Pillar Two: Global Minimum Tax 15%

Concept

Pillar Two is the second pillar of the BEPS 2.0 reform: a global minimum tax on profits of the largest multinational groups. The GloBE Rules (Global Anti-Base Erosion, Model Rules OECD) require that a group with consolidated revenue of €750 million or more pay an effective 15% on profits in each jurisdiction where it operates. Where the rate falls short, the difference is collected as a top-up tax; the only open question is which country will collect that top-up.

The purpose of the design is to remove the prize in the race to the bottom. As long as profits could be parked in a jurisdiction with zero or nominal rates and left there, tax competition drove rates downward. GloBE reverses the economics: any shortfall below the 15% minimum will be collected anyway—locally, in the parent company's country, or in any other country where the group operates. The incentive to shift paper profits disappears, and jurisdictional competition shifts from rates to subsidies, talent, and infrastructure.

The threshold is €750 million in consolidated revenue in two of the last four financial years: the same bar as for Country-by-Country Reporting. Family holdings, private funds, and businesses below the threshold are not subject to GloBE—for them, local rates work as before.

Origins

In October 2021, the Inclusive Framework OECD/G20—around 140 jurisdictions—agreed on a two-pillar reform: Pillar One reallocates taxing rights of very large groups in favour of market countries, Pillar Two sets a minimum rate. The first pillar stalled in negotiations; the second moved to legislation quickly: the Model Rules were published in December 2021, and the EU enshrined the regime in Directive 2022/2523 in December 2022—unanimously, which is rare for tax directives.

How It Works

The mechanism has three tiers, with a strict order of priority.

• QDMTT—qualified domestic minimum top-up tax, a domestic top-up tax. The jurisdiction itself collects the shortfall to 15% from its own companies, and the top-up stays in its budget. First priority.
• IIR—income inclusion rule. If the local jurisdiction does not collect the shortfall, the parent company's country collects the top-up on low-taxed subsidiaries.
• UTPR—undertaxed profits rule, a backstop: when the IIR cannot be applied, the right to collect the top-up is distributed among the other jurisdictions where the group operates.

The top-up amount = (15% − effective tax rate of the jurisdiction) × profit above the substance-based income exclusion (SBIE). The effective rate is calculated on an aggregate basis per jurisdiction, and SBIE excludes from the calculation a portion of profit tied to payroll and tangible assets: real people and offices reduce the top-up—the same economic substance, now built into the tax formula. In 2026, the exclusion is 9.4% of payroll and 7.4% of the book value of assets; by 2033, both rates will converge at 5%.

What this looks like in numbers — the calculation for a jurisdiction where the group shows GloBE income of €100 million against covered taxes of €9 million, for a year beginning in 2026 (the transitional scale of Article 9.2 of the Model Rules).

Who collects that top-up is a question of priority: with a QDMTT, the entire €5.72 million stays in the jurisdiction's own budget, and the QDMTT safe harbour blocks any recalculation above; without one, the parent company's country takes the top-up through the IIR; if no one can apply the IIR, the €5.72 million is allocated among the group's other countries under the UTPR. Substance works literally: more people and assets on the ground mean less excess profit—but at a 9% ETR the carve-out only softens the top-up, it does not cancel it.

Safe harbours do not displace that order—they sit inside it, each at a different level. The transitional CbCR, Simplified ETR and SBTI safe harbours remove or simplify the jurisdictional computation for all three rules at once; the Side-by-Side and UPE safe harbours switch off only the upper tiers and leave the QDMTT in place; the transitional UTPR safe harbour touches a single rule. Hence the sequence in which “who pays, and where” is answered: first, which safe harbour applies in the jurisdiction; then, who is left in the queue.

A separate line item is STTR, the subject to tax rule: a treaty-based rule in favour of developing countries. It allows a source jurisdiction to tax back defined categories of cross-border intra-group covered income where the recipient’s nominal corporate income tax rate is below 9% (OECD, Minimum Tax Implementation Handbook). It is implemented through a multilateral convention; the first signing ceremony took place on 19 September 2024 in Paris.

Safe Harbours

The full GloBE calculation is complex, so the regime includes safe harbours. The Inclusive Framework side-by-side package of 5 January 2026 brought their number to six: alongside the transitional CbCR safe harbour and the permanent QDMTT safe harbour it added the Simplified ETR Safe Harbour, the Substance-based Tax Incentive Safe Harbour and the Side-by-Side System, and the administrative guidance of 18 May 2026 extended the transitional UTPR safe harbour.

The package extended the transitional CbCR safe harbour by one year. By component, the extension gives up to four fiscal years of compliance relief for the IIR and the QDMTT and up to three for the UTPR. The simplified ETR threshold rises on a transition schedule, and the 2026 rate now also applies to 2027.

The extension is agreed Administrative Guidance of the Inclusive Framework and has no direct effect. Until a jurisdiction reproduces the new period in its own law, the previous one governs there. Hong Kong shows the mechanics literally: the safe harbour period is written into Schedule 61 to the Inland Revenue Ordinance, OECD documents take effect through Schedule 64, both are amended by notice of the Secretary for Financial Services and the Treasury—and without that amendment, years beginning after 31 December 2026 are computed under the full GloBE Rules (regional breakdown). The EU resolved the same question differently: by Commission notice C/2026/253 of 12 January 2026, all five safe harbours in the package apply through Article 32 of Directive 2022/2523, because every Member State consented to them — the condition Article 32 sets for a qualifying international agreement on safe harbours.

The Simplified ETR Safe Harbour is permanent and computed from reporting-package data with minimal adjustments. Mandatory application starts with fiscal years beginning on or after 31 December 2026. Early application, from years beginning on or after 31 December 2025, is available on one of three conditions: the QDMTT Safe Harbour applies for the tested jurisdiction; or only one jurisdiction has GloBE taxing rights; or every jurisdiction with such rights has introduced early application and the election is made for all of them.

The Substance-based Tax Incentive Safe Harbour adds Qualified Tax Incentives—expenditure-based or production-based—to covered taxes, so the incentive stops dragging the ETR down. The amount added is limited by the substance cap: the greater of 5.5% of payroll and 5.5% of depreciation of tangible assets; an alternative cap of 1% of the carrying value of tangible assets may be elected instead.

The transitional UTPR safe harbour removes the UTPR top-up in respect of the UPE jurisdiction for a transitional period; the guidance of 18 May 2026 extended it to 52- and 53-week fiscal years ending no later than 3 January 2027.

Implementation Map—2026

The order of the rules is determined from a single source — the OECD Central Record, which lists legislation that has completed the transitional qualification mechanism. The IIR and DMTT record is current as at 1 December 2025: 44 jurisdictions have a qualified IIR, 46 have a qualified DMTT, and the QDMTT Safe Harbour is marked "Yes" for all forty-six. The update of 18 May 2026 added further DMTT regimes with transitional qualified status and QDMTT Safe Harbour eligibility, taking the list to 50 jurisdictions.

The OECD states expressly that the absence of a jurisdiction from the record does not mean its legislation is unqualified: it means only that, as at the date of publication, the qualification process has not been initiated or completed. The computational effect of that caveat is unchanged — with no entry there is no QDMTT Safe Harbour to claim, and the top-up travels up the chain.

The EU introduced the regime by directive: IIR and domestic top-ups from 2024, UTPR from 2025. Five Member States used the deferral under Article 50 of the directive, available to those hosting no more than 12 parent companies of in-scope groups: Malta, Estonia, Latvia, Lithuania and Slovakia postponed the IIR and UTPR until the end of 2029. Slovakia nevertheless introduced a domestic top-up from 31 December 2023 and appears in the record on that basis; Malta, Estonia, Latvia and Lithuania do not appear at all.

Zero-tax jurisdictions took the "collect it yourself" route: the UAE introduced a domestic minimum top-up tax from 2025, Bermuda a 15% corporate income tax from 2025, and Bermuda is not in the Central Record. The record allows for this expressly: a jurisdiction is under no obligation to introduce GloBE rules, and there are other ways to secure an effective 15%.

As at the date of the record, the Cayman Islands, the British Virgin Islands and Cyprus do not appear in it. The Cypriot picture diverges from the record: an IIR has applied since 1 January 2024 and the DMTT and UTPR since 1 January 2025, but the legislation had not completed the qualification process as at 1 December 2025. For Cayman and the BVI the conclusion is practical: there is no QDMTT, no QDMTT Safe Harbour to claim, and the top-up on such links is collected through the IIR or the UTPR. Hong Kong mechanics, the SBIE schedule, and scenarios are covered in the regional breakdown.

Side-⁠by-⁠Side System

The United States did not join GloBE: since 2017, it has had its own minimum tax on foreign profits—GILTI, which the One Big Beautiful Bill Act (July 2025) restructured into NCTI, net CFC tested income, with an effective rate of around 12.6%.

The conflict between the two systems nearly escalated into a tax war: the OBBBA draft contained a retaliatory tax on residents of countries applying the UTPR to US groups. After a G7 agreement in June 2025, that provision was removed, and on 5 January 2026 the Inclusive Framework released the side-by-side package, whose Chapter 5 introduces the SbS Safe Harbour.

The mechanics run as follows. At the election of the Filing Constituent Entity, the top-up tax for a jurisdiction for a fiscal year is deemed to be zero for purposes of the IIR and the UTPR where the UPE of the group is located in a jurisdiction with a Qualified SbS Regime. The safe harbour is available for fiscal years commencing on or after 1 January 2026 and extends to interests in joint ventures and JV subsidiaries—the detail that decides co-investment structures with a US sponsor. For earlier fiscal years there is no relief: for 2024 and 2025 host jurisdictions apply the IIR and the UTPR to US-parented groups on the normal basis. The QDMTT is untouched: groups pay domestic top-ups in host countries on the same basis as everyone else, and the QDMTT in every jurisdiction is computed without pushdown of taxes on CFCs and foreign branches.

A regime becomes a Qualified SbS Regime only if four conditions are met together.

The Inclusive Framework assesses another jurisdiction at the request of one of its members: jurisdictions that applied are assessed by the end of the first half of 2026, and the rest may initiate a request in 2027 or 2028. Only the United States is listed in the Central Record as a Qualified SbS Regime—the Internal Revenue Code of 1986, with the safe harbour applicable for fiscal years commencing on or after 1 January 2026, and the determination itself based on US data for tax years 2019–2022. The Qualified SbS Regimes section of the record is stated as current at 18 August 2025, while the rest of the record is current at 1 December 2025; that discrepancy is in the OECD document itself.

Alongside it sits the UPE Safe Harbour, for jurisdictions that meet only the domestic limb of the criteria: the group is not subject to the UTPR in respect of profit in the UPE jurisdiction. As at the date of the Central Record, no jurisdiction is listed as having a Qualified UPE Regime.

Both safe harbours live by the same rules as the rest of the package: this is Administrative Guidance, and until it is implemented in domestic law—in the EU, through Article 32 of the directive—there is nothing in a given jurisdiction to elect. The episode itself showed that the regime rests on political balance and will continue to evolve.

GloBE Information Return

Reporting under the regime runs through the GloBE Information Return: 15 months after the end of the fiscal year, 18 months for the first year. For groups on a calendar fiscal year, the first GIRs for 2024 fell due on 30 June 2026.

On 18 May 2026 the Inclusive Framework published a common understanding on central GIR filing. The jurisdictions applying the regime from 2024 — thirty-seven by the Central Record — agreed to waive penalties or not to enforce local GIR filing before the exchange deadline, provided the group files centrally in one of the jurisdictions in the annex — a separate list of 33 jurisdictions expected to be ready to accept central filing — and files a local notification.

The notification is a load-bearing part of the structure: without it the relief does not operate. A jurisdiction may also require local filing if the GIR information is not exchanged by 31 December 2026; that date follows from the GIR exchange mechanism, which allows six months after the filing deadline for the first reporting year — 30 June 2026 plus six.

The revision of 25 June 2026 added the Bahamas and Greece to the understanding and brought in the Slovak Republic subject to a reservation — in respect of annex jurisdictions with which it has an activated exchange relationship — and the revision of 6 July added North Macedonia, so that Viet Nam alone has not joined. Poland participates only in respect of EU Member States listed in the annex, and Japan accepts central filing only for fiscal years beginning on or after 1 April 2024.

The undertaking is soft: a common understanding has no direct effect, and penalties remain a matter of each jurisdiction’s domestic law. In the EU the exchange is framed by DAC9—Council Directive (EU) 2025/872, with a transposition deadline of 31 December 2025; on 30 January 2026 the Commission opened infringement proceedings against ten Member States, so exchange within the EU is not yet even.

What It Means for Private Structures

The vast majority of family structures do not reach the Pillar Two threshold: the threshold is calculated on the consolidated revenue of the group under a common parent company, and a family-office holding, personal investment company, or medium-sized holding structure does not meet the €750 million bar. Investment and pension funds at the head of a group are excluded from the regime as excluded entities, along with governmental and non-profit structures.

Investment structures have mechanics of their own.

The fork for family capital: a classic fund under Singapore's 13O or Hong Kong's FIHV almost never reaches the perimeter—there is no €750 million of consolidated revenue, and a fund-UPE is excluded anyway. But for a family with an operating group above €750 million, the same zero-tax holdings in the BVI or the Cayman Islands inside the perimeter turn from neutral layers into a ready-made top-up point.

The regime affects private capital in two situations. The first is when a family controls an operating group with revenue of €750 million or more: then every low-tax link—a Luxembourg sub-holding, a Cypriot IP box with an effective rate of ~3%, an offshore trader—becomes a top-up point, and a rate below 15% within the perimeter ceases to be a benefit.

The second is indirect: under the influence of Pillar Two, jurisdictions are raising base rates for everyone (Cyprus raised its headline rate from 12.5% to 15% with effect from 1 January 2026), and incentives are being repackaged from rates into grants and credits. Planning has shifted from seeking zero to managing the effective rate—in conjunction with GAAR and principal purpose test, which have not gone away.

Inside the perimeter, three features read as an unclosed ETR gap before any computation is run: a zero-tax link in a jurisdiction absent from the Central Record; a host jurisdiction with no domestic top-up at all; and no plan for local GIR notifications where the group files centrally. None of them is a breach, yet each moves the top-up up the chain and turns a question of arithmetic into a negotiation with someone else’s tax authority.