EU Council agrees minimum tax directive

13 December 2022

The EU delivered an early Christmas present for supporters of the OECD Pillar Two global minimum tax initiative on Monday, as Member States unanimously agreed to back a directive that will require them to implement the top-up tax rules in their domestic law.

The announcement followed a year of wrangling, during which it appeared that objections from smaller Member States – most notably Hungary – would prevent EU-wide agreement. While five of the largest EU countries – France, Germany, Italy, the Netherlands and Spain – had already indicated that in the absence of a directive they would implement Pillar Two unilaterally, this agreement brings another 22 countries into the fold, in an important boost for global adoption.

The text of the directive, which adheres closely to the OECD’s Model Rules, has already been finalised and is expected to be formally adopted by written procedure in the coming days. It will by default require Member States to enact domestic legislation by 31 December 2023 that:

  • implements the Income Inclusion Rule (IIR), which applies a top-up tax to parent companies that have low-taxed subsidiaries, from 31 December 2023; and
  • implements the backup Undertaxed Profits Rule (UTPR) from 31 December 2024.

In line with the OECD model, the EU rules will apply to groups that have consolidated revenues of at least €750m per annum. However, the directive goes further by requiring countries to also apply the rules to wholly domestic groups that meet the revenue threshold. This approach is intended to address concerns that a “foreign only” rule might violate EU treaty rules that protect the freedom of establishment and freedom of movement of capital and prohibit Member States from treating domestic and cross-border enterprises differently.

The implementation timetable outlined above is subject to a grace period for smaller Member States – those with no more than 12 in-scope groups may elect to defer implementing both the IIR and UTPR for six years. The OECD’s recent 2018 Corporate Tax Statistics publication suggests countries including Bulgaria, Hungary, Latvia, Lithuania, Slovenia and Romania will have this option.

Whether the EU Member States that are not able to make this election can all enact implementing legislation and build the infrastructure needed to administer the rules in practice in time for 31 December 2023 commencement remains to be seen. However, the EU is now committed to Pillar Two, which adds to the sense that Pillar Two will reach the critical mass of adopters needed for the rules to be effective.

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