Pillar Two: UTPR Initial Phase of Activity Exemption

Excluded entities are by their nature outside the scope of these provisions (eg they are not considered when determining assets held or the number of jurisdictions). However, investment entities that aren’t excluded entities are still excluded. 

Similarly joint ventures (JVs) or a JV group are not taken into account as they are not required to apply the IIR, however, minority owned entities are taken into account. 

The exclusion applies for a five year period from when the MNE group first comes within the scope of the Pillar Two GloBE rules.

In many cases an MNE group may already be within the scope of the GloBE rules but the domestic legislation may implement the UTPR after the IIR. In this case, the five-year exclusion applies from when the UTPR comes into effect. 

For instance, if a jurisdiction implemented an IIR from January 1, 2024, but delayed the UTPR until January 1, 2026, the UTPR exclusion would apply from January 1, 2026 to December 31, 2030.

If an MNE group fell outside the scope of the GloBE rules during the five-year period, this would not suspend the five-year period (and in this case the MNE group would derive no benefit from the rule).

Anti-Avoidance Rule for Corporate Inversions

There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.

This is because if an MNE group had its UPE in a jurisdiction it would generally be subject to the IIR on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.

Therefore a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule. 

Therefore, Article 9.3.1 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction.