Tax and Legal News – March 2026

The inevitable difficulty of Pillar 2

Since January 2022, we have been sharing with you the joys and pitfalls of the BEPS 2.0 Pillar 2 rules. We have studied the rules, commentary, examples, administrative guidelines, Czech law and explanatory memorandum, and we have regularly shared our findings, observations and comments with you.

Until now, the work has mainly involved Excel, paper and pencil, or various calculation models. You have calculated whether you have reached a safe harbor or whether you have to set sail on the open sea full of effective tax calculations. Somewhere along the way, you have recorded a higher expected tax. Now begins the period of regular filings with the tax office.

The deadlines for submission are approaching, and in some cases have already passed. Questions about what and how to submit, when and on behalf of whom remain open in individual states, and there is considerable room for creativity. Each state has its own form, procedure and deadlines. In the Czech Republic, we are still waiting for the final forms. So far, it looks like every Czech entity will have to file at least four submissions (two notifications and two returns). And they must also hope that someone will file the GIR in the correct jurisdiction and that the content will meet the requirements of Czech law. If an entity changes its group affiliation during the year, then there will be at least eight filings. The first Czech filing will be at the end of the school year, and a clear procedure for dealing with filings is still lacking.

What will be the impact on the Czech state budget? According to the explanatory memorandum, the Ministry of Finance expected new revenue estimated at CZK 4 to 6 billion. However, after the tax rate increase from 19% to 21%, this will only amount to CZK 2 billion per year. At the same time, the ministry estimates that the rules will affect approximately 3,200 Czech taxpayers. From the perspective of the state budget, this is a negligible amount, especially when compared to the administrative burden on taxpayers.

If you are responsible for multiple jurisdictions, or even a parent company, the fun with rules multiplies significantly. The rules have been introduced across Europe, Asia and Australia. However, the United States, India and China, for example, are not actively participating in Pillar 2. Some countries have wisely introduced only a domestic tax for large groups so that profits from their jurisdictions are not taxed elsewhere. Other countries did not manage to implement the rules in time and are allowing opt-in for 2024 (e.g. Poland), or, conversely, have postponed the rules until later (e.g. the Baltic states). As a result, though we have uniform rules, their implementation and functioning will vary from country to country. Local implementation will certainly also lag; local interpretations may vary and will certainly not be consistent across jurisdictions.

Even without the influence of local differences, there seem to be more rules and exceptions than is acceptable. A brief digression. We have simplified safe harbor rules based on the Country-by-Country Report (CbCR). The key is to have the correct Country-by-Country Report, meet several conditions, successfully deal with hybrids (which, of course, differ from the rules for income tax) and pass at least one of the three tests. Every taxpayer's dream. Not surprisingly, most Czech entities will fulfill this dream, but even so, each must submit forms to the tax office. If the dream does not come true, the hard work begins. The rules are extremely complex and require careful mapping of almost everything in all Czech companies.

We now have Side-by-side (SbS) rules, which in terms of their complexity fall somewhere between safe harbors and the full rules. This new set will hopefully resolve (or at least improve) the unfortunate settings of various incentives and deductions (e.g. for research and development) in the existing pillar rules. At the same time, the coexistence of Pillar 2 with other similar concepts of international taxation (especially the American one) has apparently been resolved).

The probability of Pillar 2 rules being abolished is virtually zero, especially after the SbS package and the agreement with the US. The rules will become part of the regular tax agenda during the year, for example when calculating tax reserves. They will have to be considered when acquiring and structuring transactions, making new investments, applying for incentives or claiming various deductions. At the same time, we hope that comments and interpretations will stabilize and that the degree of uncertainty in applying the rules will decrease.