Minimum Corporate Taxation

The rules will apply to any large group, both domestic and international, with combined financial revenues of more than €750 million a year, that has presence in an EU Member State. 

In line with the OECD/G20 Inclusive Framework agreement, government entities, international or non-profit organisations, pension funds or investment funds that are parent entities of a multinational group will not fall within the scope of the Directive on Pillar 2.

The effective tax rate is calculated per jurisdiction by dividing covered taxes paid by the entities in the jurisdiction by their qualifying income. If the effective tax rate for the entities in a particular jurisdiction is below the 15% minimum, then the Pillar 2 rules are triggered and the group must pay a top-up tax to bring its rate up to 15%.

This top-up tax can be changed through the ‘Income Inclusion Rule’ (IIR), the Undertaxed Profits Rule (UTPR) or a qualified Domestic Minimum Top-up Tax (QDMTT). This comprehensive mechanism ensures that this top-up tax applies irrespective of whether all constituent entities are located in a country that is implementing the international OECD/G20 agreement.

In line with the OECD/G20 Inclusive Framework agreement, the calculations will normally be made by the ultimate parent entity of the group unless the group designates another entity of the group.

If the global minimum tax is not imposed by a low-taxed non-EU country where a group entity is based, Member States where the group is located will apply the ‘Income Inclusion Rule’ (IIR), the Undertaxed Profits Rule (UTPR). 
 
The amount of top-up tax that a Member State will collect from the entities of the group in its territory via the IIR is determined based on the domestic entities’ ownership percentage in the foreign low-taxed group entity. The amount of top-up tax that a Member State will collect from the entities of the group in its territory via the UTPR is determined via a formula based on employees and assets.

The rules provide for an exclusion of minimal amounts of income to reduce the compliance burden. This means that when the revenues and profits in a jurisdiction are under a certain minimum amount, then no top-up tax will be charged on the profits of the group earned in this jurisdiction, even when the effective tax rate is below 15%. This is known as the de minimis exclusion. 
 
Moreover, companies will be able to exclude from the top-up tax’s calculations an amount of income that is at least 5% of the value of tangible assets and 5% of payroll. This is called a ‘substance carve-out’ (the substance-based income exclusion). 
 
The policy rationale for a substance carve-out is to exclude a fixed amount of income relating to substantive presence and activities like buildings and people. This is a common aspect of corporate tax policies worldwide, that seeks to encourage investment in economic substance by multinational enterprises in a particular jurisdiction. This exclusion allows to target the so-called excess profits, such as those related to intangible assets, which are more susceptible to tax planning. 
 
The agreement excludes from the scope certain income earned in international shipping, as this particular industry is normally subject to alternative tax regimes. The widespread availability of these alternative tax regimes means that international shipping often operates outside the scope of corporate income tax.
 

Safe harbours that are agreed by the Inclusive Framework are to be applied by EU countries provided that certain requirements are met. The agreed safe harbours provide for calculation simplifications compared to the general Pillar 2 rules and generally reduce the QDMTT, IIR, UTPR or all of the aforementioned top-up taxes, with respect to a jurisdiction, to zero.