The SH temporarily allow an MNE to avoid undertaking detailed P2 calculations in respect of low-risk countries in the initial years (FYs beginning before 2026 and ending prior to or on June 30, 2028). This is done by making use of the MNE’s existing country-by-country report (‘CbCR’) and financial accounting data with little to no modifications. The SH rely on profits before taxes (‘PBT’) as included in a qualifying CbCR and (deferred) income taxes from the financial accounts (‘SH Taxes’).

The SH apply on a jurisdictional basis. They deem the amount of top-up tax (‘TT’) due in respect of all constituent entities in a country to be zero if one of the following three tests is met:

  1. De Minimis Test: Total CbCR revenue is less than € 10M and PBT is less than € 1M.

  2. Simplified ETR Test: The Simplified ETR for a country is calculated by dividing the SH Taxes by the PBT. The simplified ETR needs to be at least the transition rate specified for the year (15% for 2024, 16% for 2025 and 17% for 2026).

    Illustrative example: The 2026 financial statements of an MNE reflect SH Taxes of 20 and its CbCR mentions PBT of 100. The test is met as the Simplified ETR is 20% which exceeds the Transition Rate for 2026 (17%).

  3. Routine Profits Test: PBT is no more than the so-called substance-based income exclusion (‘SBIE’) amount for constituent entities located in that country. The SBIE is a reduction of the P2 tax base for tangible assets and payroll costs. The percentage of the reduction gradually reduces from 10% (payroll costs) and 8% (tangible assets) to 5% over a 10-year period. The Routine Profits Test is always met if the PBT is nil or a loss.

Illustrative example: In 2024, an MNE has payroll expenses in a particular country of 100 tangible assets with a net book value of 200 for accounting purposes. The PBT equals 15. The SBIE is equal to (10% x 100 + 8% x 200 =) 16. The test is met for 2024 as the PBT (15) does not exceed the SBIE (16).

Meeting one of these tests can result in a reduction of the administrative and tax burden for MNEs. Even though the TT is deemed to be zero for the relevant country(ies), the MNE will still need to file a so-called ‘GloBE information return’. When an MNE could apply the SH but did not do so in a given year, it cannot apply the SH in subsequent years for that country.
Application of the SH can be unfavorable in case of intra-group asset transfers during the period in which the SH apply. That’s because a step-up to the market value of the asset will be denied in that case, whereas this would not be the case under P2 if no SH applied.
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