The EU minimum corporate tax and Pillar Two

by Maria Ström & Victor Elovsson


On 22 December 2021, the European Commission proposed a new directive determining a minimum applicable tax rate to ensure a global minimum effective tax rate of 15% for large multinational enterprises operating in the EU. The proposal is based on the OECD Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” rules).

Covered companies

The directive is proposed to apply to large groups, including the financial sector, with combined financial revenues of more than 750 million euros a year, and with either a parent company, subsidiary or branch situated in (at least one of) the EU member states.

Excluded companies

In line with the OECD/G20 framework agreement, government entities, international or non-profit organisations, pension funds or investment funds that are parent entities of a multinational group are proposed to fall outside of the scope of the EU directive.

The draft directive further excludes international shipping income and partly ancillary shipping income.

Calculating the minimum tax

The effective tax rate will be established per jurisdiction by dividing taxes paid by the entities in the jurisdiction by their income. If the effective tax rate for the entities in a particular jurisdiction is below the 15% minimum, then the rules are triggered and the group must pay a top-up tax to bring its rate up to 15% (referred to as the income inclusion rule).

The calculations will be made by the ultimate parent entity of the group unless the group assigns another entity.

Where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules, the undertaxed payments rule will allocate any residual amount of top-up tax to group entities in the EU. The amount of top-up tax that an EU member state will collect from the entities of the group in its territory will be determined by a formula based on employees and assets.

EU adjustments

Although the draft directive follows the Pillar Two rules closely, some adjustments have been proposed to make it compatible with EU law. In particular, the proposed directive will include purely domestic groups. In contrast, Pillar Two applies to multinational groups so that a parent entity subjects only its foreign subsidiaries to the income inclusion rule. This adjustment is required so that domestic arrangements are not treated more favourably than cross-border ones so as to comply with the freedom of establishment, one of the EU’s fundamental freedoms.

The OECD model rules allow jurisdictions the option to apply a qualifying domestic minimum tax. The draft directive allows EU member states to opt to apply a domestic top-up tax to low taxed domestic subsidiaries. This option will allow the top-up tax due from the subsidiaries of the multinational group to be charged within the relevant EU country, and not in the jurisdiction of the parent company.

Next steps

EU member states will need to unanimously agree in Council. The European Parliament and European Economic and Social Committee will also need to be consulted.

The Commission have proposed that EU member states transpose the directive into their national laws by 31 December 2022 for the rules to come into effect from 1 January 2023. The introduction of the undertaxed payment rule will be deferred to 1 January 2024, as envisaged by the OECD.

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