28 May 24

Pillar Two Explained

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The Finance Act (No.2) 2023 (the “Act”), which was passed into law on 18 December 2023 introduced some important changes to Irish tax legislation. The scale of these changes is driven primarily by the transposition of the EU Minimum Tax Directive and the OECD model rules and guidelines in line with the OECD’s Two Pillar solution, more commonly known as “Pillar Two”.

The Pillar Two rules were born out of the OECD BEPS project and aim to ensure that large corporate groups maintain a minimum effective tax rate of 15% on a jurisdiction-by-jurisdiction basis. Large groups are defined as multinationals and domestic businesses with a global annual turnover exceeding €750 million in at least two of the preceding four years. Pillar Two marks a pivotal shift in Irish corporation tax policy. The 15% effective tax rate will apply to periods commencing on or after 31 December 2023, however it will remain the case that most domestic businesses and developing multinational groups will continue to be subject to Ireland’s existing 12.5% tax regime for trading profits.

In this Article, we explore the foundations of Pillar Two and the effect the new rules will have on businesses in Ireland.

Background of Pillar Two

On 1 July 2021, 130 countries in the OECD BEPS and the G20 Inclusive Framework signed a historic statement providing a framework for the reform of international tax rules.

On 12 December 2022, the European Council confirmed that the European Union reached a unanimous agreement regarding the implementation of the framework, which became widely known as Pillar Two. In Ireland, the rules underpinned by Pillar Two took effect for large businesses with accounting periods beginning on or after 31 December 2023.

The framework aims to provide a harmonised tax structure across Europe by reducing opportunities for profit shifting. The goal is to ensure that the largest multinational corporations pay a minimum rate of corporate tax.

Pillar Two pertains to taxation and customs matters. The Pillar Two framework is comprised of two domestic rules – the Income Inclusion Rule (“IIR”) and the Under Taxed Profits Rule (“UTPR”) which are collectively referred to as the Global Anti-Base Erosion (“GLoBE”) Rules, and one treaty-based rule – the Subject to Tax Rule (“STTR”).

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GloBE Rules

The GloBE Rules establish a coordinated system of taxation that imposes a top-up tax on profits earned by Multinational Enterprises (“MNEs”) in a specific jurisdiction. They have been designed to accommodate diverse international tax systems, tax consolidation rules, income allocations, entity classification rules, and business structures. The GloBE rules provide that in any jurisdiction where the effective tax rate is less than 15%, the tax paid must be topped up somewhere else in order to accommodate for the full 15%. This minimum tax rate ensures that MNEs contribute their fair share of taxes, even if they engage in cross-border activities and operate in multiple jurisdictions. The GLoBE rules have been designed to be implemented consistently across participating countries in Europe.

Income Inclusion Rule (IIR)

The first rule within the GLoBE rules is IIR. This is a domestic rule and it is notably the primary rule under Pillar Two. IIR requires the Ultimate Parent Entity (“UPE”) in the group to ensure that its subsidiaries have paid the effective tax rate for each relevant jurisdiction.

Where a group has not satisfied this requirement, the UPE will be subject to an additional tax liability in its jurisdiction to the level that the overall group has an effective tax rate of at least 15%.

If a UPE is located in a jurisdiction that has not transposed the Pillar Two rules into their national law, the obligation moves down the chain in the group to the most senior entity that is tax resident in a jurisdiction that abides by the Pillar Two Rules. Such entity is then referred to as the Intermediate Parent Entity.

The IIR top-up tax comes into effect for fiscal years commencing on, or after, 31 December 2023.

Undertaxed Profit Rule (UTPR)

UTPR is a domestic rule that acts as a backstop to IIR for the collection of taxes under Pillar Two. The IIR gives top-up taxing rights to the ultimate parent entity of the group. The UTPR gives top-up taxing rights to the constituent entities in the jurisdictions that have implemented the UTPR.

Subject To Tax Rule (STTR)

STTR is a treaty-based rule which ultimately compliments the GLoBE rules by adapting the underlying principles and mechanisms to a treaty concept. STTR allows source jurisdictions to “tax back” where defined categories of intra-group covered income are subject to nominal corporate income tax rates below the STTR minimum rate, and domestic taxing rights over that income have been surrendered under the treaty. STTR will take priority over the GLoBE rules. Its purpose is to aid developing Inclusive Framework members to protect their tax base.

Safe Harbours

Given the significant compliance burden that Pillar Two presents for in-scope taxpayers, a number of safe harbour provisions have been included in the legislation to help ease the transition.

The first safe harbour introduced by the OECD is the Qualified Domestic Top-Up Tax (“QDTT”). QDTT provides that where a constituent entity is in a jurisdiction with a qualifying QDTT, the top-up tax outside of that jurisdiction is reduced to zero. As such, in-scope entities which are Irish tax resident will pay a top-up on any tax payments due to the Irish exchequer rather than this tax liability occurring at a group level in another jurisdiction.

The second safe harbour introduced under Pillar Two is the Transitional Country by Country Reporting (“CbCR”) test. In the financial periods between 2024 to 2026, if one of the following CbCR tests are met, the entity in a given jurisdiction will qualify for the safe harbour, and the top-up tax for that jurisdiction will be deemed to be zero for the period. The tests provided under CbCR are as follows;

De Minimis Test: If a jurisdiction’s CbCR revenue is less than EUR 10 million and CbCR profit and loss before income tax is less than EUR 1 million (including losses), the top-up tax is deemed to be zero.

Effective Tax Rate (“ETR”) Test: If the Simplified ETR for a jurisdiction is at least 15% for 2024 (16% for 2025, 17% for 2026), the top-up tax is zero.

Routine Profits Test: If the profit before tax in the tested jurisdiction is equal to or less than the substance-based income exclusion amount, the top-up tax is zero. The substance-based income exclusion amount is calculated based on jurisdiction payroll costs and their tangible assets.

The third safe harbour under Pillar Two is the Transitional UTPR Safe Harbour. The Transitional UTPR Safe Harbour provides that any taxpayer with a UPE based in a jurisdiction that has no statutory corporate income tax rate of at least 20% may elect to not be subject to UTPR for the first two years of the GLoBE rules.


Pillar Two is accompanied by the Pillar One framework, which has yet to be transposed by EU Member States. The introduction of Pillar Two enshrines unprecedented changes to the international tax landscape. In-scope entities will need to register with the Irish Revenue Commissioners and will be required to file a GloBE Information Return (“GIR”). The first GIRs will be due in 2026. There will be separate pay and filing obligations and standalone returns for IIR, UTPR and QDTT.

For more information on Pillar Two, or to find out how Cafico International can assist you, reach out to Yolanda Kelly.