A compromise text dated 12 March 2022 shows a number of changes compared to the version initially proposed by the European Commission in December 2021, the most important one being a one-year deferral of the entry into force, i.e., the rules would in principle apply to tax years starting as from 31 December 2023 (instead of 1 January 2023).

EU directive on Pillar Two

On 12 March 2022, an amended draft compromise text of the EU directive on Pillar Two (Directive) was published. The draft compromise text of 12 March 2022 includes numerous amendments compared to the version of 22 December 2021 (summarized in our earlier tax flash). Some of these amendments are essentially semantic. Amendments that indicate more fundamental technical shifts are summarized below. Estonia, Malta, Poland, and Sweden are not in agreement yet, for different reasons. A revised compromise text of the Directive will therefore be again on the Council’s agenda early April.

Date of entry into force

The entry into force of both the income inclusion rule (IIR) and the undertaxed profit rule (UTPR) would be delayed by a year, i.e., the IIR would apply in tax years beginning on or after 31 December 2023; the UTPR in tax years beginning on or after 31 December 2024.

Consistency with OECD Model Rules and guidance

Several modifications seek to strengthen the overarching goal of following as closely as possible the OECD Model Rules, the related commentary and any further guidance that may still be released, notably as regards the scope of “covered taxes” and additional simplification measures such as safe harbours.

Qualified IIR and Qualified Domestic Top-up Tax

Further guidance is provided on the ‘qualified IIR’ and ‘qualified domestic top-up tax’ to ensure that these domestic implementations are sufficiently consistent with the Directive and OECD Model Rules. A ‘qualified IIR’ is a set of domestic rules implementing an IIR (on entities in low-taxed jurisdictions). In addition, to allow jurisdictions to benefit from the top-up tax revenues collected on low-taxed constituent entities located in their territory, jurisdictions can implement a qualified domestic top-up tax. The revised proposal clearly states that jurisdictions are not allowed to grant any benefit related to those rules.

Election to apply a Qualified Domestic Top-up Tax

Member States could elect to implement a qualified domestic top-up tax for a 3-year period, automatically renewable unless revoked. Electing Member States should notify the European Commission of this election within four months following the adoption of a qualified domestic top-up tax. All constituent entities located in the Member State implementing such rules should pay the top-up tax to this Member State, and the top-up tax payable under the IIR or UTPR should correspondingly be reduced. According to the amended proposal, the qualified domestic top-up tax may be computed based on local accounting standard rather than the consolidating accounting standard, adjusted to prevent material competitive distortions (variation of income or expense of more than EUR 75 million compared to IFRS).

Equivalent regimes

The Council (i.e., the 27 EU finance ministers) should determine which non-EU jurisdictions have rules that are sufficiently similar to the OECD Model Rules and the Directive to be considered as qualified IIR.

Temporary opt-out

For the sake of proportionality, Member States in which no more than ten Ultimate Parent Entities (UPEs) of in-scope groups are located might elect not to apply the IIR and the UTPR for five fiscal years, the first of which starts as from 31 December 2023. When such election is made, the UTPR normally allocable to that Member State would be reallocated to the other jurisdictions entitled to levy UTPR. The election would have to be notified to the European Commission by 31 December 2023. The temporary opt-out from the GloBE rules by a given Member State would not affect other Member States’ obligation to levy top-up tax in respect of entities located in these latter Member States while the opting-out Member State of the (ultimate) parent entity does not levy IIR.


The preamble of the draft Directive emphasises that Member States should apply adequate and dissuasive penalties towards entities that do not comply with their obligations to file a GloBE information return and pay their share of top-up tax. The draft Directive also includes a new express reference to the obligation of a constituent entity to file and pay its share of top-up tax or to have an additional cash tax expense. On the other hand, the 5% of turnover penalty has been removed in the updated draft.

Clarifications of definitions

Several new provisions and/or expressions either (i) clarify definitions already included in the Directive (e.g., flow-through entity, qualified IIR, qualified domestic top-up tax, pension fund, etc.) or (ii) provide new definitions for the application of the Directive.

UTPR rebranding

The draft Directive rebrands the OECD’s “Undertaxed Payment Rule” as “Undertaxed Profit Rule”. This may be read as an attempt by the EU to align the name given to such rule to its actual nature (i.e., being a full backstop to the IIR focused on profits of low-taxed constituent entities instead of payments to low-tax jurisdictions).

OECD Commentary

The Model Rules for the IIR and the UTPR released on 20 December 2021 had triggered reactions and questions from the business community on a variety of topics such as the risk of levying top-up tax even if there is a jurisdiction-wide net loss in a given year, the application of the rules on deferred tax accounting, the transition rules, or the neutralisation of certain intra-group financing arrangements.

The commentary to the OECD Model Rules, which was published on 14 March 2022, does not change the scope of the OECD Model Rules but seeks to provide concrete examples and additional explanations on how they should be read and interpreted. The structure of the commentary follows the structure of the Model Rules.

Our Pillar Two team is working on a detailed assessment of the commentary and its impact for affected MNEs.

OECD Consultation

As announced on prior occasions, the OECD also seeks public input on the implementation of the Model Rules. It specifically stresses that the purpose is not to reopen the discussion on the policy choices underpinning the Model Rules; rather, the OECD looks forward to receiving suggestions on how to implement the Model Rules in a workable manner that ensures consistency across participating jurisdictions and limits the financial and administrative compliance burden for taxpayers and tax authorities.

In particular, the OECD asks about the need for further administrative guidance, the possibilities to simplify tax compliance, and the mechanisms to ensure a consistent and coordinated implementation and mitigate the risk of multiple taxation. The deadline for providing input is Thursday 11 April 2022.

Next steps for taxpayers

MNEs with presence in the EU might eventually have one more year than initially expected to adapt their tax compliance systems to the Pillar Two compliance requirements – although this also depends on the speed of implementation in non-EU jurisdictions. Nevertheless, tax departments of (potentially) in-scope MNEs can and should already start modelling the impact of the rules to identify red flags and potentially make changes to the structuring of intragroup transactions or the remittance of income in territorial tax jurisdictions, amongst other topics.

MNEs also get one more opportunity to contribute to the design of the implementation framework by stressing expected challenges, and proposing practical solutions that ensure the rules are effective while not making tax compliance overly burdensome and costly. Our Pillar Two team can support you in providing input.

How can we support you?

As more than 135 jurisdictions have committed to the Pillar Two rules, and given the very ambitious and tight implementation schedule, MNEs’ tax departments can and should already start modelling the impact of the rules to identify red flags and potentially make urgent changes to the structuring of intragroup transactions or the remittance of income in territorial tax jurisdictions. This effort is bound to be regularly updated in the coming months, as jurisdictions may also react to the Pillar Two rules through tax reforms, e.g., by introducing a domestic minimum 15% ETR for large MNEs.

Our Pillar Two team is available to support you in analysing and modelling the impact of the Pillar Two rules on your group, setting up compliance processes and exploring ways to mitigate increased taxation and complexity.

Should you have any question in the meantime, please contact a member of our Pillar Two team or your regular trusted contact at Loyens & Loeff.