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.
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. A jurisdiction where the group shows GloBE income of €100 million against covered taxes of €9 million: ETR = 9/100 = 9%, top-up percentage = 15% − 9% = 6%. Then the substance carve-out. With payroll of €10 million and tangible assets of €50 million at book value, for a year beginning in 2026: SBIE = €10 million × 9.4% + €50 million × 7.4% = 0.94 + 3.7 = €4.64 million (the transitional scale of Article 9.2 of the Model Rules). Excess profit = 100 − 4.64 = €95.36 million. Top-up tax = 6% × €95.36 million ≈ €5.72 million. Who collects it 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.
The full GloBE calculation is complex, so the regime includes safe harbours. The transitional CbCR safe harbour applies to years beginning before 31 December 2026: a jurisdiction is excluded from the full calculation if it meets any of three tests—de minimis, simplified ETR, or routine profits. The QDMTT safe harbour is permanent: a top-up collected by a qualified domestic tax is not recalculated through IIR or UTPR. Reporting is via the GloBE Information Return: 15 months after year-end, 18 months for the first year; the first GIRs for 2024 were due by 30 June 2026.
A separate line item is STTR, the subject to tax rule: a treaty-based rule in favour of developing countries, allowing them to impose withholding tax up to 9% on intra-group interest, royalties, and certain payments if the recipient is taxed below that rate. It is implemented through a multilateral convention opened for signature in 2023.
Implementation Map—2026
The EU applies the IIR and domestic top-ups from 2024, and the UTPR from 2025. Five countries used the deferral under Article 50 of the directive (available to those with no more than 12 parent companies of in-scope groups): Malta, Estonia, Latvia, and Lithuania postponed the IIR and UTPR until the end of 2029; Slovakia limited itself to the domestic top-up. The United Kingdom introduced the multinational top-up tax and domestic top-up tax for periods after 31 December 2023, and the UTPR a year later. Switzerland collects the QDMTT from 2024 and applies the IIR from 2025; it has not introduced the UTPR. Singapore launched the IIR and domestic top-up on 1 January 2025; Hong Kong introduced the HKMTT and IIR from the same date, with the UTPR deferred: mechanics, SBIE schedule, and scenarios are covered in the regional breakdown. Zero-tax jurisdictions took the "collect it yourself" route: Bermuda introduced a 15% corporate income tax from 2025, and the UAE a domestic minimum top-up tax from the same date. In total, more than 60 jurisdictions have adopted the rules in one form or another.
The US and Side-by-Side
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 a side-by-side package: groups with a US parent company are, by election, exempt from the IIR and UTPR for fiscal years beginning on or after 1 January 2026—the US system is recognised as providing a comparable minimum. There is no retrospective relief: for 2024 and 2025, host jurisdictions may still apply the IIR and UTPR to US-parented groups. The exemption does not affect the QDMTT: US groups pay domestic top-ups in the countries where they operate on the same basis as everyone else. So far, the US is the only jurisdiction in the Central Record that grants such a safe harbour; the episode itself showed that the regime rests on political balance and will continue to evolve.
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. An investment fund or a REIT at the head of a group (UPE) is an excluded entity under Article 1.5 of the Model Rules: the fund itself is outside the calculation, but its revenue still counts towards the threshold, and the subsidiaries remain constituent entities. An investment entity inside the perimeter computes its ETR separately from the rest of the jurisdiction (Article 7.4), while fund neutrality is preserved by elections: the tax transparency election (Article 7.5) and the taxable distribution method election (Article 7.6) shift the tax to owner level. 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 DIFC 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.
Q/A
Is the EUR 750 million threshold tested on current-year revenue?
No. The four-year test looks at the group’s consolidated revenue in the four fiscal years immediately preceding the tested year: at least EUR 750 million must have been reached in at least two of them. Revenue for the tested year itself is not part of that test.
Does a 9% local rate automatically mean a 6% top-up on profit?
No. The GloBE ETR is adjusted covered taxes divided by GloBE income and is blended by jurisdiction; it is not a company’s headline rate. Top-up applies to excess profit after the SBIE and other adjustments, so subtracting a local statutory rate from 15% does not by itself determine the tax due.
Which country gets the Pillar Two top-up first?
The low-tax jurisdiction has first priority through a qualified QDMTT. If it does not collect the top-up, the IIR moves it to the parent jurisdiction; the UTPR is the backstop when the IIR cannot operate. A qualified domestic tax therefore takes priority, and the group cannot choose the collecting country for convenience.
Does the transitional CbCR safe harbour end after 2026?
No. The OECD package of 5 January 2026 extended it by one year: it now covers fiscal years beginning on or before 31 December 2027 and not ending after 30 June 2029. The transition ETR is 17% for both 2026 and 2027; the other tests and the “once out, always out” rule remain.
Are US-parented groups exempt from Pillar Two?
Not entirely. For fiscal years beginning on or after 1 January 2026, an eligible group may use the Side-by-Side Safe Harbour to switch off the IIR and UTPR because the United States is listed in the Central Record. QDMTTs in host countries remain applicable, and the relief does not reach fiscal years beginning before 2026.