech Blog - A blog dedicated to information, trend-spotting & analysis for science & tech-based companies

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions