OECD Pillar Two: What Global Companies Must Know

The OECD’s Pillar Two framework — commonly known as the Global Minimum Tax (GMT) — represents the most significant reform of international corporate taxation in decades. With a 15% minimum effective tax rate (ETR) now becoming law in over 140 jurisdictions, multinational enterprises (MNEs) face a fundamental shift in how they structure their global operations.

At ITA International Tax & Advisor, we have been tracking Pillar Two implementation closely. This article explains what it means, who it applies to, and what proactive steps you should take now.

What Is OECD Pillar Two?

Pillar Two is part of the OECD/G20 BEPS 2.0 initiative. It introduces a global minimum effective corporate tax rate of 15% for multinational groups with annual revenues exceeding €750 million. The rules apply through two complementary mechanisms:

• Income Inclusion Rule (IIR): The parent company pays a top-up tax if a subsidiary is taxed below 15% in its jurisdiction.
• Undertaxed Profits Rule (UTPR): A backstop mechanism that allows other group members to collect the top-up tax if the IIR is not applied.
• Qualified Domestic Minimum Top-up Tax (QDMTT): Countries can collect the minimum tax domestically before other states claim it.

Pillar Two: Key Rules at a Glance

Which Jurisdictions Have Implemented Pillar Two?

As of 2026, the following key jurisdictions have enacted Pillar Two legislation:

• 🇪🇺 EU Member States — transposed via Council Directive 2022/2523 (effective from FY2024)
• 🇬🇧 United Kingdom — effective from January 2024
• 🇨🇭 Switzerland — QDMTT effective 2024
• 🇯🇵 Japan, South Korea, Australia, Canada — various effective dates 2024–2026
• 🇦🇪 UAE — QDMTT enacted to protect revenue from foreign IIR claims
• ⚠️ United States — not yet implemented; GILTI regime considered partially equivalent

The Substance-Based Income Exclusion (SBIE): A Critical Carve-Out

One of the most important planning opportunities within Pillar Two is the Substance-Based Income Exclusion. This carve-out allows companies to exclude a portion of income based on genuine economic substance — specifically:

• 5% of payroll costs for qualifying employees in the jurisdiction
• 5% of the carrying value of tangible assets located in the jurisdiction

During a transitional period (2024–2032), these rates are higher (7.5%–10%), gradually reducing to 5%. This means companies with real operations, staff, and assets in a jurisdiction have a lower effective Pillar Two exposure.

How Pillar Two Affects Common Structures

1. Holdings in Zero-Tax Jurisdictions (UAE, BVI, Cayman)

If your parent or holding company pays 0% tax and the group exceeds €750M revenue, the parent’s jurisdiction (or other group members under UTPR) will now collect a 15% top-up. The tax benefit of these structures is significantly reduced without genuine substance.

2. IP Holding Companies (Netherlands, Luxembourg, Ireland)

These remain competitive if they have genuine R&D staff and IP development activity. The SBIE carve-out for payroll is especially relevant here. However, pure IP boxes with no substance face full top-up taxation.

3. Finance and Treasury Companies

Intragroup financing structures (e.g., finance subsidiaries in Luxembourg or Ireland) must demonstrate genuine treasury functions. Interest margins and financing activities are subject to ETR calculation — companies must model their ETR carefully.

4. Manufacturing and Distribution (Real Substance)

Companies with factories, warehouses, and local employees are generally the least affected. Their SBIE carve-outs for payroll and tangible assets reduce top-up tax exposure significantly or eliminate it entirely.

Pillar Two Compliance: What Your Group Needs to Do

1. Revenue Threshold Check: Confirm whether your group exceeds €750M consolidated revenue in any 2 of the last 4 fiscal years.
2. Jurisdiction Mapping: List all entities, their jurisdictions, and current effective tax rates (ETR) by jurisdiction.
3. ETR Calculation: Calculate ETR per jurisdiction using the GloBE (Global Anti-Base Erosion) income and tax definitions — note these differ from local GAAP/IFRS ETR.
4. SBIE Modelling: Quantify the SBIE carve-out for each low-tax jurisdiction based on payroll and tangible assets.
5. Top-Up Tax Estimation: Where ETR net of SBIE is below 15%, calculate the expected top-up tax liability.
6. Country-by-Country Reporting (CbCR): Ensure your CbCR data is aligned and up-to-date — it feeds directly into GloBE calculations.
7. GloBE Information Return: File the GloBE return within 15 months of fiscal year-end (18 months in the first year).

Common Mistakes to Avoid

• ❌ Using local statutory ETR instead of GloBE ETR — GloBE tax includes deferred taxes and specific adjustments not in your local computation.
• ❌ Ignoring QDMTT elections — electing QDMTT in your local jurisdiction can be advantageous to keep revenue domestically.
• ❌ Forgetting the transitional safe harbours — CbCR-based and ETR-based safe harbours can simplify compliance for many jurisdictions.
• ❌ Waiting too long to model exposure — retroactive restructuring is complex; early modelling is essential.