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EU proposed directive implementing the Pillar Two global minimum tax model rules published by OECD inclusive framework

Further to the publication of the G20/OECD inclusive framework on BEPS’ Global Anti-Base Erosion Model Rules (Pillar Two) (“OECD inclusive framework model rules”) designed to ensure a global minimum level of taxation for multinational groups (by reference to a minimum effective tax rate of 15%), the European Commission (EU Commission) proposed on 22 December 2021 a draft directive to implement the OECD inclusive framework model rules in a coherent and consistent way across EU member states. This proposal delivers on the EU's pledge to move extremely swiftly and be among the first to implement the political consensus deriving from the OECD/G20 inclusive framework on Pillar Two.


The effective taxation at a rate of a minimum of 15% is calculated per jurisdiction as covered taxes divided by the profit and loss attributable to constituent entities for that jurisdiction. As a reminder, the Pillar Two principles are based on the following:

  • The two domestic tax rules, the income inclusion rule (IIR) and its “backstop,” the undertaxed payments rule (UTPR), together known as the Global Anti-Base Erosion (GloBE) rules. The UTPR would be applied by member states if the global minimum rate, calculated according to the IIR, is not imposed by a non-EU country where a group entity is based.
  • The subject to tax rule (STTR) is a treaty-based rule that allows source jurisdictions to impose source taxation on certain related party payments that are subject to tax in the payee’s jurisdiction below a minimum adjusted nominal rate.

In line with scope of the OECD inclusive framework model rules issued on 20 December 2021, the draft directive would implement only the GloBE rules. The model treaty provision to give effect to the STTR is expected to be issued early in 2022.

The draft directive closely follows the OECD model rules, with some adjustments to guarantee conformity with EU law.

EU GloBE rules

The draft directive would extend the scope of the GloBE rules to large-scale purely domestic groups, i.e., groups of which all entities are located in the same EU member state, in order to ensure compliance with the fundamental freedoms to avoid any risk of discrimination between cross-border and domestic situations. All entities, including the parent entity that applies the IIR, that are located in a low-taxed member state would be subject to the top up tax. Equally, constituent entities of the same parent entity that are located in another low-taxed member state would be subject to the top up tax.

The draft directive would apply only to entities located in the EU that are members of multinational enterprise (MNE) groups or large-scale domestic groups that meet the annual threshold of at least EUR 750 million of consolidated revenue in at least two of the four preceding years. This threshold would be consistent with the threshold adopted in existing international tax rules such as the country-by-country reporting rules.

In line with the OECD inclusive framework model rules, the following entities are excluded from the scope of the draft directive:

  • Government entities;
  • International organisations;
  • Non-profit organisations;
  • Pension funds;
  • Investment entities and real estate investment vehicles that are the ultimate parent company of a group; and
  • Entities that are owned at least 95% by excluded entities.

Other provisions foreseen by the draft directive are:

  • A conditional five-year transitional phase for MNE groups in the initial phase of their international activity; and
  • A de minimis exclusion for MNE groups or large-scale domestic groups that have an average revenue of less than EUR 10 million and an average qualifying income or loss of less than EUR 1 million in a jurisdiction. The top up tax should not be paid even if the ETR is below the minimum tax rate in that jurisdiction.

The directive provides the following flow chart illustrating the operation of the rules in the EU:

In order to preserve sovereignty of member states, the draft directive provides that a member state may opt to apply the top up tax domestically to constituent entities located in its territory (domestic top up tax). This election allows the top up tax to be charged and collected in the jurisdiction in which the low level of taxation occurred, instead of collecting all the additional tax at the level of the ultimate parent entity. When the election is exercised, the parent entity applying the IIR will be obliged, when calculating its top up tax in respect of the relevant jurisdiction, to reduce, up to a minimum of zero, the IIR by the amount of the qualified domestic top up tax due by those constituent entities.

While the OECD will peer review the national transposition of the GloBE rules, the proposed directive contains provisions to determine the equivalence of laws of certain non-EU countries to the IIR and sets out four conditions which need to be fulfilled for granting equivalence, namely that the jurisdiction:

  • Enforces a set of rules in accordance with which the parent entity of an MNE group must calculate and collect its allocable share of top up tax in respect of the low-taxed constituent entities of the MNE group
  • Establishes a minimum effective tax rate of at least 15% below which a constituent entity is considered as low-taxed;
  • Allows only the blending of income of entities located within the same jurisdiction for the purpose of computing the minimum effective tax rate; and
  • Provides for relief for any top up tax that was paid in a member state when applying the IIR set out in the draft directive.

The inclusive framework is expected to verify in 2022 whether the US global intangible low-taxed income (GILTI) regime meets the equivalence conditions after the US tax reform is completed.

Interaction with other tax policy provisions and reforms

According to the EU Commission, the OECD inclusive framework model rules and the controlled foreign company (CFC) rules under the anti-tax avoidance directive (ATAD) would apply in parallel. In practice, ATAD CFC rules would apply first and any additional taxes paid by a parent company under a CFC regime in a given fiscal year would be taken into consideration in the GloBE rules by attributing those to the relevant low-taxed entity (i.e., the CFC) for the purpose of calculating its jurisdictional effective tax rate. Consequently, the ATAD CFC rules will not be amended for the time being.

According to the proposal, “the transposition of the GloBE rules in the EU should pave the way for agreeing the pending proposal for recasting the Interest and Royalties Directive (IRD), which has been in the Council since 2011. The aim of the recast Directive was to make the benefits of the Directive (which eliminates withholding tax obstacles to cross-border interest and royalty payments within a group of companies) conditional on the interest being subject to tax in the destination state. Some Member States held the view that the IRD should go further and set a minimum level of tax in the destination state as a condition for benefiting from the absence of withholding tax. The implementation of the GloBE rules in the EU should resolve the issue under discussion for recasting the IRD.”

Next steps

Member states will need to unanimously agree the text of the directive and adopt the directive in the Council of the EU under the special legislative procedure. The European Parliament and European Economic and Social Committee also will need to be consulted and give their opinion.

The French Presidency of the Council of the EU is aiming for an agreement by June 2022 at the latest and ideally even earlier, with a view to the directive applying as from 1 January 2023. The timing will be challenging for member states who must transpose the directive into domestic law.

It is important to note that EU members of the G20/OECD Inclusive Framework on BEPS already are supporting the global agreement that the Commission proposal is implementing. Cyprus is the only EU member state that is not a member of the inclusive framework and as such has not formally committed to the agreement; however, the EU Commission is expecting Cyprus to support the directive.

In 2022, the EU Commission will put forward a transparency proposal linked to this one, requiring certain large groups to publish their effective tax rates leveraging on the calculations performed under the directive implementing the OECD inclusive framework model rules.

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