European Union: Minimum Tax Directive (Pillar Two) – EU Adoption And State Of Play

Following the announcement of political agreement, on 15 December 2022 the Council of the EU reached unanimous agreement to implement the EU Minimum Tax Directive (Pillar Two).

The final text of the Directive was published in the Official Journal of the EU on 22 December 2022, exactly one year after the initial proposal was released by the European Commission. The Directive (2022/2523) on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU therefore entered into force on 23 December 2022.

The Directive requires Member States to transpose the rules into domestic law by 31 December 2023. The main rule of the Directive (so called Income Inclusion Rule or IIR) will become effective on or after 31 December 2023 with the backstop rule (so called Undertaxed Profits Rule or UTPR) becoming effective on or after 31 December 2024.

The Directive provides the option for Member States to implement a qualified domestic top-up tax (QDMTT) that operates to increase the domestic tax liability of in-scope MNE groups within a jurisdiction to the minimum effective tax rate of 15% of profits.

In addition, the text allows delayed adoption of the rules up to 31 December 2029 by those Member States in which no more than 12 ultimate parent entities of in-scope MNE groups are based.

With this timeline in mind, attention now turns to the next steps that each EU Member State will take to transpose and implement the Directive domestically. All this while momentum on the implementation of Pillar Two is building in some non-EU jurisdictions and while there is ongoing work by the OECD on certain components of the Pillar Two package.

Indeed, on 20 December 2022, the OECD released the first three components of the package, including guidance on transitional safe harbors and penalty relief as well as public consultation papers on the Global Anti-Base Erosion (GloBE) Information Return and tax certainty. An expected fourth component in form of administrative guidance is expected to be released in early 2023.

For businesses, although the Pillar Two story is still unfolding, it is by understanding the implications of these developments that your group could be better prepared.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.