Global minimum tax (Pillar Two)

What is global minimum tax under Pillar Two?

Global minimum tax, commonly referred to as Pillar Two, is an international tax framework developed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. Its purpose is to ensure that large multinational enterprise groups pay a minimum level of tax in each jurisdiction in which they operate. The core standard is a 15% minimum effective tax rate, calculated on a jurisdiction-by-jurisdiction basis. This threshold is set out in the OECD Global Anti-Base Erosion Model Rules published in 2021 and reflected in Council Directive (EU) 2022/2523.

Pillar Two does not replace domestic corporate income tax systems. It operates as an additional layer of taxation. If the effective tax rate of a covered group in a particular jurisdiction falls below 15%, a top-up tax may be charged in respect of low-taxed profits, generally to bring the effective taxation of excess profits in that jurisdiction up to the agreed minimum. The rules are aimed mainly at reducing incentives for profit shifting to low-tax jurisdictions and limiting tax competition based solely on very low nominal or effective rates.

The regime generally applies to multinational enterprise groups with annual consolidated revenue of at least EUR 750 million in at least two of the four fiscal years preceding the tested year. This revenue threshold is provided in the OECD Model Rules and in the EU Pillar Two Directive. In the European Union, the Directive also extends the framework to certain large-scale domestic groups meeting the same revenue threshold.

How does Pillar Two work in practice?

The Pillar Two system is based on the Global Anti-Base Erosion rules, often called the GloBE Rules. These rules require a covered group to determine, for each jurisdiction, the amount of qualifying income or loss, the amount of covered taxes, and the resulting effective tax rate. If the jurisdictional effective tax rate is below 15%, a top-up tax may arise.

The main charging mechanisms include the Income Inclusion Rule, the Undertaxed Profits Rule and the Qualified Domestic Minimum Top-up Tax. The Income Inclusion Rule generally allows the jurisdiction of the ultimate parent entity or an intermediate parent entity to tax low-taxed income of subsidiaries. The Undertaxed Profits Rule may apply as a backstop where low-taxed income is not fully captured under the Income Inclusion Rule. A Qualified Domestic Minimum Top-up Tax allows the jurisdiction where the low-taxed income arises to collect the top-up tax locally, if the domestic rule meets agreed international standards.

In practice, Pillar Two requires groups to combine tax, accounting and legal analysis. The calculation is not limited to the statutory corporate income tax rate. It depends on financial accounting data, deferred tax adjustments, covered tax definitions, entity classification, ownership structure, safe harbours and jurisdictional blending. This means that a jurisdiction with a nominal corporate tax rate above 15% may still require analysis, while some low-tax outcomes may be mitigated by specific adjustments or transitional reliefs.

When should a business assess Pillar Two exposure?

A Pillar Two assessment should be considered by groups that meet, or may soon meet, the EUR 750 million consolidated revenue threshold. It is also relevant for subsidiaries and local management teams of international groups, even where the ultimate parent company is located outside Poland or outside the European Union. Local entities may be required to collect data, support group reporting, calculate domestic top-up tax exposure or comply with filing and notification obligations under applicable implementing legislation.

Pillar Two may become important during business acquisitions, reorganisations, financing transactions, transfer pricing reviews, establishment of holding structures, tax incentive planning and financial reporting. A transaction that changes the group perimeter, ownership chain or allocation of income may affect the effective tax rate calculation and the allocation of top-up tax. The rules can also influence how tax incentives, special economic zone benefits, research and development reliefs, deferred tax assets and losses are reflected in group tax reporting.

Early review is important because Pillar Two compliance depends on data that may not have been historically collected for tax purposes. Accounting systems, consolidation packages, transfer pricing documentation and local tax returns may all contain relevant information, but not always in the format required for GloBE calculations. A timely legal and tax analysis can help identify reporting gaps, reduce the risk of inconsistent filings, and avoid unexpected tax costs or disputes with tax authorities.

What risks are associated with global minimum tax?

The main risks include incorrect identification of covered entities, incomplete jurisdictional calculations, failure to apply safe harbour rules properly, and insufficient documentation of tax positions. Groups may also face uncertainty where domestic implementation differs in timing, administrative practice or detailed interpretation. Although the OECD Model Rules, Commentary and Administrative Guidance provide a common framework, local legislation and tax authority guidance remain important for determining actual compliance obligations.

For multinational groups, Pillar Two is also a governance issue. Boards and finance teams may need to understand whether the group is exposed to top-up tax, whether the tax position is reflected correctly in financial statements, and whether internal controls are sufficient. In acquisition processes, Pillar Two exposure may affect due diligence, pricing assumptions, tax warranties and post-closing integration.

Legal support in global minimum tax matters

Support in relation to global minimum tax may include in particular:

assessment of whether a group falls within the scope of Pillar Two rules, including the EUR 750 million consolidated revenue threshold;
analysis of group structure, parent entities, subsidiaries, permanent establishments and joint ventures;
review of potential top-up tax exposure under the Income Inclusion Rule, Undertaxed Profits Rule and Qualified Domestic Minimum Top-up Tax;
support in interpreting OECD guidance, EU rules and domestic implementing provisions;
coordination of Pillar Two analysis with corporate tax, transfer pricing and financial reporting obligations;
tax due diligence in acquisitions, restructurings and holding company arrangements;
preparation of internal procedures, data collection frameworks and documentation supporting Pillar Two positions;
support in communications with tax authorities and in managing tax risk connected with global minimum tax.

Need assistance with global minimum tax or Pillar Two compliance? Contact us.