EU Minimum Tax Directive adopted by the Council
A new EU Council Directive on global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (the so-called Pillar Two) should transpose the rules into local law by 31 December 2023.
After the resolution of reservations of Poland and a political solution to the subsequent negative position of Hungary, on 14 December 2022 the Council of the EU reached an agreement to implement the EU Minimum Tax Directive (Council Directive (EU) 2022/2523) in the amended wording of 25 November 2022.
The EU Minimum Tax Directive establishes common measures for the minimum effective taxation (by minimum effective tax rate of 15%) of multinational enterprise (MNE) groups and large-scale domestic groups in the form of:
- an income inclusion rule (IIR) in accordance with which a parent entity of an MNE group or of a large-scale domestic group computes and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of the group; and
- an undertaxed profit rule (UTPR) in accordance with which a constituent entity of an MNE group has an additional cash tax expense equal to its share of top-up tax that was not charged under the IIR in respect of the low-taxed constituent entities of the group.
Member States may elect to apply a qualified domestic top-up tax in accordance with which top-up tax shall be computed and paid on the excess profit of all the low-taxed constituent entities located in their jurisdiction pursuant to the EU Minimum Tax Directive.
To meet the requirement of Poland, a statement was attached to the Council conclusion confirming the European Union’s determination to have both Pillar 1 (related to digital taxation) and Pillar 2 (resulted in the EU Minimum Tax Directive) implemented. The note also requires the European Commission to present a proposal for the Pillar 1 rules by the end of 2023, if agreement at international level on a Pillar 1 solution is not reached.
The agreed text of 25 November 2022 mainly includes linguistic and structural changes compared to the June 2022 version and remains closely aligned with the OECD GloBE Model Rules. To achieve consistency with the freedom of establishment, the EU implementation of Pillar 2 differs from the OECD Model Rules mainly as follows:
- it is not limited to cross-border situations but also applies to domestic groups, and
- it requires the application of the IIR at the level of an EU parent entity located in a low-taxed jurisdiction not only with respect to its low-taxed foreign subsidiaries, but also with respect to all low-taxed entities resident in the same Member State of that parent.
The Member States must now transpose the rules into domestic legislation by 31 December 2023 and to start applying the Income Inclusion Rule (IIR) for fiscal years beginning on or after 31 December 2023. The Undertaxed Profits Rule (UTPR) will be applied for fiscal years beginning on or after 31 December 2024. The agreed compromise text, however, provides the option for Member States to implement a qualified domestic top-up tax (QDMTT) and to defer the application of the IIR and the UTPR up to 31 December 2029, assuming that the number of Ultimate Parent Entities (UPEs) based in that EU Member State does not exceed 12 UPEs with a consolidated turnover of at minimum EUR 750 million in two years from four years preceding the tested financial year.
Where the ultimate parent entity of an MNE group is located in a Member State that has made an election to postpone the application of the IIR and UTPR rules up to 31 December 2029, the Member States, other than the one in which the ultimate parent entity is located, shall ensure that the constituent entities of that MNE group are subject, in the Member State in which they are located, to the UTPR top-up tax amount allocated to that Member State for the fiscal years already beginning from 31 December 2023. The UTPR percentage determined for a Member State that has made an election to postpone the application of the IIR and UTPR rules up to 31 December 2029 shall be deemed to be zero for the transitional fiscal years.
We will now have to wait to see when will Slovakia implement this Directive and if the Pillar 2 rules will be applied from 1 January 2024, or the postponement to 1 January 2030 will be utilised even if the respective UTPR percentage will be lost by Slovakia up to the application of the IIR and UTPR rules.
The Slovak Ministry of Finance published preliminary information on the draft law, which will implement this Directive into Slovak law. We expect that a legislative proposal will be prepared by Slovak Ministry of Finance in May 2023.