EU agreement on Pillar Two / Minimum Taxation Directive

Introduction – EU agreement on Pillar Two

Eventually, after a number of failed attempts, the EU has reached agreement on the Minimum Taxation Agreement.

The 27 European Union Member States reached agreement on the 12 December 2022.

The agreement clears the way for the implementation of a minimum level of taxation for the largest companies. These reforms are also known as the Pillar Two or Minimum Taxation Directive.

The Directive has to be transposed into Member States’ national law by the end of 2023.

What is it?

Broadly, the agreed Directive reflects the global OECD agreement with some adjustments.

The new agreement will apply to any large group of companies whether domestic or international. The rules will apply to such organisations with aggregate revenues of over €750 million a year. As such, it will only apply to the biggest companies around the globe.

It should be noted that it is necessary for either the parent company or a subsidiary of the group to be situated within the EU.

The rate of the minimum tax

The effective tax rate is established for a location by dividing the taxes paid by the entities in the jurisdiction by their income.

Where this calculation results in a rate of tax below 15% then the group must ‘top-up’ the tax paid such that the overall rate is 15%.

What’s next?

The development means that the EU will be a pioneer around Pillar Two. However, it seems highly likely that other jurisdictions (I.e non-EU) will follow suit.

Further, by the end of this month (Jan 2023), it is expected that the OECD will publish its own guidelines for Pillar Two. Again, these should act as a catalyst for wider adoption of Pillar Two internationally.

In addition, it is expected that they will shed some light on some of the key outstanding issues around how the US rules (such as US GILTI rules) will conform with Pillar Two.

If you have any queries about the EU agreement on Pillar Two, or international tax matters generally, then please do not hesitate to get in touch.

The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article