For more information on Pillar One we refer to our tax flashes of 13 October 20202 July 2021 and 11 October 2021.


Pillar One is meant to address tax challenges that arise from the digitalisation of the economy. Amount A (deemed “residual profit”) provides a new taxing right over a portion of the profits that large and highly profitable enterprises realise in market jurisdictions where they supply goods or services, or where consumers or users are located. The Model Rules for Domestic Legislation on Scope contain a template that can be implemented in domestic law in order to determine whether a Group qualifies as a Covered Group for the purpose of Amount A of Pillar One.

We refer to our publications of 7 February 2022 and 24 February 2022 for the other published building blocks on Pillar One for nexus, revenue sourcing rules and the framework for tax base determination rules.

Title 9: Definitions

Title 9 of the Model Rules on Scope contains definitions for identifying the Covered Group and determining revenue and profitability.

  • Ultimate Parent Entity. Amount A uses a specific concept of a Group, where the Ultimate Parent Entity (“UPE”) is the entity where Consolidated Financial Statements are commonly prepared. The UPE is the entity that holds a Controlling Interest in other Group Entities and therefore serves as the starting point for identifying all Group Entities. Furthermore, it should be noted that a standalone entity that satisfies the thresholds and profitability tests can also qualify as UPE.
  • Excluded Entities. There are a few exceptions which provide that certain Excluded Entities cannot qualify as UPE to ensure a standardized approached to defining a UPE, such as Investment Funds or Real Estate Investment Vehicle.
  • Any legal person can qualify as a Group Entity. A Group is formed by entities that are included in Consolidated Financial Statements. A Controlling Interest means an Ownership Interest such that the interest holder is or would be required to prepare Consolidated Financial Statements.
  • Anti-fragmentation. To prevent fragmentation of ownership that is meant to avoid being in scope of Amount A, the Model rules include an anti-abuse provision including a principal purpose test. This means that if the UPE is controlled by an Excluded Entity with one of the principal purposes to create more than one Entity that qualifies as UPE in order to fail the global revenue test, the global revenue test is still deemed to be met if the Excluded Entity has a Controlling Interest and the sum of global revenue of all Fragmented Groups is greater than EUR 20 billion.
  • Pre-Tax Profit Margin. In order to determine the Total Revenues of a Group, based on Title 5 of the Pillar One Model Rules, certain adjustments must be made to the revenues reported in the Consolidated Financial Statements of the Group. These adjustments include reversing tax expenses, dividends, equity gains or losses and disallowed expenses. Furthermore, certain adjustments, such as loss carry forwards and book-to-tax adjustments, must be made to the Financial Accounting Profit (or Loss), based on Title 5. After these adjustments, the Pre-Tax Profit Margin is determined by dividing the Adjusted Accounting Profit (or Loss) by the Total Revenues.

Title 2: Scope rules

The scope rules are designed to ensure Amount A only applies to large and highly profitable Groups, where these are applied at the level of a Group. In order to provide certainty, the rules are meant to quantitatively and objectively determine whether a Group is in scope.

For the application of the tests below, the relevant period is the reporting period with respect to which the Group prepares Consolidated Financial Statements. In case of reorganisations such as (de)mergers, the prior period test and average test are modified accordingly.

To determine whether a Group qualifies for the application of Amount A, the following steps are undertaken:

  • Step 1: threshold tests. There are two threshold tests in order to determine whether a Group is in scope:
    1. Global revenue test: The Group’s total pre-tax Qualifying Revenues must exceed an absolute amount of EUR 20 billion in a Period; and
    2. Profitability test: The Group’s profitability relative to total Qualifying Revenues must exceed 10%.
  • Step 2: profitability tests. In order to ensure that Groups with volatile profitability are not in scope, the Group’s profitability must exceed the 10% threshold:
    1. Period test: In the current Period; and
    2. Prior period test: In at least two of the four prior Periods; and
    3. Average test: On average across all four prior Periods.
  • Step 3 (optional): Extractives and Regulated Financial Services Exclusion. A Group can only be a Covered Group if its non-excluded global revenue (“Qualifying Revenue”) meets the threshold and profitability tests. This means that the Group’s revenues should be corrected by excluding Revenues and Profits from Extractives and Regulated Financial Services, after which the threshold and profitability tests are re-applied in order to determine whether a Group is in Scope. Both exclusions are further discussed below.

Schedule F: Extractives Exclusion

The Extractives Exclusion will exclude from the scope of Amount A the profits from Extractive Activities. As described above, the general scope rules will be applied first in steps 1 and 2. Then, in step 3, the threshold and profitability tests are re-applied after excluding the revenue from Extractives Activities.

It is imperative that two requirements are satisfied in order to apply the Extractives Exclusion:

  • Requirement 1: product test. The Group must sell an Extractive Product, which includes minerals, mineraloids, hydrocarbons, and similar materials extracted from the earth’s crust, and products resulting from the Qualifying Processing of such materials. Extractive Products also includes licenses and exploration or development assets to explore for or exploit the materials.
  • Requirement 2: activities test. The Group must conduct Exploration (searching and assessing resource deposits or reservoirs), Development (drilling, excavating or constructing infrastructure) or Extraction (removal of Extractive Products, including the Qualifying Processing and Transportation).

The revenue of Extractive Activities is determined based on the deemed Delineation Point, i.e., where there is a (deemed) third-party sale or (deemed) intra-group transfer of the Extractive Products. In order to accurately identify the profits and profitability of Extractive Activities, intra-Group revenue and cost allocations must be identified.

To simplify the process of determining revenue and profits, some Groups will be able to apply the Disclosed Operating Segment Approach, which requires that a disclosed segment in the Consolidated Financial Statements is made up of at least 75-85% of excluded revenue from Extractive Activities. If this approach is infeasible, profits can be identified using the Entity-level Approach, where an entire Entity qualifies for the Extractives Exclusion if at least 75-85% of revenue is from Extractive Activities and the entity does not exceed EUR 1 billion of revenue from activities that are otherwise in scope of Amount A.

Once the revenues and profits from Extractive Activities are identified and excluded, the threshold and profitability tests are re-applied to determine whether a Group is in scope of Amount A. Due to the application of the Exclusion, profits derived from Extractive Activities will not be reallocated as part of Amount A.

Schedule G: Regulated Financial Services Exclusion

The Regulated Financial Services Exclusion will exclude the revenues and profits from Regulated Financial Institutions (“RFI”) from the scope of Amount A. The reason behind the Exclusion is that the financial sector is subject to regulation that reflects the risks taken on by the Institution and generally helps to already align the location of profits with the market.

As described above, the general scope rules will be applied first in steps 1 and 2. Then, in step 3, the threshold and profitability tests are re-applied after excluding the revenue from Regulated Financial Services.

Seven types of Regulated Financial Institutions (“Qualifying RFI”) can be excluded: Depositary Institutions; Mortgage Institutions; Investment Institutions; Insurance Institutions; Asset Managers; Mixed Financial Institutions and RFI Service Entities.

The requirements for Qualifying RFIs are:

  • Requirement 1: licensing requirement. The Group Entity must be licensed to carry on its activities under the laws or regulations of the jurisdiction in which the Group Entity does that business. This also includes cases where the laws or regulations of that Jurisdiction – such as within the European Economic Area – provide for the recognition of the license of another Jurisdiction, for example, under equivalence regimes.
  • Requirement 2: regulatory capital requirement. The Group Entity must be subject to (i) capital adequacy requirements that reflect the Core Principles for Effective Banking Supervision as provided by the Basel Committee on Banking Supervision, (ii) Objectives and Principles of Securities Regulation as adopted by the International Organisation of Securities Commissions (IOSCO) and the related implementing methodology, or (iii) solvency or capital adequacy standards incorporating a risk-based capital measure.
  • Requirement 3: activities requirement. The activities requirement relates to the seven types of RFIs described above, i.e., depositing; financing; dealing, broking, and trading; hedging; participating in underwriting, M&A, syndication, or securitisation; holding, transferring, controlling, administering or distributing financial assets; insuring; investing in, administering, managing or distributing interests in, an Investment Fund or Real Estate Investment Vehicle, Financial Assets, or money for or on behalf of other persons; and performing services exclusively for the benefit of one or more other RFIs.

Once an Entity is a Qualifying RFI, the calculation of the excluded profits is performed on an Entity-by-Entity basis, so every in-scope Entity in the Group must be identified. Then, the Qualifying RFIs must be consolidated into one segment for Amount A purposes, using a “top-down” approach (i.e., excluding third party revenues and costs from RFIs and including related-party revenues and costs derived from transactions with the RFIs) or a “bottom-up” approach (i.e., recombining the in-scope entities into a consolidated bespoke segment).

Once the revenues and profits from Regulated Financial Services are identified and excluded, the threshold and profitability tests are re-applied to determine whether the Group is in scope of Amount A. Due to the exclusion, profits derived from Regulated Financial Services will not be reallocated as part of Amount A.

Open questions

There are three open issues that remain unaddressed in the Model Rules on Scope:

  • Whether the total revenues should be subject to equivalent rules as the prior period test and the average test (currently, these tests are only applied to profitability);
  • Whether the prior period test and average test should apply permanently (which is currently drafted), or as an “entry test” only.

What can taxpayers do?

  • Based on the details in the Model Rules, it can be determined whether your MNE would be a Covered Group under the Pillar One Rules. The rules on revenue determination and nexus are outlined in more detail in Title 5 of the Pillar One Draft Model Rules. For the sourcing rules, we refer to our previous publication of 7 February 2022.
  • Subsequently, the application of the profitability tests can be determined based on the Group’s Total Qualifying Revenues (global revenue test) and the Adjusted Accounting Profit should be determined for the past four years. These can be used to arrive at the Pre-Tax Profit Margin (profitability test) for each of these years.
  • Then, it must be determined whether the Group’s profitability exceeds 10% in the current period (period test), in at least two of the four prior periods (prior period test), and on average across all four prior periods (average test). If applicable, the Extractives Exclusion or the Regulated Financial Services Exclusion should be applied to redetermine whether the Group is in scope of Amount A.

Following the above assessment of whether an MNE Group is in scope the expected impact of Pillar One can be further assessed. Loyens & Loeff can assist in preparing a Pillar One Impact Assessment Model. We would be happy to assist you in preparing a reaction to the consultation or any other step indicated above. Furthermore, we will keep you informed about further developments. Should you have any question or need assistance in assessing the impact of the rules, please contact a member of our Pillar One & Pillar Two team or your trusted Loyens & Loeff adviser.


For more information, please reach out to Harmen van Dam, Jan-Willem Kunen, Pierre-Antoine Klethi and Aline Nunes.