In 2007 the European Commission proposed a cap of €300,000 on subsidies to individual farmers, which was ultimately rejected by EU governments.
In the paper, the Commission said any negative impacts of a subsidy cap on large farms could be offset by taking into account the number of people they employed, hinting at some flexibility in any future cap.
Direct subsidies should give farmers a basic level of income support, but part of the subsidy should be linked to mandatory environmental protection measures, the paper - due to be published by the European Commission on 17 November - said.
This is in line with recent demands from the European Parliament, which will have an equal say in the reform process along with EU governments, and is designed as a way of better justifying farm subsidies to EU taxpayers.
A key question in the reform is how to distribute subsidies more fairly between old and new member states, with payments currently varying from over €500 per hectare in Greece to less than €100 in Latvia.
The Commission said imposing a flat rate subsidy across the EU would fail to reflect the "very different economic and natural conditions" that exist in Europe.
One possible solution would be to guarantee farmers in all countries a minimum percentage of the current average subsidy rate of about €250 per hectare, the paper said.
No budget figures
The paper contained no details on the future size of the Common Agricultural Policy (CAP) budget, which currently consumes about €55 billion of the bloc's €130 billion annual budget.
But one EU source told Reuters that the paper had been drafted by the Commission's agriculture department on the assumption that the CAP budget would remain stable at between €55 and €60 billion a year.
That will please EU governments such as France and Spain, which have called for the farm budget to remain at least at its current level after 2013.
But other Commission departments and governments such as Britain are pushing for cuts in EU farm spending, in a bid to fund new priorities such as innovation and job creation at a time of huge pressure on public finances in Europe.
Existing market management measures such as export subsidies should be kept as a "safety net", and the use of public intervention could be extended, while new tools are needed to combat market volatility, such as insurance and mutual funds, the paper added.
The Commission said it would also examine options for phasing out EU sugar production quotas "at a date to be defined" as part of the reform.
(EurActiv with Reuters.)