Global Tax Alert: European Union reached agreement on Minimum Taxation Directive

After failed previous attempts, on 15 December 2022 the 27 European Union Member States reached agreement on a minimum level of taxation for largest corporations, also known as the Pillar Two or Minimum Taxation Directive. The agreed text of the Directive, which aims to implement the Pillar Two of the OECD/G20 Agreement, is based on the latest version published on 30 November 2022. The Directive has to be transposed into Member States’ national law by the end of 2023.

In general, the Directive reflects the global OECD agreement with some adjustments which aim to guarantee conformity with EU law. It expands the scope (including MNEs without entities abroad) and tends to the harmonization of a binding IIR within the European Union. As a consequence, once implemented, there will be less pressure on the need for an UTPR. The rules will apply to any large group, both domestic and international, including the financial sector, with combined financial revenues of more than EUR750 million a year, and with either a parent company or a subsidiary situated in an EU Member State.

Under the Directive, the calculation of the effective tax rate will be made by the ultimate parent entity of the group (unless the group assigns another entity) following what has been agreed upon at the international level. The effective tax rate is 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 15%, the group must pay a top-up tax to bring its rate up to 15%.

The Directive allows the EU Member States to exercise the option to apply a domestic top-up tax to low-taxed domestic subsidiaries. This option will allow the top-up tax due by the subsidiaries of the multinational group to be charged locally in the respective Member State, and not at the level of the parent entity.

While this development means that the European Union acts as a frontrunner in the implementation of Pillar Two, it seems only matter of time that other jurisdictions outside the European Union will follow.

In the meantime, it is also anticipated that the OECD will publish its implementation guidelines for Pillar Two by the end of January 2023. The implementation guidelines should be another important step forward in creating momentum towards broader implementation of Pillar Two amongst the Inclusive Framework members. The implementation 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.

Considering the implementation timeline within and outside the European Union it is advised that companies start assessing the impact of Pillar Two on their businesses.

For more information, please contact either of the authors or your usual DLA Piper contact.