Pillar Two is the most misunderstood item in cross-border tax planning right now. Founders with €30m groups ask whether they need to restructure because of the 15% minimum. Groups genuinely approaching the threshold have often done nothing about it.
The scope test
The GloBE rules apply to multinational enterprise groups with consolidated revenue of €750m or more in at least two of the four preceding fiscal years. Below that, the GloBE rules do not apply. Some jurisdictions apply domestic minimum taxes with their own thresholds, and some have extended similar rules to large domestic groups, but the €750m figure remains the core perimeter.
If your group''s consolidated revenue is €40m, Pillar Two does not apply to you. It may still affect you indirectly — because your customers, investors or joint-venture partners are in scope, and because jurisdictions have changed their headline regimes in response — but the top-up tax itself does not.
The mechanics, briefly
For in-scope groups, an effective tax rate is computed per jurisdiction using a common tax base (GloBE income) and a common definition of covered taxes. Where the jurisdictional ETR falls below 15%, a top-up tax is charged on the excess profit.
Three collection mechanisms, in order of priority:
- QDMTT — a Qualified Domestic Minimum Top-up Tax, levied by the low-tax jurisdiction itself. Most jurisdictions that would otherwise export revenue have enacted one, because it keeps the money at home.
- IIR — the Income Inclusion Rule, applied at the ultimate (or intermediate) parent level.
- UTPR — the Undertaxed Profits Rule, a backstop denying deductions or making an equivalent adjustment where income is not otherwise topped up.
There is a substance-based income exclusion: a carve-out computed from payroll costs and tangible assets in the jurisdiction, which reduces the profit exposed to top-up. Real people and real assets in a jurisdiction genuinely reduce the charge — which is a deliberate design choice, and a strategically important one.
Safe harbours based on country-by-country reporting data continue to spare many jurisdictions from full computation in transition years, and the ongoing side-by-side and simplification work has focused on reducing compliance burden and coordinating with the US regime rather than lowering the floor.
What it means for genuinely in-scope groups
- Data first, planning second. The computation needs jurisdiction-level data on a GloBE basis. Most groups discover their systems cannot produce it. Start with the data project.
- Test the safe harbours. Transitional CbCR safe harbours can remove most jurisdictions from full computation. Establish which apply before modelling anything else.
- QDMTT changes the answer. If the low-tax jurisdiction has a QDMTT, the top-up is collected there anyway. Structuring to avoid an IIR charge in the parent jurisdiction achieves nothing if the QDMTT takes it first.
- Substance carve-out is the lever that remains. Where activity is real, payroll and tangible assets reduce exposure. This aligns the tax answer with the operational answer, which is unusual and welcome.
- Model the interaction with domestic incentives. Tax holidays and reduced rates in incentive regimes may simply convert into top-up tax paid elsewhere — the incentive delivers nothing to the group.
What it means for groups below the threshold
Read it as direction of travel, not obligation.
- Jurisdictions have reformed headline regimes in response — the UAE''s 9% corporate tax and its domestic minimum top-up for large groups being the clearest example in our client base. The zero-tax era ended for reasons connected to this, and it will not reverse.
- Investors and acquirers increasingly diligence tax structures against a 15% expectation, even where the rules do not bind. A structure producing a 2% effective rate with no substance is a diligence problem in a sale process regardless of Pillar Two.
- Planning to a sub-15% effective rate is planning to something that becomes a liability if the group grows into scope. If a trajectory to €750m is plausible within five years, build for the destination.
Common errors we see
- Restructuring a €50m group "for Pillar Two". It is not in scope; the cost is real and the benefit is zero.
- Assuming the threshold is per entity or per jurisdiction. It is consolidated group revenue.
- Treating the substance carve-out as a reason to invent substance. Payroll and assets must be real, in that jurisdiction, and supportable.
- Ignoring the interaction with transfer pricing. Pillar Two computes on outcomes; transfer pricing determines where the profit sits in the first place. The transfer-pricing file remains the primary document.
FAQs
Does Pillar Two make offshore structures pointless?
No — for the vast majority of privately held groups it does not apply, and for those in scope, substance-backed structures with real activity remain effective.
Is the €750m test on revenue or profit?
Consolidated revenue, in at least two of the four preceding fiscal years.
What if my parent jurisdiction has not implemented?
The UTPR backstop and other jurisdictions'' rules can still reach the group. Non-implementation by the parent state is not an exemption.
Should a growing group plan for it now?
If you can see €750m within a few years, design the structure so that substance sits where profit sits. That is good design irrespective of the rules.
