Pillar Two GloBE Rules and Estonia’s Distribution Tax

Distribution Tax Regimes, Generally

Article 7.3.1 of the OECD Model Rules permits a constituent entity to to make a Distribution Tax Regime Election.  This is an annual election on a jurisdictional basis.

A distribution tax regime is a tax regime that doesn’t levy a tax charge on taxable income when it is generated, but when it is distributed.

Estonia is a good example of this, which levies a 20% corporate income tax charge when profits are distributed.

In order to ensure that expenses that are not deductible for tax purposes are also taxed, non-business expenses are treated as a deemed distribution and would also be subject to the distribution tax. 

Some aspects of a distribution tax regime fit in with the Pillar Two GloBE Rules nicely.

For instance, the Estonian distribution tax relies on the financial accounts, just like the GloBE Rules. There are limited book-to-tax adjustments unlike in most traditional corporate income tax regimes.

However, the issue with distribution tax regimes relates to the timing of income and tax suffered for the purpose of calculating the GloBE ETR.

As such, ensuring that a distribution tax regime is accommodated by the Pillar Two GloBE Rules requires some specific adjustments to the general rule. Article 7.3 of the OECD Model Rules implements this. 

The key issue is that a company may not distribute profits for a number of years. They would have GloBE income but no or limited tax suffered on that income which would lead to a sizeable Pillar Two top-up tax liability. 

In the years that profits were distributed and a distribution tax charge was incurred, the tax levied may be substantial compared to the income for the year, resulting in no top-up tax. The tax suffered does not, therefore, tie in with annual taxable income. 

Distribution Tax Regimes under the GloBE Rules

The way that the Model Rules incorporate distribution tax regimes is by deeming an amount of tax to have been suffered on the income to the lower of:

  •  the amount that would have been suffered under the 15% global minimum rate; and 
  • the amount of distribution tax that would have been paid if the Constituent Entities in the jurisdiction had distributed all of their income during the fiscal year.

After doing this, a Deemed Distribution Tax Recapture Account is created.

This tracks the amount of the deemed distribution tax, and reduces it for losses and distributions.

If the Deemed Distribution Tax Recapture Account is not reduced to zero (on a rolling basis) within four years after the year of creation then the balance on the account is clawed back and included in adjusted covered taxes. 

A Deemed Distribution Tax Recapture Account is applied to the entire jurisdiction to ensure that jurisdictional blending applies. 

Note that the distribution tax regime election is made on an annual basis. This means that the next four years are considered in relation to the year of creation. Any future years where there is deemed distribution tax are then considered separately and there is a new four year window. This ensures that distribution tax is correctly tracked to the year of creation. 

How the Deemed Distribution Tax Recapture Account Applies

When the Distribution Tax Regime Election is made, any amount of deemed distribution tax for that year is added to the account. Then in the following four years, this account is reduced for:

  • any distribution tax actually paid in the jurisdiction (in chronological order)
  • a GloBE loss for the jurisdiction. The reduction in the deemed distribution account is based on the 15% global minimum rate * the amount of the GloBE loss and again applies in chronological order. 
  • any Recapture Account Loss Carry-forward. This applies when a GloBE loss for a jurisdiction exceeds the amount in the Deemed Distribution Tax Recapture Account.

If the Deemed Distribution Tax Recapture Account is not reduced to zero by the end of the fourth fiscal year after it was created, the top-up tax is recalculated for the year of creation.

The outstanding balance on the distribution account is effectively clawed back and deducted from adjusted covered taxes for that year. 

Example – Deemed Distribution Tax Recapture Account

X Co is resident in Estonia which applies a distribution tax regime. The distribution tax is applied at 20% on a net basis (ie 100 of distributable reserves would suffer tax of 20 and the distribution would be 80).

X Co makes a distribution tax regime election for all years under Article 7.3.1 of the OECD Model Rules


In 2024, X Co has GloBe Income of 10 million euros. No distribution is made.

As such deemed distribution tax is created of 1.5 million euros (as this is less than 2 million distribution tax it would have suffered under Estonian law if it had distributed the 10 million). At the end of 2024 the Deemed Distribution Tax Recapture Account has a balance of 1.5 million euros. 


In 2025, X Co has GloBe Income of 5 million euros. It distributes 1 million euros and suffers distribution tax of 200,000 euros. This reduces the 2024 Deemed Distribution Tax Recapture Account to 1.3 million euros. Deemed distribution tax for 2025 is 750,000 euros. 


In 2026, X Co incurs a loss of 5 million euros. Tax attributed to the loss at the minimum rate (750,000 euros) is deducted from the 2024 Deemed Distribution Tax Recapture Account and reduces it to 550,000 euros. 

2027 and 2028

In 2027 and 2028, X Co has GloBE income of 1 million euros and deemed distribution tax of 150,000 euros each year. As such at the end of 2028 the balance on the Deemed Distribution Tax Recapture Account is 550,000 euros.  

The adjusted covered taxes for 2024 need to be amended as the Deemed Distribution Tax Recapture Account has not been reduced to zero by the end of 2028.

The 2024 adjusted covered tax is reduced from 1.5 million euros by 550,000 to equal 950,000 euros.