In one of our previous articles, we informed you about the upcoming global minimum tax regulation (so-called Pillar II) and outlined its general principles. In this publication, we will analyse which entities are obliged to apply the new regulations and discuss the model principles of the Pillar 2 structure that may be introduced into national tax legislation.

Tax collection mechanisms

Where the effective tax rate (ETR) is below 15%, the following mechanisms for the collection of the global minimum tax are envisaged:

• Income Inclusion Rule (the so-called IIR)- The IIR rule is that a top-up tax is levied on the parent entity in respect of the low-taxed income of group entities (which are referred to as qualified entities). Most often, the IIR rule will be applied by the entity at or near the top of the ownership chain, i.e. the ultimate parent entity. Subsequently, the so-called ‘top-down’ approach is applied, meaning that the right to collect tax may pass to subsequent entities in the capital hierarchy. In a situation where the ultimate parent entity does not apply the IIR principle, the obligation will be transferred to one or more direct parent entities that apply the IIR principle to their low-taxed qualifying entities.

Example:

• Undertaxed Payments Rule (UTPR) – used as an additional mechanism in cases where the IIR rule does not apply. This should be the case where the ultimate parent is established outside the EU (this is because the ultimate parent established in the EU should in principle apply the IIR rule to itself and to its domestic subsidiaries, or it considers that a top-up tax has been imposed locally through a domestic top-up tax). It may also be the case that the jurisdiction where the ultimate parent or other parent company is located has not yet legislated for a global minimum tax. In such a situation, the qualifying entities of such a group of companies will be allocated a share – payable in their Member State – of the top-up tax associated with the low-taxed subsidiaries of the MNE group. Under the UTPR, the top-up tax is allocated between the jurisdictions of the subsidiaries based on the number of employees and the value of fixed assets. The UTPR rule is to be applied from the 2025 tax year.

• The Pillar 2 regulations also provide for the power of member states to introduce a domestic top-up tax (QDMTT). It will allow for a top-up tax to be charged and collected in the jurisdiction where the low level of taxation has occurred, rather than collecting all of the additional tax at the ultimate parent entity level. If this election is made, the parent applying the IIR rule will be required to credit the qualified domestic top-up tax towards the calculation of the top-up tax in respect of the jurisdiction.

To whom does a global minimum tax apply?

As envisaged by the OECD, the global minimum tax is to be 15 per cent and will apply to multinational enterprises (MNEs) and large domestic companies with consolidated revenues of at least 2 out of the last 4 years exceeding €750 million. This threshold is set on the basis of consolidated financial statements and is intended to ensure consistency with existing international corporate tax policies, such as the rules on the exchange of information on group entities.

The most important entity with an obligation to account for the global minimum tax is the ultimate parent entity (UPE). According to the Directive, this is an entity that holds – directly or indirectly – a controlling interest in any other entity and that is not held – directly or indirectly – by another entity that would hold a controlling interest in it, or a central entity. In practice, it is the entity that is required to consolidate the financial statements of all entities in a multinational or large national group, and that has the most important information and capacity to ensure that the group’s level of taxation in each jurisdiction complies with the minimum rate.

The Directive also provides for situations where the obligation may apply to an entity at a lower level in the ownership structure of the group – the so-called intermediate parent entity (IPE). This is a qualifying entity that has – directly or indirectly – an ownership interest in another qualifying entity of the same MNE group and that is not the ultimate parent, a partially owned parent, a foreign permanent establishment or an investment entity.

Under the terms of the Directive, a qualified entity (CE) is considered to be an entity (any legal person or legal structure that prepares separate financial statements) or a foreign permanent establishment that is part of a multinational enterprise group or a large corporate group.

In each of the above cases, Polish entities belonging to a multinational group subject to Pillar 2 regulations should provide the relevant accounting data to enable the calculation of the ETR.

The following is a graphical summary of the 3 countervailing tax collection regimes:

Please stay tuned for further publications on Pillar II. The next edition of our series will deal with one of the key elements of the global minimum tax calculation – the determination of qualified income or qualified loss.