International Tax: Pillar Two - EU Directive

The European Commission proposes its Directive to implement Pillar Two Model Rules

In brief

On 20 December 2021, the OECD/G20 Inclusive Framework (IF) published model legislation regarding the Pillar II global minimum tax regime: the Global Anti-Base Erosion (GloBE) rules (also referred to as the "Model Rules"). The Model Rules consist of the Income Inclusion Rule (IIR) and its backstop, the Under Taxed Payment Rule (UTPR). The Model Rules intend to ensure that profits of large multinational groups generated in each jurisdiction in which the groups operate are subject to an effective tax rate of at least 15%. Our alert covering this publication can be found here.

Only 2 days after the publication of the Model Rules, on 22 December 2021, the European Commission ("Commission") published its legislative proposal for an EU Directive to incorporate the Model Rules as published by the IF ("Directive"). The Directive closely follows the Model Rules and aims to implement the IIR and UTPR consistently across the 27 Member States.

If adopted, Member States will apply the provisions of the Directive as of 1 January 2023. The provisions regarding the UTPR, however, would come into effect as of 1 January 2024. 



In a nutshell, the Model Rules aim to ensure that large multinational groups pay an effective tax rate of at least 15% tax across every jurisdiction where they have operations. If the effective tax rate in a particular jurisdiction is less than 15%, the Model Rules (i.e., the IIR and its backstop, the UTPR) will come into effect and the group is required to pay a top-up tax to bring the effective tax rate up to 15%.

Primarily, the IIR allocates the top-up tax to the highest entity within the chain of ownership that is resident in a jurisdiction that has implemented the IIR. The IIR applies whether or not the jurisdiction of the low-tax constituent entity has implemented the IIR.

In situations where the IIR is unable to bring the effective tax rate to 15%, the UTPR effectively leads to a denial of deductions. Please see our client alert on the Model Rules, linked above, for more detail.

Design of the Directive

The Directive aims to implement the Model Rules in the EU and closely follows the content and structure of the Model Rules. However, in the design of the Directive some deviations are made in order to align the Directive with primary Union law (e.g., the fundamental freedom of establishment). The key substantive differences and chosen design options seem to be the following:

  • Application of the IIR to large-scale domestic groups: In light of the EU’s fundamental freedom of establishment, the Directive extends the application of the IIR to purely domestic groups established in a Member State if they reach the EUR 750 million threshold. This extension of the application of the IIR reduces the risk of discrimination in an EU Member State between an entity that is part of a group with cross-border activities and a group with purely domestic activities.
  • Domestic top-up tax: In order to safeguard the tax sovereignty of EU Member States, the Directive provides that an EU Member State can choose to apply the top-up tax domestically to constituent entities located in its territory. This election allows the top-up tax to be allocated to and collected in the low-tax jurisdiction, instead of collecting the additional tax at the level of the ultimate parent entity of the group. When an EU Member State chooses to elect this option, the amount of top-up tax due by the ultimate parent entity shall be reduced (up to zero) by the amount of top-up tax due by the constituent entities. 
  • The UTPR: The Directive provides that the UTPR is applicable when the ultimate parent entity is located outside the EU in a jurisdiction that has not implemented the IIR.
    In addition, the Directive provides that the UTPR is also applicable when the ultimate parent entity is located in a jurisdiction outside the EU that has implemented the IIR, but the ultimate parent entity (together with the other constituent entities in that jurisdiction) is low-taxed. Based on the UTPR, the top-up tax corresponding to the jurisdiction of the ultimate parent entity is allocated to all entities that have implemented the UTPR, including those located in a Member State. The UTPR, however, is not applicable when the ultimate parent entity is located in a Member State, because an ultimate parent entity located a Member State, applies the IIR principles.

Administrative provisions

Each constituent entity of a multinational group located in an EU Member State is obliged to file a yearly top-up tax information return, unless this return is filed in another jurisdiction with which the EU Member State has an agreement regarding the exchange of information.

The top-up tax information return shall include information on:

  • the identification of the constituent entities, including their TIN numbers, domicile and their status under the rules of the Directive;
  • information on the overall corporate structure of the group, including the controlling interests in the constituent entities held by other entities; and
  • the information that is necessary to compute:
    • the effective tax rate for each jurisdiction and the top-up tax of each constituent entity;
    • the top-up tax of a member of a joint-venture group;
    • the allocation of top-up tax under the IIR and the UTPR top-up tax amount to each jurisdiction;
    • a record of the elections made in accordance with the relevant provisions of the Directive.

The top-up tax information return must be filed within 15 months after the end of the fiscal year of the constituent entity. The Directive also provides for a penalty of 5% of the turnover of the constituent entity if the filing obligations are not met.

Different administrative provisions are applicable to a constituent entity located in a Member State, with an ultimate parent entity located in a third country jurisdiction.


The legal basis for the Directive is Article 115 of the Treaty on the Functioning of the EU. This means that the European Parliament and the European Economic and Social Committee must be consulted prior to implementation of the Directive and that the EU Council will only adopt the Directive by unanimity.

The Commission indicates that the most important political decisions regarding the Model Rules have already been taken by the IF and at the highest political level (G20 Finance Ministers and G20 Heads of States). It also emphasizes on the extreme political urgency to go forward with the project and states that it is essential to have a swift adoption and implementation process of the Directive for the Member States.

As 26 of the 27 EU Member States are member of the IF, they have already agreed on the main aspects of the Model Rules. Cyprus is the only EU Member State that is not a member of the IF. However, Cyprus previously stated to welcome the agreement reached by the G20 on 8 October 2021 on the minimum effective tax rate.

If adopted in time, the Directive must be implemented by the Member States by 31 December 2022. Member States will then have to apply the provisions of the Directive as of 1 January 2023. The provisions regarding the UTPR, however, will come into effect as of 1 January 2024.


The Directive is the first step of the implementation of the Model Rules in the EU Member States. With the Directive, the EU is following up on its promise to act quickly and be among the first to implement the Model Rules.

The question to what extent and in which timeframe the Directive will be implemented depends on the discussions and concessions of the different Member States. Given the impact of the Directive on the autonomous taxation of the various Member States, considerable commentary on the legislative proposal is expected. However, since 26 of the 27 member states are part of the IF and Cyprus has indicated to support the outcome of the IF, it is our expectation that the Directive will be adopted.

The Directive is currently open for feedback (until 24 February 2022) by the public. The summarized feedback will be taken into account in the further consideration of the Directive. Ultimately, it is up to the EU Member States in Council to unanimously agree to the Directive.

Our tax policy experts are closely monitoring the developments regarding the Directive and actively contributing to the discussions. We will keep you informed of any new developments. If you have any questions regarding the Directive, or its impact on your operations, please do not hesitate to reach out to us.

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