EU flags infront of European commission in Brussels

Five things to watch as EU Member States roll out Pillar Two rules

Multinationals will need to keep an eye out as similar but differing minimum taxes take shape across the EU this year.

In brief

  • The EU has committed to implementing global minimum taxes (Pillar Two) by the end of 2023.
  • Variations may arise across EU Member States, including when and how.
  • Careful consideration and monitoring of legislative activity across the EU will be key for effective actions.

The 27 European Union Member States have started their efforts to implement the EU’s minimum tax rules by the end of this calendar year. The way in which Member States choose to implement will significantly affect tax positions and reporting obligations of businesses with EU activities. It is therefore crucial for businesses to timely anticipate these choices and plan ahead.

This article sets out five important attention points for businesses with respect to each relevant Member State:

  • Know what kind of minimum tax the Member State introduces.
  • Verify how the Member State applies the Undertaxed Profit Rule (UTPR).
  • Confirm whether its legislation aligns with international guidance.
  • Determine when the Member State will begin applying the new taxes.
  • Evaluate how its tax incentive regimes are impacted and reshaped.

Pillar Two adoption by the EU

Nearly all Member States were part of the international negotiations in the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework that resulted in the agreement on the model 15% minimum tax rules at the end of 2021. The EU adopted its Pillar Two directive at the end of last year and Member States are obliged to implement the rules by 31 December 2023.

The adoption of the directive means that minimum tax rules have become part of EU law. There are some differences and additions in the EU rules compared to the internationally agreed model rules, such as a mandatory application for large domestic groups. Another important choice made by the EU is that the application of the rules has been postponed to 2024, which is one year later than the international agreement. This delay has subsequently been followed by many non-EU jurisdictions; it seems unlikely that jurisdictions will apply the rules in 2023 and some jurisdictions may even delay their implementation beyond 2024.

Finally, all Member States have committed to implementation by adopting the EU rules. The international agreement contained no such obligation as it only obliged jurisdictions to adhere to the rules if they decided to introduce a minimum tax. Jurisdictions are also committed to accepting the application of the rules by others if they themselves do not adopt them.

Know what kind of minimum tax the Member State is introducing

Member States can opt to apply a domestic top-up tax based on the rules. This election allows the top-up tax to be charged and collected by the Member State where the lowest level of taxation occurs. The amount of domestic top-up tax computed by another Member State is to be reduced by the amount of domestic top-up tax in the Member State where the profits arose. The domestic top-up tax therefore allows the low-tax Member State to tax its own low-taxed profits so that other jurisdictions do not levy a top-up tax over its profits.

The domestic top-up tax is not the only option available for Member States if they do not want other jurisdictions taxing their low-taxed profits. Member States could also choose to increase their tax rates, change their corporate tax rules, or introduce another form of minimum tax. The choice for implementation can have significant implications and may even result in tax consequences outside the Member State. For example, the method of implementation may affect another jurisdiction’s taxation of profits arising in the Member State under a Controlled Foreign Company regime. The introduction of domestic top-up taxes by Member States will also create additional filing obligations in these jurisdictions. This all points to a need for businesses to assess how each Member State’s minimum tax may affect their tax position and compliance obligations.

Know how the Member State applies the Undertaxed Profit Rule (UTPR)


The directive’s UTPR obliges Member States to charge a top-up tax on low-taxed profits of other jurisdictions. This is a fallback provision in case low-tax profits are not addressed by domestic top-up taxes or an Income Inclusion Rule (IIR) and it also applies to low-taxed profits in non-EU jurisdictions. Member States can choose whether they apply the UTPR as a separate top-up tax or as a denial of deductions. A separate top-up tax could theoretically lead to a tax liability which exceeds the group's revenue in the Member State where the tax is charged.

Non-EU jurisdictions have so far taken divergent actions (pdf) when it comes to the UTPR. For example, South Korea has already enacted the rule and decided to apply it as early as 1 January 2024. The UK has released implementation legislation that does not include provisions on the UTPR, but has indicated the intention to implement the UTPR in future legislation. Furthermore, questions have been raised on how the UTPR relates to provisions of the OECD Model Tax Convention and other international obligations. Nevertheless, the current reality is that Member States remain obliged to implement the UTPR under the directive. It will therefore be essential for businesses to understand the timing and design of UTPR implementation for every Member State in which a business has presence. This allows businesses to better anticipate potential impacts on their tax position.

Confirm whether the Member State’s legislation adheres to international guidance

International discussions on the rules are continuing in the Inclusive Framework and among the recent developments are the  release of safe harbor rules as well as more detailed guidance. These developments were anticipated in the drafting of the directive and additional safe harbors and more guidance is expected in the coming months and beyond.

Member States will need to consider how to reflect later guidance in their local implementation, especially where the guidance expands or even differs the literal wording of the globally agreed model rules on which the EU rules are based. Keeping an eye on how Member States align their legislation with international developments is key, as deviations may affect the impact on businesses.

Related articles

How a global minimum tax will affect sustainability tax incentives

Multinationals and jurisdictions may need to rethink their sustainability tax incentives if countries adopt 15% global minimum tax rules. Learn more.

27 Feb 2023 EY Global

    Determine when the Member State will begin applying the new taxes


    Member States must generally apply the rules from FY 2024. Therefore, the IIR will apply for fiscal years starting on or after 31 December 2023. However, the UTPR generally applies for fiscal years starting on or after 31 December 2024. Member States that have a small number of headquartered groups within the scope of the rules can opt to delay their application of the rules for six consecutive fiscal years.

    Member States are generally expected to adhere to the deadlines provided in the directive. However, determining when exactly Member States will apply their domestic top-up taxes is important given potential new additional tax and compliance obligations. Member States could align the domestic top-up tax with the IIR (2024) or delay them a year in alignment with the UTPR (2025). In the case of small Member States, elections for delayed application of the rules should be verified as these elections can potentially shift tax and compliance obligations elsewhere.


    Evaluate how the Member States’ tax incentive regimes may be impacted, reshaped and potentially replaced


    Many jurisdictions worldwide provide tax incentives such as special investment zones, patent box regimes or R&D credits. The minimum tax rules may impact the value of frequently used tax incentives. This could be the case if the incentive reduces a business’s effective tax rate below 15% in a jurisdiction. In such a case, the effects of the incentive may be reduced or eliminated as the top-up tax effectively taxes the incentive. The potential impacts of the new rules on incentives may vary greatly depending on the design of the incentive.

    This reality has resulted in a worldwide reassessment of incentive regimes. Jurisdictions may decide to remove tax incentives altogether, re-examine designs or replace them with non-tax subsidies or incentives. In the EU, the interaction with incentives is particularly topical considering discussions on the EU’s competitiveness and the European Commission’s Green Deal Industrial Plan, which includes the relaxation of state aid rules and the potential introduction of new subsidies and tax incentives. It is therefore key to monitor how the EU and each Member State will respond to the interaction of the new rules with existing and future tax incentives.


    While the EU has unanimously adopted the minimum taxes directive, there are still unknowns and potential variations ahead as the EU Member States forge ahead with implementation plans. For businesses operating in the EU, staying close to the developments in each EU Member State is a must to effectively navigate and plan for the new world of Pillar Two.

    Related articles

    Five steps tax accounting teams can take for BEPS 2.0 

    With BEPS 2.0 due to come into force in late 2023/early 2024, tax accounting teams prepare for Pillar Two rules on global minimum taxation. Learn more.

    21 Mar 2023 Adam Sweet

    How BEPS 2.0 leads to a more integrated finance and tax function

    The data challenge created by Pillar Two presents the finance and tax functions with an opportunity to future-proof their data streams. Learn more.

    27 Jan 2023 EY Global

    Why BEPS 2.0 needs consistency, coordination and certainty

    The G20 must lead – and consider input from businesses – to make tax transformation workable for all. Learn more.

    23 Jan 2023 Barbara Angus