The primary rule under Pillar Two is the IIR. The IIR gives taxing rights to the UPE of the MNE group. In case of a US UPE, the IIR will not be applied at the level of the US UPE but at the level of its first subsidiary located in a country that has adopted the IIR. Special rules apply in – amongst others – cases of so-called Partially-Owned Parent Entities. 

The UTPR serves as a backstop to the IIR and is aimed at dealing with cases in which no Top-up Tax is imposed under the IIR or such Top-up Tax is not yet fully levied under an IIR. This could particularly be relevant for US MNEs as the US has not (yet) adopted the IIR in its domestic laws. Under the UTPR, any country where the MNE has operations may impose tax on its pro-rata share of the low-taxed income of another country where the MNE has operations (to the extent such low-taxed income is not subject to a QDMTT or IIR). This pro-rata share is determined pursuant to an allocation key that is based on employees and tangible assets in the countries that have adopted the UTPR. The UTPR does not require a(n) (top-down) ownership link between the jurisdiction imposing the UTPR and the jurisdiction with the undertaxed profits. This means that UTPR can be imposed by a subsidiary on the profits of its parent company and on the profits of a sister company of such subsidiary.  

A QDMTT allows countries to introduce a domestic Top-up Tax that is aligned with the Pillar Two rules and applies to domestic entities falling within scope of the Pillar Two rules. In essence, it enables countries to tax the undertaxed profits arising in their country before another country can tax such income under the IIR or UTPR. 

As a starting point, domestic corporate taxes have priority to the extent they count towards the GloBE ETR. If the GloBE ETR in a country is at least 15%, then Pillar Two should not be applicable with respect to group companies in that country. 

If the GloBE ETR in a particular country is below 15%, then it first needs to be considered whether that country of the LTCE implemented a QDMTT. If so, then that country will have the first right to tax the undertaxed profits. That also makes sense as the profits have their origin in that country. 
As a second step, CFC taxes (e.g., GILTI) will be allocated to the constituent entities that do not meet the 15% threshold. Generally speaking, CFC taxes are allocated to the LTCE itself instead of the CFC-owner(s). This increases the GloBE ETR of the LTCE and therefore reduces the amount of Top-up Tax in another country in respect of that particular LTCE. 
As a third step, the UPE can impose a Top-up Tax in case the GloBE ETR of the LCTE is still below 15% after applying the QDMTT and allocating CFC taxes in step 1 and 2 respectively. If the UPE does not impose such Top-up Tax, an IPE is allowed to impose the IIR. Special rules apply for – amongst others – Partially Owned Parent Entity structures.   
Step four is the application of the UTPR which serves as a backstop in case the IIR does not (fully) apply. The UTPR applies to any Top-up Tax left after having applied the previous steps. 

In order to be in scope of the Pillar Two rules, the consolidated revenue as derived from the qualifying (deemed) consolidated financial statements of the UPE of the MNE group has to be equal to at least EUR 750M in two out of the four years preceding the relevant year. Special rules apply in case of mergers or demergers.  

Based on the directive, EU countries should adopt legislation pursuant to which the IIR and the UTPR will enter into force for book years starting as from December 31, 2023, and December 31, 2024, respectively. South Korea – so far – has announced to implement both the IIR and the UTPR as from January 1, 2024. The United Kingdom will likely apply the IIR as from January 1, 2024, whereas both Hong Kong and Singapore have indicated to introduce the Pillar Two rules in 2025. Other countries may have different implementation dates. 

US MNEs could, amongst others, incur additional taxation due to Pillar Two in the following situations: 

  1. A US parent company (‘USCo’) holds an EU subsidiary (‘EU Sub’) which in turn holds a subsidiary (‘SubCo’) that does not meet the 15% GloBE ETR (e.g., because it benefits from a preferential IP regime or a tax holiday or is located in a tax haven). EU Sub will be subject to Top-up Tax on SubCo’s undertaxed profits under the IIR, in absence of USCo imposing such tax as UPE. 

  2. USCo itself does not meet the 15% GloBE ETR (e.g., because it benefits from tax incentives in the US such as FDII and/or tax credits). EU Sub could impose tax on the undertaxed income of USCo under the UTPR.

  3. USCo holds a (low-taxed) SubCo in another chain than EU Sub. EU Sub could be subject to tax on that SubCo’s undertaxed profits under the UTPR even though it does not hold an interest in SubCo. 

Particularly situations 2 and 3 could result in unexpected outcomes for US MNEs and should be taken into account by MNEs in their Pillar Two impact analysis. 

For Pillar Two purposes, a distinction has to be made between (i) QRTCs and (ii) NQRTCs.

A QRTC is a tax credit that will be refunded in cash (equivalent) to the extent the tax credit has not been used within a four year period to be offset against the corporate income tax of the taxpayer. In all other cases, a tax credit is considered an NQRTC.  
QRTC and NQRTC are treated differently for Pillar Two purposes in the GloBE ETR calculation. Such ETR is determined by dividing the Adjusted Covered Taxes (the numerator) by GloBE Income (the denominator). QRTC are treated as GloBE Income resulting in an increase of the denominator. NQTRC decrease the amount of Adjusted Covered Tax resulting in a decrease of the numerator. As QRTC have generally less impact on the GloBE ETR they are usually preferred over NQRTC for Pillar Two purposes. 
A simplified example to illustrate this: Let us assume that the GloBE Income of a Constituent Entity is 100, the Adjusted Covered Taxes are 15 and the tax credit is equal to 10.  

  • If the tax credit qualifies as a QRTC, the tax credit of 10 will be added to the GloBe Income. As a result, its GloBE Income is 110 (100 + 10) and its Adjusted Covered Taxes remain 15. The GloBE ETR is equal to 15 / 110 = 13.64%. 

  • However, the tax credit of 10 will reduce the Adjusted Covered Taxes in case it is an NQRTC. In such case, its GloBE Income remains 100 but its Adjusted Covered Taxes is reduced to 5 (15 minus 10). The GloBE ETR is equal to 5 / 100 = 5%.  

This can be relevant for US MNEs benefiting from tax credits such as the R&D tax credit or renewable energy tax credits in the US. 

The UTPR can give rise to unexpected outcomes for US MNEs as they could cause a non-US entity to levy Top-up Tax on the US UPE of the group or another LTCE in a situation where there is no direct ownership link. The concrete question in this case is whether such country would be entitled to tax the undertaxed profits of its US UPE in the absence of a Permanent Establishment within the meaning of article 5 of the relevant treaty with the US. 

The OECD takes the position that this is indeed possible and in the 2020 Blueprint they mention the following two arguments to support this position:
- First, they refer to the so-called savings clause in Article 1(3) of the OECD Model which says that tax treaties are not intended to restrict a jurisdiction’s right to tax its own residents.
- Secondly, they point to the fact that the IIR resembles a CFC rule and that it has been agreed upon by most OECD members that CFC taxes can be imposed under tax treaties. 
The question is whether this position is correct or not. We will not go into too much detail here, but we quickly wanted to highlight some arguments against this OECD interpretation:

  • Unlike a CFC measure, Pillar Two also targets low-taxed active business income and therefore has a much broader scope.

  • A CFC measure only applies top-down, whereas the UTPR could also be applicable in a bottom-up situation, e.g. where a sub taxes the low-taxed profits of its US parent company. 

And more fundamentally, the question arises whether it is permissible under tax treaties to tax income which has its origin in other countries without having any nexus in that country such as in the form of a Permanent Establishment. It may be good to keep in mind that when the OECD indicated in 2020 that the UTPR should not be an issue under existing tax treaties, that the UTPR was still intended to be an expense deduction limitation with a direct link between the deduction and the payment made to a LTCE. In such situation, there would still be a direct link to the LTCE, whereas such link is absent in the current form of the UTPR where the undertaxed income is allocated on the basis of a formula. The worry is that this could encourage countries across the globe to levy arbitrary taxes on companies which do not have a particular nexus with that country. 

The OECD confirmed in its Administrative Guidance that GILTI cannot be qualified as an IIR due to its global blending nature. The Administrative Guidance confirms that GILTI is considered a (Blended) CFC Tax Regime for Pillar Two purposes. This means that GILTI will be allocated to the Constituent Entities that do not meet the 15% threshold. Such GILTI allocation results in an increase of the GloBe ETR of the relevant LTCE.

The Administrative Guidance provides for a simplified allocation method of GILTI taxes for a limited period (only for FY beginning before December 31, 2025, not including FY ending after June 30, 2027). Pursuant to this allocation method, GILTI will in essence be allocated to LCTEs in a country with a combination of the lowest GloBE ETR and the highest GloBE income. This allocation key is therefore favorable for US MNEs.

Based on the OECD’s Administrative Guidance, tax paid pursuant to a QDMTT will be included in this calculation if the Blended CFC Tax Regime allows a foreign tax credit for the QDMTT. In a GILTI context, this may result in the following consequences: 

  • If QDMTT is not creditable in the U.S., CFCs may face double taxation where both a QDMTT and GILTI are charged. The reason for it is that GILTI would be allocated to entities that already meet the 15% threshold because of taxation under the QDMTT in that country. As a result, less GILTI can be allocated to LCTEs that could eventually be subject to Top-up Tax.  

  • If QDMTT is creditable against GILTI, the QDMTT amount will be included in an entity’s GloBE ETR, resulting in GILTI not being allocated to that entity. 

CAMT does not qualify as a QDMTT for Pillar Two purposes due to differences between a QDMTT and CAMT (incl. different threshold, different definition of income, different ETR calculation, different treatment of carve outs, carryover of losses and credits). 

Pillar Two contains transitional CbCR Safe Harbours designed as a short-term measure that would effectively exclude an MNE’s operations in certain lower-risk jurisdictions from the scope of GloBE in the initial years, including relief from GloBE compliance obligations. The transitional CbC Safe Harbour rules allow a US MNE to avoid undertaking detailed GloBE calculations in respect of a jurisdiction if it can demonstrate, based on its CbCR report and financial accounting data, that one of the below three tests is met for that specific jurisdiction. 

  1. De Minimis Test: Total revenue of less than EUR 10 million and PBT of less than EUR 1 million.  

  2. Simplified ETR Test: The MNE group has an ETR of at least the Transition Rate specified for the year (15% for 2023 and 2024, 16% for 2025 and 17% for 2026). Simplified ETR is calculated for a tested jurisdiction by dividing Covered Taxes as derived from the financial statements of the Constituent Entity (and therefore not as calculated under the Pillar Two rules) by PBT as included in the qualifying CbC report. 

  3. Routine Profits Test: The MNE group’s PBT is no more than the Substance-based Income Exclusion amount for entities resident in that jurisdiction. 

If a transitional Safe Harbour test is available and elected for a specific jurisdiction, the Top-up Tax for this jurisdiction is zero. There should also be no QDMTT consequences for such jurisdiction. In essence, the transitional Safe Harbour rules identify low-risk jurisdictions, in which there are no Top-up Tax consequences and full-fledged GloBE compliance will not apply. Permanent Safe Harbour rules (aside from the one currently included in the Pillar Two rules) are to be published by the OECD.   

We have already seen in recent years that MNEs are centralizing their holding companies in countries where they have an operational presence. This is caused by increased scrutiny from the perspective of the source countries to deny treaty benefits to holding companies which are perceived to have insufficient substance. The question is what the introduction of Pillar Two will mean for the future of holding companies. 
We understand from recent experience that some US MNEs are considering transferring their LTCE from underneath their (EU) holding company (HoldCo) structure to a country which has not yet adopted the Pillar Two rules. The main benefit of this seems that it buys them an additional year of time as the IIR already becomes effective as of December 31, 2023, whereas the UTPR becomes effective one year later. 
However, the question is whether this is also advantageous in the long run. The problem is that several countries could start taxing the profits of the undertaxed entities once the UTPR becomes effective as per December 31, 2024. This could result in allocation questions between countries (i.e., countries challenging that they should get more UTPR allocated to them) and can also result in additional Top-up Tax in certain situations.  
In order to shut down the potential application of the UTPR, it could be considered to hold this LTCE via a HoldCo (again) in a country which adopted the IIR. Preferably this should be a country with a stable and business friendly tax administration. The main benefit of such HoldCo structure for Pillar Two purposes is that there is a clear view in which jurisdiction the Top-up Tax needs to be paid. This mitigates the risk of disputes on UTPR allocation and reduces the compliance burden.  
To summarize the above, the flat structure without a HoldCo seems beneficial in the short term, but the use of a HoldCo could be beneficial in the longer run once the UTPR becomes effective. 

The starting point for the GloBE ETR calculation is financial accounting net income or income, which is subsequently adjusted to eliminate certain B/T Differences. An example of such adjustment for Pillar Two purposes relates to dividends and capital gains. This is caused by the fact that dividends and capital gains derived from qualifying participations are treated as tax exempt under the participation exemption in many countries, whereas they are included as income in the consolidated statements. This would be an issue for Pillar Two purposes as income would be taken into account which is not subject to tax. Pillar Two recognizes that this is an undesirable outcome and adjusts this by excluding dividends (Excluded Dividends) and capital gains (Excluded Equity Gains or Losses) from qualifying participations (generally shareholdings of 10% or more) from the Pillar Two computation as income. In addition, taxpayers can make an election to mitigate the impact of certain B/T Differences. This concerns for instance differences in the treatment of stock-based compensation and debt releases for financial accounting and tax purposes. 

However, not all B/T Differences are adjusted. The remaining B/T Differences can be split in (a) permanent differences and (b) temporary differences. It is important to distinguish between these categories as only permanent differences generally have an impact for Pillar Two purposes and temporary differences generally have less of an impact. 
Examples of permanent B/T Differences which have an impact for Pillar Two purposes are for instance: 

  • Preferential IP regimes.

  • The depreciation of goodwill in the tax accounts, but not in the financial accounts.

  • Debt / equity classification differences (financial accounting vs tax). E.g. preference shares which are treated as equity for tax purposes, but debt under financial accounting standards.

  • Participation exemption systems which apply for tax purposes to income derived from shareholdings of less than 10%, whereas such income is recognized for Pillar Two purposes as the Pillar Two adjustment only relates to shareholdings of at least 10%. 

Temporary differences exist if the tax and financial accounts both recognize the income, but at different points in time. Temporary differences are addressed via deferred tax accounting. For Pillar Two purposes, deferred taxes are capped at a 15% rate. An example of a temporary difference that should not have an impact for Pillar Two purposes is (accelerated) depreciation on tangible assets. 

Abbreviations & Explanations

We made an overview of all the abbreviations mentioned in our Q&A.

Qualified Domestic Minimum Top-up Tax, a domestic measure that low-taxed jurisdictions might introduce to ensure their own jurisdiction imposes additional tax resulting in an ETR of 15%.

Undertaxed Profit Rule.

Income Inclusion Rule.

Ultimate Parent Entity.

Intermediate Parent Entity.

Low-Taxed Constituent Entity.

Controlled Foreign Company.

Global Intangible Low Taxed Income.

Additional tax levied under Pillar Two to ensure a GloBE ETR of 15% is reached.

Multinational Enterprise.

The Effective Tax Rate as determined in accordance with the Pillar Two rules.

Administrative Guidance in relation to the Pillar Two rules published by the OECD in February 2023.

Profit before tax.

Qualified Refundable Tax Credit, a tax credit that is designed in such a way that it provides for a cash (equivalent) refund within four years.

Non-Qualified Refundable Tax Credit, a tax credit that is designed in such a way that it does not provide for a cash (equivalent) refund within four years.

Corporate Alternative Minimum Tax.


Book-to-tax differences.

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