Intragroup financing arrangements are subject to special rules under Article 3.2.7 of the OECD Model Rules.
This is a common area of tax planning for MNE’s and without specific provisions, they could adjust the effective tax rate (ETR) of jurisdictions by structuring financing operations.
For instance, they could reduce Pillar Two GloBE income in jurisdictions that were just below the minimum rate (therefore increasing the ETR and potentially resulting in the jurisdictional ETR being over 15%) whilst increasing Pillar Two GloBE income in jurisdictions that had significant ETR capacity (ie where the jurisdictional ETR is significantly above 15% anyway).
A typical arrangement that would be targeted by this is a hybrid financing arrangement such as:
MNE Co 1 is resident in a low-tax jurisdiction. It borrows money from MNE Co 2 by way of a debt instrument 2. MNE Co 2 is a member of the same MNE group and is resident in a high tax jurisdiction.
The debt instrument is treated as equity for tax purposes and debt for financial accounting purposes in both jurisdictions.
As such, interest payments by MNE Co 1 would reduce Pillar Two GloBE income (and therefore increase the Pillar Two GloBE ETR) without any reduction in the domestic tax liability (as dividends are generally not tax-deductible).
By contrast, the interest receipt would increase Pillar Two GloBE income in MNE Co 2 (reducing its Pillar Two GloBE ETR) without a corresponding increase in its domestic taxable income.
Therefore, as an anti-avoidance measure, the Pillar Two GloBE income or loss of a low-taxed entity does not include any expenses of an intra-group financing arrangement that can be expected to increase the expenses of a low-taxed entity without a corresponding increase in the taxable income of a high taxed entity.
A low-taxed entity is generally an entity in a jurisdiction where the Pillar Two GloBE ETR is less than 15%.
There is no increase in the taxable income of a high-taxed entity if the income qualifies for an exclusion or deduction ie just because the high-taxed entity is allocated the income for local tax purposes does not mean this requirement is met, if it qualified for deduction or credits that offset it.
This could be the case if, for example, it has brought forward interest expenses sufficient to offset interest received from the low-taxed entity.
Whether there is an intragroup financing arrangement in place is an objective test and is based on whether there is an arrangement between two or more members of an MNE group which results in a high taxed entity directly or indirectly providing credit or making an investment in a low taxed entity.
In addition, again using an objective test, the arrangement must be reasonably expected to reduce the Pillar Two GloBE income of a low taxed entity without increasing the taxable income of a high taxed entity over the duration of the agreement.
Profits from international shipping (eg profits derived from the transport of cargo or passengers by ships) as well as certain ancillary income are generally exempt for Pillar Two GloBE income purposes under Article 3.3 of the OECD Model Rules.
As this would have been included in the profits in the financial accounts, an adjustment to the Pillar Two GloBE income is required.
Insurance Investment Entities are subject to special treatment under the Pillar Two GloBE Rules. Read our analysis of the key provisions.
On March 20, 2025, the Swedish Ministry of Finance issued a draft law to amend the Global Minimum Tax Act. The draft law is open for consultation until May 26, 2025. The purpose of the draft law is to implement the provisions of the June 2024 OECD Administrative Guidance into domestic law.
On March 18, 2025, the government approved a draft bill on the amendment of Liechtenstein’s Global Minimum Tax Act (‘the bill’). The bill is intended to implement domestically the OECD provisions for the exchange of information in the GloBE Information Return (GIR) under the multilateral agreement between competent authorities on the exchange of GloBE information (GIR MCAA).
On March 6, 2025 a Decree of the Italian Ministry of Finance on Notification Requirements for Global Minimum Tax purposes was published in the Official Gazette. This provides more details on the double filing relief notification under Article 51(4) of Legislative Decree December 27, 2023, no. 209 (the Global Minimum Tax Law).
The Pillar Two Rules include specific provisions for tax transparent entities to avoid artificially low effective tax rates and significant top-up tax, particularly for tax transparent UPEs.
Centralized HR/payroll companies are frequently used by MNE groups but raise specific issues in relation to the Pillar Two GloBE Rules. In particular, the impact of using a centralized function and the nature of recharges could have an impact on the substance-based income exclusion of group entities.
Jurisdictions that apply a territorial basis do not tax foreign source income. This raises some interesting issues in the application of the Pillar 2 rules.
On February 20, 2025, Gibraltar issued the Income Tax (Allowances, Deductions, and Exemptions) (Amendment) Rules 2025 to allow in-scope MNEs to just be taxed under the Global Minimum Tax Act, and not the Income Tax Act.
In this article we look at the interaction between deferred tax on bonus depreciation and the substance-based income exclusion on investments in tangible assets.
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