Minimum Taxation Directive

Introduction

The European Union (EU) has recently reached an agreement on the Minimum Taxation Directive, which aims to ensure that large companies pay a minimum level of tax in the EU. This directive, also known as Pillar Two, is a set of rules agreed upon by the 27 EU member states and will come into force in 2023.

Key provisions of the Minimum Taxation Directive

The Directive applies to any large group, both domestic and international, including the financial sector, with combined financial revenues of more than EUR 750 million per year and a presence in an EU member state. It requires that the effective tax rate for entities in a particular jurisdiction be at least 15%. This rate will be applied to the company’s total profits, regardless of where they are generated. The Directive also includes provisions to prevent companies from shifting profits to countries with lower tax rates.

Domestic top-up tax option

In addition to the minimum effective corporate tax rate, the Directive allows EU member states to apply a domestic top-up tax to low-taxed domestic subsidiaries. This option allows the top-up tax due by the subsidiaries of a multinational group to be charged locally in the respective EU member state, rather than at the level of the parent entity.

Future developments

It is expected that other jurisdictions outside the EU will adopt similar rules in the future. The OECD is also expected to publish implementation guidelines for Pillar Two by the end of January 2023. These guidelines are expected to provide clarity on some of the key outstanding technical matters of Pillar Two, including how the US rules, and in particular the US GILTI rules, will fit into the context of Pillar Two.

Impact on businesses

Considering the implementation timeline within and outside the EU, it is advisable for companies to start assessing the potential impact of Pillar Two on their businesses.