Pillar 2 Dashboard: The UK

On October 15, 2025, the UK updated its list of qualifying jurisdictions for the IIR, QDMTT and the QDMTT Safe Harbour.

On July 24, 2025, the UK issued a notice to amend the Multinational Top-up Tax (Pillar Two Territories, Qualifying Domestic Top-up Taxes and Accredited Qualifying Domestic Top-up Taxes) Regulations 2025 (SI 2025/406) to include Spain and Guernsey as jurisdictions qualifying for GloBE purposes (QIIR, QDMTT and the QDMTT Safe Harbour).

On July 21, 2025, the UK issued draft legislation for the January 2025 OECD Administrative Guidance and other relevant changes.

On March 31, 2025, the UK issued the Multinational Top-up Tax (Pillar Two Territories, Qualifying Domestic Top-up Taxes and Accredited Qualifying Domestic Top-up Taxes) Regulations 2025. This outlines which jurisdictions have implemented a qualified income inclusion rule, a QDMTT and which QDMTTs qualify for the QDMTT Safe Harbour.

On November 20, 2024, the UK issued guidance on how to replace a filing member for Pillar 2 purposes

On November 20, 2024, the UK issued guidance on how and when to pay Pillar 2 top-up tax.

On November 7, 2024, the Finance Bill 2024-2025 was introduced to Parliament. This includes provisions to enact the UTPR (and associated rules such as the Transitional UTPR Safe Harbour and Initial Phase of International Activity Exemption), and other Pillar 2 amendments.  On December 19, 2024, the UK issued amendments to the Finance Bill 2024/2025 which includes amendments for the June 2024 OECD Administrative Guidance. This was further amended on January 27, 2025. On March 20, 2025, the Finance Act, 2025 received Royal Assent.

In the UK 2024 Budget on October 30, 2024, it was confirmed that:

• The UTPR is to apply from 2025

• The transitional CbCR anti-arbitrage rules are to be implemented (effective from the publication of the Written Ministerial Statement on March 14, 2024).

Other amendments are also to be made to the MTT and DTT regime for technical changes and to provide for the Fourth Set of OECD Administrative Guidance.

On September 12, 2024, the UK issued further draft guidance on the Multinational Top-up Tax and Domestic Top-up Tax. The issued draft guidance now runs to over 300 pages.

On July 29, 2024, the UK government issued Draft Legislation for the Hybrid Arbitrage Arrangement Anti-Avoidance Rule

On July 18, 2024, the UK issued draft legislation to implement the UTPR.

On May 20, 2024, the UK issued a Pillar 2 top-up taxes registration notice, that  explains how to register for Pillar 2 top-up taxes in the UK, the information required and how to notify HMRC of any reporting related changes.

On February 22, 2024, the UK 2024 Finance Act received royal assent. This domestically implements amendments provided in the OECD Administrative Guidance.

On December 21, 2023, the UK issued detailed draft guidance on various aspects of the UK’s multinational top-up tax, including how to calculate the ETR.

Finance (No. 2) Act for the ‘Multinational Top-Up Tax‘ enacted on July 11, 2023.

On June 15, 2023, the UK issued draft guidance on the application of the multinational top-up tax.

The UK closely follows the OECD Model Rules and reflects the latest guidance, including aspects of the OECD Safe Harbours Guidance and the Administrative Guidance.

It should be noted that Section 255 of the Finance Act specifically refers to the OECD Model GloBE Rules and Commentary (including the OECD Examples) and directly applies them in various aspects of the application of the Multinational Top-Up Tax.

In addition, it applies ‘any further commentaries or guidance published from time to time by the OECD that are relevant to the implementation of the Pillar Two model rules’.

This would, therefore, include the OECD Administrative Guidance that will itself be included in an updated version of the OECD Commentary.

On July 21, 2025, the UK issued draft legislation for the January 2025 OECD Administrative Guidance and other relevant changes (including the NMCE Safe Harbour).

GLOBE APPLICATION

General

The broad operation of the application of the Multinational Top-Up Tax is, as you’d expect, in line with the OECD Model Rules.

The Finance Act adapts the global minimum tax to the UK’s specific tax regime. For instance, the definition of Excluded Entities in Section 127 of the Finance Act, includes UK Real Estate Investment Trusts.

Article 2.4 of the Administrative Guidance provides that certain debt releases under various corporate rescue situations are excluded from GloBE Income subject to an election by the filing constituent entity.

Section 151 of the UK Finance Act provides for a similar treatment for debt releases for companies in distress, but this is specifically drafted for the UK purposes to include references to the definition of insolvency in the UK Corporation Tax Act, 2010.

In order to be a qualifying GloBE reorganisation a number of conditions must be met under the Model Rules. Section 212(2) of the UK Finance Act requires that the reorganisation does not result in a change in the ownership of an entity, and determines this by Sections 719-724A Corporation Tax Act, 2010.

Administrative Guidance

The UK Finance Act includes many of the additional rules that have been published in the OECD Administrative Guidance.

For example:

-Section 183 of the Act addresses substitute loss carry forwards. This reflects Article 2.8 of the OECD Administrative Guidance that provides for the inclusion of deferred tax in the GloBE deferred tax adjustment amount for ‘Substitute Loss Carry Forwards’.

-Sections 202-205 of the Act provide for the carry-forward of Excess Negative Tax Expenses. As an alternative to incurring additional top-up tax when a domestic tax loss exceeds the GloBE loss, Article 2.7 of the OECD Administrative Guidance provides that an MNE can elect for the Excess Negative Tax Expense administrative procedure. The Act implements these provisions.

-Section 180 of the Act applies specific provisions for Blended CFC Regimes (which reflects the OECD Administrative Guidance and includes a simplified formula to allocate CFC taxes in blended CFC regimes such as GILTI for fiscal years that begin on or before 31 December 2025 but not ending after 30 June 2027).

-Article 2.3 of the OECD Administrative Guidance includes an anti-avoidance rule for excluded dividends. In particular, it applies to hybrid-mismatch situations, where a financial instrument (such as redeemable preference shares) may be treated as debt in one jurisdiction but equity in another. This is included in Article 141(3) of the UK Finance Act.

The 2024 Finance Act includes a number of aspects of the OECD Administrative Guidance, including:

Meaning of “ancillary” for Non-Profit Organisations

Section 1.6.of the First Set of OECD Administrative Guidance includes specific rules for the definition of  “ancillary” for Non-Profit Organisations. This is included in Schedule 12(3) of the 2024 Finance Act which includes a bright line test to determine if activities are ancillary.

Accrued Pension Expenses

Section 2.5 of the First Set of OECD Administrative Guidance includes rule to determine what is and is not an accrued pension expense for Pillar Two purposes.

Schedule 12(7) of the 2024 Finance Act ensures that the adjustment for pension fund expenses in GloBE income includes scenarios where groups have received amounts from funds, which can occur where the fund is in surplus. It also clarifies that the amounts of income and expense referred to are limited to those recognised in the accounts of a sponsoring employer solely due to the funding requirements or overfunding of its pension fund.

Transferable Tax Credits

Section 2 of the Second Set of OECD Administrative Guidance issued on July 17, 2023, provides new rules that apply to transferable tax credits. A transferable tax credit is similar to a refundable tax credit and can generally be used to pay income taxes or can be sold to someone else and the proceeds used to pay its income taxes or other expenses.

This is included in Schedule 12(8) of the 2024 Finance Act.

Substitute Loss Carry-Forwards

The new Schedule 12(20) of the 2024 Finance Act provides that where an entity has set a domestic loss against foreign income, and the territory consequently raises the limit on foreign tax credits that may be applied against tax on the foreign income, a special foreign tax asset will be created. This asset can be used to increase the covered tax balance of the entity.

The value of that asset is the amount of the domestic loss used, multiplied by the nominal rate of tax in the member’s territory but restricted to the minimum rate of 15%.

The amount of the asset that can be used in a period is limited to the additional amount of foreign tax credits that may be credited as a result of the utilisation of the domestic loss. Any remainder may be carried forward.

Substance-Based Income Exclusion

Section 3 of the Second Set of Administrative Guidance provides a number of rules relating to the Substance-Based Income Exclusion. This includes rules relating to:

 – Interjurisdictional assets and employees;

 – Impairment losses; and

 – Leases

Sections Schedule 12(21) –(25) of the 2024 Finance Act provide for these rules.

Currency Rules

The Second Set of OECD Administrative Guidance included additional rules for currency conversion when applying the GloBE rules. Schedule 12(33) of the 2024 Finance Act implements this and provides:

 – That calculations are to be carried out in the currency of the consolidated financial statements of the UPE

 – Where an amount is required to be converted into the currency of the consolidated financial statements, the conversion is done in accordance with the authorised accounting standards or the appropriate accounting standard if consolidated financial statements are not prepared.

 – Where a provision requires an amount to be converted into euros for the purpose of comparison with a threshold in the legislation, the average exchange rate for the December of the preceding period is used.

Transitional Rules for Intragroup Transfers

Section 4 of the First Set of OECD Administrative Guidance included more transitional rules for intra group transfers.

This is included of the Schedule 12(27) of the 2024 Finance Act.

Transitional Reporting Election

Schedule 12(40) of the 2024 Finance Act included a new transitional reporting election, which may change the reporting requirements for the information contained within the GIR for all members in a territory for which the election is made.

It can only apply for accounting periods that begin on or before 31 December 2028 and end before 1 July 2030.

One of the following conditions would need to be met:

-none of the members in the territory have top-up amounts or additional top-up amounts for the accounting period to which the election is to apply.

-there is only one responsible member responsible for all of the members in the territory for the accounting period to which the election is to apply, and the total amounts attributed to that responsible member for that period in respect of those members’ top-up amounts and additional top-up amounts is equal to the total of the members’ top-up amount and additional top-up amounts.

-there is more than one responsible member responsible for the members of the group in the territory for the accounting period to which the election is to apply, and each responsible member is responsible for every member of the group in the territory and has the same inclusion ratio for each member it is responsible for.

Securitisation Entities

The Fourth Set of OECD Administrative Guidance (issued in June 2024) provides that jurisdictions implementing QDMTTs may exclude a Securitisation Entity from its scope.

Where it does apply a QDMTT to securitization entities, the QDMTT is not required to impose top-up tax liabilities on SPVs used in securitisation transactions and any QDMTT liability in respect of a Securitisation Entity should generally be imposed on other Constituent Entities located in the jurisdiction.

The 2024 Finance Act amends Section 267 to exclude a securitisation company from the DMT. A ‘securitisation company’ has the meaning it has in the Taxation of Securitisation Companies Regulations 2006.

Finance Act 2025

Amongst other measures, the 2024 UK Budget confirmed further changes will be made to the UKs domestic implementation of the Pillar Two rules to provide for various aspects of the Third and Fourth Set of OECD Administrative Guidance. The Finance Act 2025 received Royal Assent on March 20, 2025.

December 2023 OECD Administrative Guidance

Aspects of the December 2023 OECD Administrative Guidance included in the Finance Act include:

Section 46(6) applies Section 1 of the December 2023 OECD Administrative Guidance (Transitional CbCR – Purchase Accounting Adjustments (consistent reporting condition, goodwill impairment adjustment)).

Section 47 applies Section 2.6 of the December 2023 OECD Administrative Guidance (Transitional CbCR – Treatment of hybrid arbitrage arrangements).

Section 25 applies Section 4.2 of the December 2023 OECD Administrative Guidance (Blended CFCs – multiple GloBE Jurisdictional ETRs, Blended CFCs – not required to calculate an ETR and Blended CFCs – income of non-GloBE Entities).

Section 52 applies Section 5.3 of the December 2023 OECD Administrative Guidance (June 30, 2026 Filing deadline).

June 2024 OECD Administrative Guidance
Aspects of the June 2024 OECD Administrative Guidance included in the Finance Act include:

Section 30 applies Section 1 of the June 2024 OECD Administrative Guidance (DTL Recapture rules) (Note that the primary approach is the methodology set out in regulations. The secondary approach is the one set out in Chapter 1 of the OECD’s June 2024 Administrative Guidance which only applies if no methodology has been set out in Regulations).

Section 12 applies Section 2.1.2 of the June 2024 OECD Administrative Guidance (Recalculated deferred tax where GloBE carrying value differs from accounting carrying value).

Section 13 includes provisions to apply Section 5.2.2 of the June 2024 OECD Administrative Guidance (Determining GloBE status when a Flow-through Entity is held directly by another Flow-through Entity).
Section 27 applies Section 3.1 of the June 2024 OECD Administrative Guidance (Cross-crediting systems). (Note that the primary approach is the methodology set out in regulations. The secondary approach is the one set out in Chapter 3.1 of the OECD’s June 2024 Administrative Guidance which only applies if no methodology has been set out in Regulations).

Section 28 applies Section 4.2 of the June 2024 OECD Administrative Guidance (Allocation of deferred tax expenses and benefits from a Parent Entity to a CFC, PE Hybrid or Reverse Hybrid and a Five-Year Election to exclude the allocation of all deferred tax expenses and benefits to CFCs, PEs, Hybrids and Rev Hybrids).

Section 31 applies Section 4.2.3 of the June 2024 OECD Administrative Guidance (Exclusion of deferred tax assets or liabilities arising under a Blended CFC regime from transition rules).

Section 13 applies Section 5.3 of the June 2024 OECD Administrative Guidance (Non-group owners: Partially owned Flow-through Entities and Non-group owners: Indirect minority ownership).

Section 16 applies Section 5.4.2 of the June 2024 OECD Administrative Guidance (Taxes allocated to a flow-through entity) and 5.6.2 (Extension of taxes pushed down to include Reverse Hybrids).

On July 21, 2025, the UK issued draft legislation for the January 2025 OECD Administrative Guidance and other relevant changes.

Paragraphs 15-18 of the 2025 Draft Law includes the deferred tax recognition amendments to Articles 9.1 of the GloBE Rules in the January 2025 OECD Administrative Guidance (including the grace period for DTA reversals). The consequential amendments to the Transitional CbCR Harbour and the QDMTT Safe Harbour are also included. This is planned to come into force from July 21, 2025.

Safe Harbour and Penalty Relief Guidance

Schedule 16 of the Act includes the Transitional CbCR Safe Harbour, based on the proposals included in the OECD Safe Harbours and Penalty Relief Guidance.

Certain MNE Groups are not required to prepare and file CbCR reports (eg domestic groups). Would this, therefore mean they cannot utilise the CbCR Safe Harbour?

The December 2023 Administrative Guidance provides that certain groups that are not required to prepare and file CbCR reports (eg domestic groups) can still qualify for the Transitional CbCR Safe Harbour. This applies providing they complete section 2.2.1.3(a) of the GloBE Information Return using the data from Qualified Financial Statements that would have been reported as Total Revenue and PBT in a Qualified CbC Report if the MNE Group were required to file a CbC Report.

For this purposes, “as reported in a Qualified CbC Report” means the amounts that would have been reported in a Qualified CbC Report if the MNE Group were required to file a CbC Report in accordance with the CbC requirements in the UPE Jurisdiction (or, if the UPE Jurisdiction does not have CbC requirements, the amounts that would have been reported in accordance with the OECD BEPS Action 13 Final Report and the OECD Guidance on the Implementation of Country-by-Country Reporting).

The UK reflects these requirements and it inserts a new Schedule 12(29) in the 2024 Finance Act which defines what is a qualifying CbC Report.

It states that a CbC Report is “qualifying” if the information relating to the territory is prepared on the basis of qualified financial statements of the multinational group.

Where there is no requirement under the law of any territory for a CbC report to be prepared and filed in respect of a multinational group, the filing member may include, in the information return in which the election is made, the information that would have been in such a report:

-prepared in accordance with legislation implementing the OECD’s guidance on country-by-country reporting under the law of the territory of the ultimate parent, or

-where there is no such legislation, prepared in accordance with that guidance.

Where this information has been included in that information return, that information is to be treated as if it were a country-by-country report for the purposes of the Transitional CbCR Safe Harbour.

The December 2023 OECD Administrative Guidance provides that where a Constituent Entity has entered into a Hybrid Arbitrage Arrangement, the Transitional CbCR Safe Harbour is not available to the MNE Group where the Hybrid Arbitrage Arrangement results in a jurisdiction qualifying for the safe harbour.

On March 14, 2024, the Exchequer Secretary to the Treasury confirmed that the UK is to apply the anti-avoidance rules targeting Hybrid Arbitrage Arrangements. This was included in the Finance Act 2025 and the UK will apply these provisions from March 14, 2024. The Finance Act also includes the amendments in the December 2023 OECD Administrative Guidance relating to purchase price adjustments.

Section 5.1 of the Second Set of OECD Administrative Guidance includes a QDMTT Safe Harbour Election.

The QDMTT Safe Harbour excludes the application of the GloBE Rules in the UK by deeming the Top-up Tax payable under the GloBE Rules to be nil where top-up tax is levied under a foreign QDMTT.  The MNE Group therefore only needs to undertake one calculation.

Schedule 12(41) of the 2024 Finance Act includes a new Schedule 16A in the Finance (No.2) Act 2023 to provide for this.

The Finance Act 2025 includes a new Section 12A in Schedule 16 which provides for the election for the UTPR transitional safe harbour.

Blended CFC Rules and the Transitional CbCR Safe Harbour

The Finance Act 2025 includes new subsections 180A(1) and 180A(2), that provide that where a transitional CbCR safe harbour election has been made in relation to a territory, the ETR of the members in that territory is just the simplified effective tax rate of group members in that territory computed for the purposes of the transitional CbCR safe harbour election.

However, where there are local blending subsets in a territory, a separate ETR must be computed for each using the simplified effective tax rate for any locally blending subset in relation to whose members a transitional safe harbour election applies.

A similar provision applies for the QDMTT Safe Harbour. In this case the jurisdictional ETR is to be computed using the qualifying domestic top-up tax figures.

The aggregate tax expense is divided by the income used to determine the qualifying domestic top-up taxes. As in the case of the transitional CbCR safe harbour election, where there are local blended subsets in a territory, a separate ETR is to be worked out for each. In the case of blended subgroups, each blended subgroup should compute its own ETR using its members’ aggregate tax expense and income numbers.

Qualifying Territories for the QDMTT Safe Harbour

Section 51 of Finance Act 2025 includes a provision which enables foreign QDMTTs to have qualifying status for the QDMTT Safe Harbour.

This is being implemented as it is unlikely the OECD will publish lists of taxes which have passed its peer review process in time for the UK to issue regulations before the end of 2024.

Once the OECD provides details on QDMTTs that qualify for the QDMTT Safe Harbour, the UK will issue regulations that will implement them for UK purposes. However, the new provisions state that where no regulation has been issued, a QDMTT qualifies for the QDMTT Safe Harbour if it complies with the OECD guidance, or that it is reasonable to expect it to do so.

This is treated as having come into force on November 7, 2024 and will be treated as being substantially enacted prior to the end of 2024 for the purposes of UK GAAP and IFRS. This will allow MNE groups with accounting periods ending on December 31 to make tax provisions in their 2024 accounts taking account of the QDMTT Safe Harbour.

When the GloBE Information Return/domestic tax returns are submitted for accounting periods ending on December 31, 2024 regulations would have been issued in the UK. MNE groups would then submit their tax returns on the basis of the position outlined in the regulations.

On March 31, 2025, the UK approved the Multinational Top-up Tax (Pillar Two Territories, Qualifying Domestic Top-up Taxes and Accredited Qualifying Domestic Top-up Taxes) Regulations 2025.

This provides a definitive statement of the qualifying territories applicable to groups whose accounting periods end on or after the date the regulations are laid (March 31, 2025). The position for accounting periods ending before this are based on the treatment under Section 51 of Finance Act 2025 as outlined above.

The list follows the same approach as the list of jurisdictions with Transitional Qualified Status published by the OECD on January 15, 2025 with no differences. As such it does not yet include a number of jurisdictions that have IIRs and DMTTs in place (and which were enacted late in 2024 or early 2025).

NMCE Safe Harbour

The 2025 Draft Law amends Schedule 16A of Finance (No.2) Act 2023 to include the Simplified Calculations Safe Harbour for Non-Material Constituent Entities. This is to apply to accounting periods beginning on or after December 31, 2023.

ELECTIONS

Elections in the OECD Model Rules

The Finance Act includes all of the key elections as provided in the OECD Model Rules, including:

-Excluded Entity Election (Section 127(8) of the Finance Act)

-Election to use the Realization Method (Section 161 of the Finance Act)

-Stock-Based Compensation Election (Section 162 of the Finance Act)

-Election to Spread Capital Gains (Section 163 of the Finance Act)

-Consolidation Election (Section 164 of the Finance Act)

-GloBE Loss Election (Section 187 of the Finance Act)

-Tax Transparency Election (Section 213 of the Finance Act)

-Taxable distribution Election (Section 214 of the Finance Act)

-Unclaimed Accrual Election (Section 182(8) of the Finance Act)

-Distribution Tax Regime Election (Section 189 of the Finance Act)

-Substance-Based Income Exclusion Election (Section 195(2) of the Finance Act)

-Prior Year Adjustment Election (Section 217(8) of the Finance Act)

-Transitional Safe Harbour Election (paragraph 3 of Schedule 16 of the Finance Act)

-De minimis Election (Section 199 of the Finance Act)

Section 48 of the Finance Act 2025 removes the Substance-Based Income Exclusion Election. A formal election is no longer required as the filing member is now able to choose exactly how much of its payroll costs and tangible asset amounts it wishes to include.

Elections in the Administrative Guidance

The UK Finance Act includes some of the elections from the OECD Administrative Guidance, including:

-Portfolio Shareholding Election (Section 141(7) of the Finance Act);

-Foreign Exchange Hedge Election (Section 166 of the Finance Act);

-Debt Release Election (Section 151 of the Finance Act);

-Equity Investment Inclusion Election (Section 165 of the Finance Act); and

-Excess Negative Tax Carry-Forward Election (Section 205 of the Finance Act).

New Elections

Article 9.1.3 of the OECD Model Rules provides that if an asset is transferred between group entities after November 30, 2021 and before the first year the GloBE rules apply to the group, the asset is recorded at its historic cost providing the entities would have been subject to the Pillar Two GloBE rules had they been in-scope.

Paragraph 2(7) of Schedule 16 of the Finance Act provides for an election for certain transfers where the tax paid on the transfer exceeds a ‘cap’.

The Finance Act 2024 included a new transitional reporting election, which may change the reporting requirements for the information contained within the GIR for all members in a territory for which the election is made. See above for details.

DEVIATIONS FROM THE OECD MODEL RULES/EU GLOBAL MINIMUM TAX DIRECTIVE

There are a number of deviations, including:

Protected Cell Companies

Unlike both the OECD Model Rules/Commentary and other draft legislation to date, Section 233 of the UK Finance Act addresses the treatment of protected cell companies which are particularly popular in captive insurance arrangements.

A protected cell company is a limited company that has been separated into legally distinct cells. The income, assets and liabilities of each cell are separate from all other cells. The Finance Act provides that:

-a protected cell company is not to be regarded as an entity, and

-each part of a protected cell company is to be treated as an entity distinct from the others.

Therefore, the fact an entity is a part of a protected cell company is irrelevant to determining whether it is a member of a consolidated group, and the accounts of the protected cell company are not to be regarded as consolidated financial statements.

Acceptable Financial Accounting Standards

Article 10.1.1 of the OECD Model Rules includes GAAP of the following as accepted accounting standards:

-Australia,

-Brazil,

-Canada,

-Member States of the European Union,

-Member States of the European Economic Area,

-Hong Kong (China),

-Japan,

-Mexico,

-New Zealand,

-the People’s Republic of China,

-the Republic of India,

-the Republic of Korea,

-Russia,

-Singapore,

-Switzerland,

-the United Kingdom, and

-the United States of America.

However, Section 250 of the UK Finance Act only includes the following as generally accepted accounting standards:

-Australia;

-Brazil;

-Canada;

-an EEA state;

-the Hong Kong Special Administrative Region of the People‘s Republic of China;

-Japan;

-Mexico;

-New Zealand;

-the People’s Republic of China;

-the Republic of India;

-the Republic of Korea;

-Singapore;

-Switzerland; and

-the United States of America

Therefore both EU members states and Russia do not appear on the default acceptable accounting standard list. This could potentially lead to these having to be reviewed and adjusted to prevent material competitive distortions.

Excluded Entities: 85% Subsidiaries

Under Article 1.5.2(b) of the OECD Model Rules certain 85%+ subsidiaries of excluded entities can also qualify as excluded entities where ‘substantially all’ of their income is excluded dividends or excluded equity gains or losses.

Section 127(7) of the UK Finance Act amends this to where ‘almost all’ of the entity’s income is excluded dividends or excluded equity gains or losses.

Insurance Investment Entities

The definition of an Insurance Investment Entity differs from the OECD Model Rules. Section 236(2) of the UK Finance Act doesn’t require it to be wholly owned by a regulated company, just that each person with direct ownership interests in the entity is subject to a regulatory regime in the territory in which it is established or managed.

Substitute Loss Carry-Forwards

Article 2.8 of the First Set of OECD Administrative Guidance provides for the inclusion of deferred tax in the GloBE deferred tax adjustment amount for ‘Substitute Loss Carry Forwards’.

This is already included in Section 183 of Finance (No.2) Act 2023. The 2024 Finance Act includes a new alternative to the substitute loss carry-forward rules where the carry forward of credits is not permitted

The new Schedule 12(20) of the 2024 Finance Act provides that where an entity has set a domestic loss against foreign income, and the territory consequently raises the limit on foreign tax credits that may be applied against tax on the foreign income, a special foreign tax asset will be created. This asset can be used to increase the covered tax balance of the entity. See above for details.

Asset Holding Companies

Section 44 of the Finance Act 2025 inserts a new subsection (3ZA) to section 267 of the Finance (No.2) Act 2023. This treats qualifying asset holding companies which are not members of multinational groups as excluded entities for DTT purposes.

Qualifying Territories

Section 51 of the Finance Act 2025 includes provisions which enables territories to be recognised as Pillar Two territories for the purposes of a qualifying IIR, and for foreign domestic minimum taxes to be QDMTTs.

The new provisions state that where no UK regulation has been issued:

-A territory will be a Pillar Two territory if it has a Qualified IIR, or if it would be reasonable to conclude that a tax is likely to be a Qualified IIR after it has been peer reviewed.

-A qualifying domestic top-up tax is a tax which is listed as a QDMTT by the OECD, or can reasonably be expected to be so listed following the conclusion of the OECDs peer review process.

On March 31, 2025, the UK approved the Multinational Top-up Tax (Pillar Two Territories, Qualifying Domestic Top-up Taxes and Accredited Qualifying Domestic Top-up Taxes) Regulations 2025.

This provides a definitive statement of the qualifying territories applicable to groups whose accounting periods end on or after the date the regulations are laid (March 31, 2025). The position for accounting periods ending before this are based on the treatment under Section 51 of Finance Act 2025 as outlined above.

The list follows the same approach as the list of jurisdictions with Transitional Qualified Status published by the OECD on January 15, 2025 with no differences. As such it does not yet include a number of jurisdictions that have IIRs and DMTTs in place (and which were enacted late in 2024 or early 2025).

DOMESTIC MINIMUM TAX

General

Part 4 of the Act provides for a domestic minimum tax which is designed with the intention of it being a Qualified Domestic Minimum Top-Up Tax (QDMTT). This is to apply for accounting periods beginning on or after December 31, 2023.

The UK QDMTT is comprehensive and applies as a stand-alone tax as opposed to simply mirroring the GloBE top-up tax.

Some aspects of the GloBE top-up tax calculation are used to determine the QDMTT amount for the sake of simplicity. However, the UK approach aligns with the OECDs suggested approach in its Administrative Guidance.

In particular, it is beneficial to adapt the design of a QDMTT to reflect a domestic tax regime as otherwise this could exacerbate the complexity of a QDMTT and include provisions that aren’t even relevant to the jurisdiction or for the QDMTT calculation.

In Section 272 of the Act for instance, the UK excludes relevant sections of the GloBE rules relating to eligible distribution tax systems as they aren’t relevant for the UK QDMTT.

Investment entities are excluded from the scope of the QDMTT.

QDMTT Design Features

Domestic Groups

The OECD Administrative Guidance provides that a QDMTT can also apply to purely domestic groups, i.e. groups with no foreign subsidiaries or branches (similar to the approach taken by the EU Global Minimum Tax Directive). Under Section 272(2) of the Finance Act, the domestic top-up tax also applies to wholly domestic groups.

Accounting Standards

The default GloBE rules apply so that the Accounting Standard of the UPE is used unless it is reasonably practicable. 

Section 272(8) of the Finance Act provides for a QDMTT election to use UK GAAP where the following are met:

-the alternative accounting standard is UK GAAP,

-all members of the group are located in the United Kingdom, and

-the filing member of the group has made an election in a self-assessment return that the underlying profits of all members of the group are to be determined on the basis of UK GAAP

Amended Top-Up Tax Calculations

The UK amends the general GloBE rules significantly to remove adjustments that aren’t relevant for the domestic top-up tax. Eg

-Section 173(1)(b) and Sections 189 to 192 remove the rules for eligible distribution tax systems; and

-Section 225 removes the rules governing the attribution of top-up amounts of investment entities.

Where the entity is not part of a group there are further adjustments to:

-Eliminate PE rules;

-Eliminate consolidation adjustment rules in Section 139;

-Eliminate purchase accounting adjustment rules in Section 140;

-Eliminate the Section 141(3)(c) rule for intra group dividends;

-Eliminate the arms-length requirement in Section 149;

-Eliminate transfer pricing rules in Section 150;

-Eliminate qualifying intra-group financing arrangement rules in Section 154;

-Eliminate the consolidation election in Section 164;

-Eliminate provisions for flow through UPE’s in Section 170;

-Eliminate provisions for UPE’s subject to deductible dividend regimes in Section 172;

-Eliminate the reallocation of tax expenses for hybrid, transparent and reverse hybrid entities in Section 178;

-Remove CFC and Blended CFC Rules in Sections 179 & 180;

-Eliminate tax allocation rules on intra group dividends in Section 181;

-Eliminate substitute loss c/f rules in Section 183;

-Eliminate the deemed distribution election in Section 189;

-Eliminate reorganisation rules in Sections 208-212;

-Eliminate the tax transparency election in Section 213;

-Eliminate the taxable distribution method election in Section 214;

-Eliminate the recapture for the deemed disposal of assets election where the entity leaves an MNE group < 5 years;

-Eliminate provisions on joint venture groups, minority owned members and multi-parent groups in Sections 226-229.

No Pushdown/PE Adjustments

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Section 273 of the Finance Act.

This preserves the UKs primary right to tax income accruing to a UK member entity which is also a CFC. If there were no statutory derogation from the general GloBE rules for the calculation of the domestic minimum tax, and the CFC tax paid by the controlling company abroad were included in the included taxes of the UK CFC, the effective tax rate would be increased. Therefore, excluding the CFC tax from the UK CFCs covered taxes allows the UK to tax low-taxed income at a higher rate than would be the case under an IIR.

Section 273 also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions.

Amended QDMTT Allocation

Section 43 of Finance Act 2025 inserts a new subsection 272(3A) to section 272 of the Finance (No.2) Act 2023. This changes the method used to allocate the total top-up amount chargeable to individual chargeable members. The current method in section 193 is used for both Multinational Top-up Tax and Domestic Top-up Tax and it allocates top-up amounts according to each member’s adjusted profits alone. The new method applies for amounts of Domestic Top-up Tax only and it applies an allocation key based on effective tax rate and adjusted profits is used, so top-up amounts are effectively allocated to members in proportion to each member’s contribution to the total top-up amount.

The 2025 Draft Law adds a new subsection (3) to the substituted section 193 which factors a payment for group relief into the entity level effective tax calculation for the purpose of allocating the DTT charge between members of the group. This is limited to the lower of the amount of the payment and the tax value of the group relief.

Registration

Schedule 14(6) of the Finance Act requires that when an MNE group becomes a qualifying multinational group it is required to register with the UK tax authority.

Groups must register with HMRC within 6 months of the end of the first accounting period that started on or after 31 December 2023 which makes them subject to the rules. Under Section 129 of the Finance Act, an MNE group is qualifying if its turnover meets the 750 million euro requirement.

The Pillar 2 Top-up Taxes Registration Notice, provides that a group or single entity who:

· has at least 1 entity located in the UK

· has made consolidated group annual revenues of €750 million or more within 2 of the last 4 accounting periods

is required to use the online service to register and report for Pillar 2 top-up taxes in the UK.

Only the filing member for the group can use the online service. This will be the ultimate parent entity (UPE) by default, but the UPE can nominate another group entity as the filing member when it registers for Pillar 2 purposes. On November 20, 2024, the UK issued guidance on how to replace a filing member for Pillar 2 purposes.

This is submitted via an online service and the new filing member will need to provide the group’s Pillar Two top-up taxes ID, the date the group first registered to report Pillar Two top up taxes in the UK, contact details and preferences, for one or two individuals or teams in the group and a contact postal address for the group.

Filing

Paragraphs 10(9)-(11) of Schedule 14 of the Finance Act requires filing of the GloBE Information Return within 15 months after the end of the fiscal period (increased to 18 months for the first accounting period an MNE is subject to the multinational top-up tax).

Schedule 14(2) of the Finance Act states that the filing member of a multinational group is the ultimate parent entity (UPE) of that group, unless the UPE nominates another group member to act as the filing member.

Under Schedule 14(10) of the Finance Act, a Constituent Entity is not required to file a GloBE Information Return with the UK tax administration if a GloBE Information Return has been filed by either the UPE or a  Designated Filing Entity located in a jurisdiction that has a Qualifying Competent Authority Agreement in effect with the UK for the Reporting Fiscal Year.

Where this applies, the Constituent Entity or the Designated Local Entity on its behalf, must notify the UK tax administration of the identity of the entity that is filing the GloBE Information Return and the jurisdiction in which it is located.

In addition, under Schedule 14(13) of the Finance Act, the filing member of a registered group must submit a self-assessment return within 15 months from the day after the end of the accounting period (increased to 18 months for the first accounting period an MNE is subject to the multinational top-up tax).

This will outline which members of the group are chargeable to multinational top-up tax, and the amount of multinational top-up tax chargeable to each member.

If the group was not a qualifying multinational group in the accounting period, and is unlikely to be in the next two accounting periods, it can submit a ‘below-threshold notification’ instead of a self-assessment return.

Payment

Schedule 14(32) of the Finance Act requires payment of top-up tax by the filing deadline.

Penalties

Various penalties apply under Schedule 14, Part 11 of the Finance Act.

In particular an administrative penalty applies if the GloBE information return is not submitted by the filing deadline.

The penalty is:

• £100, if the return or notification is submitted within three months after the submission date; and
• £200, if the return or notification is submitted within six months after the submission date.

These amounts are increased to £500 and £1,000 for third successive failures.

The penalty for failure to submit a self-assessment return or below-threshold notification by the deadline is:

• £100, if the return or notification is submitted within three months after the submission date;
• £200, if the return or notification is submitted within six months after the submission date;
• the higher of £200 and 10% of the unpaid tax, if the return or notification is submitted within twelve months after the submission date; and
• the higher of £200 and 20% of the unpaid tax, in any other case.

On May 20, 2024, the UK issued a Pillar 2 top-up taxes registration notice, that explains how to register for Pillar 2 top-up taxes in the UK, the information required and how to notify HMRC of any reporting related changes.