EU Code of Conduct Group to assess EU tax regimes using modified nexus, adopt BEPS transfer pricing rules

by Davide Anghileri and Julie Martin

On 17 November, the EU Code of Conduct Group published a report on the work done by a subgroup during the Slovak Presidency on the clarification of the third and fourth criteria (i.e., substance and internationally accepted principles) of the Code.

The report includes discussion of a project to be undertaken by the subgroup to assess whether EU tax regimes other than patent box regimes are harmful using concepts developed in the OECD/G20 base erosion profit shifting (BEPS) project. It also recommends that the Council of the European Union endorse the new BEPS transfer pricing guidelines.

While not legally binding, the EU Code of Conduct Group’s work has political force, reflecting agreement among EU Member States on how to assess whether a tax measure adopted by a State is harmful to other States.


 In December 2015, the ECOFIN Council mandated the Code of Conduct Group to develop guidelines covering:

  • The interpretation of criterion three (whether advantages are granted even without any real economic activity and substantial economic presence within the member State offering such tax advantages), focusing on the application of a nexus approach to preferential regimes other than patent boxes on the basis of OECD BEPS conclusions on Action 5; and
  • The interpretation of criterion four (whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD), focusing on which internationally agreed standards are relevant and the role of the arm’s length principle in identifying potentially harmful measures in the light of the OECD Transfer Pricing Guidelines, as amended by OECD BEPS conclusions on Actions 8-9-10.

Modified nexus

According to the new report, the Code of Conduct Group on 19 October agreed to recommend that the Council of the European Union adopt conclusions which clarify that, when assessing preferential regimes other than patent boxes under the third criteria of the Code, the Code of Conduct Group should use the modified nexus approach, as described in the OECD BEPS report on Action 5, as a starting point.

According to the report, the Code of Conduct Group subgroup will use the principles of the modified nexus approach to assess the following EU regimes, on a case-by-case basis, by order of priority:

  • holding company regimes;
  • banking and insurance regimes;
  • fund management regimes;
  • financing and leasing regimes;
  • headquarter regimes;
  • distribution and service centre regimes; and
  • other regimes that may be identified by the group.

For example, the subgroup will clarify how the modified nexus approach could be applied to these regimes in respect to the attribution of costs and revenues

The Code of Conduct Group will also consider whether Code of Conduct guidance on “special economic zones” must be reviewed and updated in the light of the new interpretation of criterion three, the report states.

Transfer pricing

The Code of Conduct Group also agreed to recommend that the Council adopt conclusions endorsing the OECD BEPS report on Aligning Transfer Pricing Outcomes with Value Creation (Actions 8-9-10) and using the new OECD Transfer Pricing Guidelines a key reference for the fourth criterion of the Code of Conduct.

The draft Council conclusions invite the EU Commission, through the EU Joint Transfer Pricing Forum, to investigate whether EU guidelines on transfer pricing need revision so they are consistent with the OECD guidance by the end of 2019. The draft conclusions further suggest that the Council support further work by the OECD on transfer pricing, including the transactional profit split method.

Also, the report states that the Code of Conduct Group subgroup will develop more guidelines on the use of internationally accepted principles for interpreting criterion four, assessing the Commentary to the OECD Model Tax Convention, OECD principles for profit attribution to permanent establishments, and OECD BEPS minimum standards.

Davide Anghileri

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues. He can be reached at

Davide Anghileri

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Martin has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie Martin

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