The following section provides some preliminary observations from implementing legislation that has already been enacted in various Member States.
General
The provisions of the Pillar Two bills are generally closely aligned with the text of the EU Minimum Tax Directive. The OECD Commentary and Administrative Guidance are explicitly mentioned in some bills for interpretation purposes (e.g., Austria, the Czech Republic, Ireland, Italy, Romania).
In addition, implementing legislations in most countries incorporate into the legislative text certain elements of the OECD Administrative Guidance that adapt the OECD Model Rules / EU Directive rules. Examples include the election to exclude income attributable to debt releases under certain conditions, election to include portfolio shareholding income, application of an Excess Negative Tax Expense carry forward, special methodology to allocate taxes arising under blended CFC tax regimes (e.g. GILTI) or treatment of (non-) marketable transferable tax credits. However, the specific items of Administrative Guidance reflected in domestic legislation varies across the EU – for example, some Member States have (at this stage) only included certain elements of the February 2023 Administrative Guidance, while others also refer to items from the July OECD release (e.g. reflected in the design of domestic minimum top-up-taxes).
We observe that the most comprehensive final legislation can be found in Germany where the legislative text incorporates various clarifications and supplementary provisions of the Commentary as well as the February and July OECD Administrative Guidance.
In addition, it is expected that additional provisions, in particular relating to those elements that have been introduced through the July and December 2023 Administrative Guidance, will be added via subsequent amendment acts (e.g. Belgium, Germany) or separate decrees to be adopted by the government (e.g. Croatia, Italy).
IIR / UTPR
In line with the EU Directive, the IIR applies in all EU jurisdictions that have enacted related legislation to date for financial years starting on or after December 31, 2023. The exception is Slovakia, which has enacted Pillar Two legislation but has made use of the deferral option.
The UTPR is generally applicable one year later, i.e. for financial year starting on or after December 31, 2024. However, the UTPR applies for financial years starting on or after December 31, 2023 where the UPE of the group is located in an EU Member States that opted for the IIR and UTPR deferral (Article 50 of the Directive). The UTPR top-up tax will be collected as an additional top-up tax in all EU jurisdictions.
DMTT
All EU jurisdictions that have completed the transposition process will apply a DMTT for financial years starting on or after December 31, 2023.
Explanatory notes published with respect to the implementation laws in a number of jurisdictions clarify that the DMTT is designed to reach the qualified status under the Inclusive Framework peer review process (in accordance with the OECD QDMTT guidance). This is the case in e.g., Austria, Denmark, Hungary, Italy, Ireland, Romania, Sweden.
As such, in accordance with OECD Guidance, DMTTs in most jurisdictions must be imposed with respect to 100 percent of the Top-up Tax calculated for local Constituent Entities (i.e. the top-up-tax cannot be limited to a UPE’s ownership percentage in the local Constituent Entities). In addition, foreign covered taxes (e.g. CFC taxes) that would be allocated to local Constituent Entities under the regular GloBE rules must be excluded for DMTT purposes.
Furthermore, it is important to note the specific provisions related to the accounting standard that is to be used for DMTT computation purposes. The approach adopted by Member States to date can be categorized as follows:
- EU countries that have opted for a DMTT based on accounts and the financial accounting standard used for purposes of the Consolidated Financial Statements of the UPE, except where it is not reasonably practicable to use such accounts (in accordance with Article 3.1.2 and 3.1.3 of the Model Rules). This is the case in e.g., Austria, Finland, Germany.
- EU countries that have decided to apply the second option provided in the OECD July Administrative Guidance that requires for the QDMTT computations to be based on a Local Financial Accounting Standard. This is the case in e.g., Hungary, Ireland, Italy, Luxembourg, the Netherlands1, Romania. Under this approach, Guidance (reflected in local law)requires that all of the local entities in the group prepare accounts using a local accounting standard and that each of the local entities has a Fiscal Year that aligns with the Fiscal Year of the Consolidated Financial Statements of the UPE. Where this is not the case, the QDMTT provisions would require the application of the UPE accounting standard (i.e. fall back clause).
- EU countries where it is not clear from the relevant text which option allowed by the OECD Guidance applies – for example, where MNE Groups are provided with the option to compute the DMTT using an acceptable financial accounting standard or an authorized financial accounting standard that differs from the one used in the Consolidated Financial Statements provided, subject to conditions. This is the case in e.g., Bulgaria, the Czech Republic, France, Slovenia.
Finally, most EU countries do not make use of additional variations or modifications that are explicitly allowed under the OECD February and July QDMTT guidance (e.g. stricter blending rules, higher minimum rate). Exceptions are, for example, Ireland, Luxembourg, Romania and Slovenia where Investment Entities and Insurance Investment Entities are excluded from the DMTT scope (in Romania this exclusion also applies to tax transparent entities). In addition, the Bulgarian DMTT applies the substance-based income exclusion only in respect of tangible assets for DMTT purposes (i.e. no exclusion with respect to payroll costs).
Safe Harbours
Most EU countries that have published final legislation have incorporated the agreed transitional CbyC Reporting Safe Harbour2 and the majority have also included the transitional UTPR Safe Harbour3. In some EU countries, it is expected that missing Safe Harbour provisions (e.g. Belgium, Hungary, Italy) will be incorporated through future amendment acts or a separate government decree.
Notably, the legislation of EU countries differs in relation to the provisions allowing for a QDMTT Safe Harbour, i.e. whereby the top-up-tax is deemed to be nil only with respect to jurisdictions that meet specific criteria with regard to the design of their DMTTs.
- Some countries provide for a permanent QDMTT Safe Harbour where the DMTT in the relevant jurisdiction meets the conditions set out in the OECD’s July Administrative Guidance4. This is the case in e.g., Austria, Bulgaria, the Czech Republic, Germany, Hungary, Ireland, Luxembourg, the Netherlands.
- In other countries, the laws provide for a QDMTT Safe Harbour that is aligned with article 11(2) of the EU Minimum Tax Directive, which was adopted prior to agreement being reached on this topic at the level of the OECD Inclusive Framework and is therefore somewhat broader. Under the EU Directive, the IIR and UTPR top-up tax is deemed to be zero in relation to other jurisdictions that apply a QDMTT computed in accordance with the UPE’s acceptable financial accounting standard or IFRS, as adopted by the EU. This is the case in e.g., Bulgaria, Croatia, the Czech Republic, Finland, France, Romania, Sweden. It remains to be seen whether these jurisdictions will amend their rules to align with the OECD Guidance, in light of the peer review process to be conducted by the Inclusive Framework. Note that legislation in Bulgaria the Czech Republic and Luxembourg includes two sets of Safe Harbour provisions to reflect both the EU Directive text (Article 11(2)) and, separately, the OECD conditions (as per the July Guidance).
Administration
In most EU countries that have enacted Pillar Two legislation, all local Constituent Entities are required to file the GloBE Information Return (GIR) within 15 months after the end of the Reporting Fiscal Year (18 months for the transitional year). However, an option is provided to transfer the filing obligation to another Constituent Entity, subject to conditions and along with the requirement to notify the local tax authorities where the GIR has been filed by a foreign Constituent Entity. Whilst some countries require such notification to be made within the same deadline as for the GIR (e.g., Austria, Finland, Ireland, the Netherlands), the Hungarian legislation requires such notification within six months after the GIR was filed.
In addition to the GIR, most EU countries require the filing of a self-assessment notification or tax return, including relevant information for assessing and imposing top-up tax. Note that there are typically separate filing obligations for the DMTT and for the IIR/UTPR top-up-tax (GloBE self-assessment), respectively. In some cases, filing is required even where there is no top-up tax liability (e.g. Germany, Slovenia).
The deadlines for the self-assessment filings or tax returns differ among Member States. Whilst some countries apply the same deadline as for the GIR (e.g., Bulgaria, Finland, France, Germany, Ireland, Romania, Slovakia), others provide for shorter deadlines (e.g. Belgium (11 months)) and yet others for longer deadlines (e.g., Austria (24 months), the Netherlands (17 months), Sweden (16 months)). Other countries also apply different filing deadlines depending on whether it relates to IIR/UTPR top-up tax or DMTT due:
- In Croatia, a local tax return would need to be filed within the same deadline (DMTT) or within 30 days following the submission deadline for the GIR (IIR/UTPR).
- Special attention might also be drawn to the Czech Republic where the taxpayer would be required to submit a self-assessment tax return as well as a GIR no later than 10 months after the end of the tax period. For IIR and UTPR purposes, the taxpayer would need to file a GIR no later than 15 months after the last day of the reporting fiscal year (18 months for the transitional year) and submit a self-assessment tax return no later than 22 months after the end of the tax period.
The deadlines for payment of any top-up tax would generally be the same as for filing the tax return (e.g., Bulgaria, Ireland, France, the Netherlands, Romania) or within one month following the submission of the tax return (e.g., Croatia, Luxembourg, Germany, Slovenia). Some other countries apply an assessment regime, which means that the tax is in principle due following the assessment by the tax authorities (e.g. Belgium, Sweden); note, however, that in Belgium advance payments are required for the DMTT and IIR top-up tax liability (subject to transitional measures for 2024).
In many EU countries, the law provides for the option to identify a designated local group member that is responsible for settling the top-up tax liability on behalf of all local group members for DMTT and UTPR purposes (in Austria and Germany centralized filing and payment is also required for IIR purposes). In some cases, where no such group member has been identified, the obligation would be passed on to the top domestic parent or the economically most significant local group member (e.g. Austria).
Where the option to designate one local group member to settle the top-up tax liability is available (either limited to QDMTT and UTPR, or including IIR as well, depending on the jurisdiction) some jurisdictions further clarify that compensation payments between group members for settling the top-up tax or QDMTT liability is legally required (e.g. Germany) and must be disregarded for income tax purposes (e.g., Austria, Belgium, Germany, Ireland, Italy). In addition, some countries clarify that all local group members will have joint and several liability for amounts due by them in relation to top-up tax and DMTT charges (e.g., Belgium, Croatia, Germany), even where the liability is settled by another group member in that jurisdiction. In the Netherlands, Constituent Entities located outside the jurisdiction could also be held jointly and severally liable for top-up tax due by their group members in the Netherlands.
In general, it is expected that further administrative clarifications (including the content and procedures for GIR and local tax return filing, payment deadlines, etc.) will be implemented by separate decrees or ordinances to be issued by the respective governments.
Penalties
The EU Directive does not determine the scope and value of penalties to be applied in case of non-compliance with the administration of the GloBE rules. Under the Directive, Member States are only required to lay down rules on penalties that are effective, proportionate and dissuasive. As a result, the amount of fines applied in case of non-compliance, incomplete or delayed fulfilment of reporting or notification requirements vary significantly. Depending on the type of infringement, penalties may apply of up to EUR 100,000 (Austria, France), EUR 250,000 (Belgium, Luxembourg), EUR 1,030,000 (the Netherlands).
Accompanying measures:
In addition to the options available with respect to the implementation of the GloBE rules, some Member States have also taken steps to reform the existing corporate income tax regime and anti-abuse provisions.
This includes amendments to existing CFC legislation to allow for a credit for QDMTT suffered with respect to a low-taxed jurisdictions in order to avoid double-taxation of the same amount of low-taxed income (e.g., the Czech Republic, Denmark, Ireland, the Netherlands). In addition, Germany reduced the minimum tax threshold for German CFC and royalty deduction limitation purposes from 25 percent to the global minimum tax rate of 15 percent.
With regard to the application of existing anti-abuse provisions, some countries have specifically extended the domestic General Anti-Abuse Rule to Pillar Two legislation or have clarified that local GAAR applies in this respect (e.g., Belgium, Finland, Ireland).
Furthermore, amendments are also being made to local tax incentives to ensure alignment with the GloBE rules. Whilst some EU counties amended their R&D tax credit regimes to ensure that they are considered a qualified refundable tax credit for Pillar Two (e.g., Belgium, Ireland), others have introduced new refundable R&D tax credits with the aim to ensure compatibility with the GloBE rules (e.g., France, Hungary).