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International Participation Exemption Regimes & Pillar Two

Participation exemptions in many domestic tax regimes provide for a corporate income tax (or in some cases a withholding tax) exemption on dividends and capital gains on equity interests between group or connected companies. 

The Pillar Two GloBE Rules include a participation exemption when calculating GloBE income. This will not however always tie into the domestic law treatment. 

Articles 3.2.1(b) and (c) of the Model Rules provide that excluded dividends and excluded equity gains or losses are deducted (or in the case of losses, added back) from financial accounting profits/losses when calculating GloBE income. 

The aim is to try and harmoise the measure of taxable profit for Pillar Two purposes (GloBE income) with domestic taxable income. 

Excluded Dividends are defined in Article 10 of the Model Rules as generally dividends (or other distributions) received or accrued from an ownership interest except where they had the right to less than 10% of the profits, capital, reserves, or voting rights of an entity and which had been held for less than one year.

Excluded Equity Gains or Losses include gains and losses from disposition of an ownership interest except where they had the right to less than 10% of the profits, capital, reserves, or voting rights of an entity. 

Note that for Pillar Two purposes dividends arising from a <10% ownership could still be excluded if they had been held for a year or more, however, gains or losses on the holding wouldn’t be. 

The domestic law in some jurisdictions mirrors key aspects of these rules. Austria, for example excludes dividends from corporate income tax if an Austrian company holds at least 10% of the issued share capital for a minimum holding period of one year. Various other EU jurisdictions also apply a similar rule (eg the Czech Republic, Denmark and Finland).

Not all jurisdictions adopt participation regimes that match these requirements. 

Some adopt much more stringent requirements. 

Egypt exempts 90% of dividends where at least 25% of the share capital or the voting rights of the subsidiary company is held for a period of two years. 

By contrast France exempts 95% of dividends and 88% of capital gains on shareholdings where the ownership interest is at least 5% and the shares have been or will be held for at least two years. 

The Netherlands applies a similar 5% ownership requirement for its participation regime. There is no specific holding period but portfolio investments are excluded. The determination as to whether an interest is held as a portfolio investment is based on the facts and intention of the parent company.

Hungary exempts dividends where there is a one-year ownership period irrespective of the ownership interest. 

Therefore, there is significant divergence between the GloBE Rules and many domestic tax systems. This will impact on the GloBE ETR calculation and potentially the amount of any top-up tax. 


Company A has held 8% of the ownership interest of Company B for 1 year. It receives dividends of 5 Million Euros. 

For domestic tax purposes a participation exemption applies where a company holds at least 5% of the ownership interest. The 5 Million dividend would therefore be exempt. 

For Pillar Two GloBE purposes, the 5 Million dividend would not be an excluded dividend given the ownership interest was 5%.  This would therefore increase GloBE income and reduce the GloBE effective tax rate. 

Summary of international participation regimes