Nebezpečné administrativní vody Pilíře 2 a bezpečné přístavy

Dangerous Pillar 2 administrative waters and its safe harbours

During our International Tax Update webinar and in our alerts, we highlight various pitfalls of the BEPS 2.0 - Pillar 2: Global Minimum Taxation rules. 

The rules are gradually being introduced in various jurisdictions, and we see that most countries are going to follow the OECD Model Rules as closely as possible to qualify for the so-called QDMTT safe harbour. There are of course exceptions (e.g., we are talking about Cyprus).  Conversely, there are various registration, notification and other administrative obligations where jurisdictions use their full discretion.

Administrative obligations

There is no registration obligation for constituent entities in the Czech Republic in 2024. According to the current Czech rules, the earliest filing date related to Pillar 2 (local top-up tax return) is October 2025. However, the draft amendment under discussion in the Chamber of Deputies foresees a postponement of all Pillar 2 filing deadlines to 30 June 2026 at the earliest (primarily for information returns and top-up tax returns). We expect that the amendment will pass the approval process sooner or later and, according to the transitional provisions, it should also apply for 2024. However, constituent entities abroad (from countries in Europe, e.g. Belgium, Hungary or Austria) may be required to register or notify that they are members of a group that is subject to Pillar 2 and these will be required to file various returns and notifications and possibly pay (advance payments of) top-up taxes already this year or during 2025.

Although constituent entities will usually not be required to prepare their filings until the second half of 2025 or even 2026, it will be necessary to demonstrate already during the preparation of the financial statements and subsequent audits that the obligation to pay the top-up tax for 2024 will not arise and therefore no top-up tax expense needs to be recognized in the financial statements or the tax expense quantified and accounted for. In principle, this means that constituent entities should already have a more detailed calculation of the impact of Pillar 2 in their jurisdiction.

Transitional safe harbour rules under the CbCR

For the transitional period of the 2024 to 2026 reporting periods, groups may use the transitional safe harbour rule based on the information contained in the Country-by-Country Reporting. If, on an aggregate basis for a jurisdiction, at least one of the three tests (simplified effective tax rate, routine profits test, or de minimis test) is met, the group does not have to calculate the effective tax rate in that jurisdiction under the full rules or pay a catch-up tax. Although the rules are simplified compared to the full rules, they are not entirely straightforward. The country-by-country report on which the calculation is based, as well as the related financial statements, must be "qualified" (they must meet certain fixed conditions); while the number of possible adjustments is limited, the adjustments due to hybrid arbitrage arrangements, for example, are broad and relatively vague.

We expect that a large number of groups in the Czech Republic will qualify for one of the safe harbours, as the nominal tax rate is 21% and the activity in the Czech Republic is usually associated with the presence of personnel and tangible assets. However, in the case of companies with investment incentives or material research and development deductions, or where no deferred tax is accounted for, Czech constituent entities may not even enter one of the safe harbours. It is then necessary to go through a full calculation, which is a tortuous journey full of complexities and surprises.

At EY, we are intensively involved in the Pillar 2 rules and would be happy to provide our knowledge and experience to you.

If you have any questions, please contact the author of the article or the EY advisory team you are working with.

Author:

Karel Hronek