M&A and Pillar Two

What is Pillar Two?

The OECD/G20 project to introduce a global minimum tax ("Pillar Two") is the most ambitious reform of international tax policy since the League of Nations introduced double tax treaties 100 years ago. It provides that multinational groups with consolidated revenues of at least € 750 million will be subject to a minimum tax rate of 15% per tax jurisdiction.

Why does it matter?

The OECD's GloBE Model Rules and accompanying documents are highly complex and require expert knowledge in tax law and international accounting standards such as IFRS, US GAAP and Swiss GAAP FER. Pillar Two Top-up Taxes differ in important aspects from traditional income taxes and therefore require a separate and differentiated approach in M&A transactions. Pillar Two will become an integral part of any M&A transaction and will play a crucial role in due diligence, transaction structuring, negotiations of the transaction documents and the subsequent integration of the target.

What are the key issues?

• Pillar Two top-up taxes differ greatly from traditional income taxes. Differences include tax liability, group taxation, tax base, elections rights, and safe harbours.
• Pillar Two necessitates broadening tax due diligence and understanding of the Pillar Two position of the Subject Group. Considerations include scoping of the tax due diligence scope, identification of tax risks in connection with Pillar Two, tax opportunities in relation to the subsequent integration of the Subject Group, tax information and tax base.
• The Pillar Two revenue threshold for mergers and demergers is subject to special provisions. There is a general ‘two in four’ rule as well as cases where different rules are applied. 
• A transaction can shelter the Pillar Two tax liability of the buyer. Sheltering the buyer’s low-taxed entities is similar to tax losses carry-forwards. Substance-based income exclusion of high substance targets also allows for sheltering. 
• A transaction can impact a buyer’s CbCR safe harbour position. There are three ways to satisfy the transitional CbCR safe harbour: the simplified effective tax rate (ETR) test, the routine profits test and the de minimis test.
• It is necessary to have a separate Pillar Two clause in the transaction agreement. Standard clauses for representations and warranties, as well as indemnifications, need to be significantly enhanced with regard to Pillar Two. Special features include co-operation, indemnity and data. 

Consequences of non-compliance

In addition to the obligation to pay a top-up tax under Pillar Two, failure to comply with the filing requirements within 15 months after the fiscal year end of each constituent entity results in penalties.

A deep dive into Pillar Two and M&A

Through our in-depth focus on Pillar Two and its impact on M&A, we’ll help you understand the key issues. We make sure your business is prepared.