image showing 'OECDpillars.com logo'

Pillar Two: Initial Phase of Activity Exemption

Pillar Two: UTPR Initial Phase of Activity Exemption

Article 9.3 of the OECD Model Rules provides for an exclusion from the under-taxed payments rule (UTPR) for MNEs that are in the initial phase of their activity for a five-year period.  The exclusion applies just for the UTPR – not the income inclusion rule (IIR). 

In order to benefit from the exclusion, the requirements in Article 9.3.2 of the OECD Model Rules need to be met:
 
Firstly, the MNE group can qualify for the exclusion if it has constituent entities in no more than five jurisdictions outside the ‘reference jurisdiction’. The reference jurisdiction is defined in Article 9.3.3 of the OECD Model Rules as the jurisdiction where the MNE group has the highest total value of its tangible assets based on the net book value of the assets held by constituent entities in that jurisdiction.  
 
As always with the Pillar Two GloBE rules the net book value of assets is based on the financial accounts. In particular it is the average value of tangible fixed assets at the start and end of the accounting period, as adjusted for depreciation and impairments. 
 
The exclusion is for a five-year period but the jurisdictions don’t have to remain the same, they can differ over the five-year period provided there are no more than five. 
 
Secondly, the value of tangible assets (defined as above) cannot exceed 50 million euros in all jurisdictions aside from the reference jurisdiction. Therefore the total value of the assets outside the main base of operations must be 50 million euros or less.
 

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. 

Instant Access

Full access to all articles, analysis, modelling tools and trackers.