The Netherlands is one of the countries that will introduce the new European tax law Pillar Two Groups that include Dutch group companies can be affected by the Pillar Two rules and become subject to additional compliance obligations. Pillar Two is a new tax system that will be implemented in the European Union on 1 January 2024.
It aims to ensure a global minimum effective tax rate of 15%. It targets large groups with a turnover of at least 750 million euro, in at least two of the four preceding years. To calculate for every jurisdiction whether the entities in these countries are effectively taxed against at least 15% Pillar 2 introduces its own calculations.
If not, Pillar 2 introduces three main rules to achieve this:
- The domestic top-up tax.
- The Income Inclusion rule.
- The Undertaxed Payments Rule.
By means of these rules, countries will impose additional taxation to achieve the 15% minimum tax.
The domestic top-up tax
With the domestic top-up tax, Pillar 2 countries levy an additional tax if group entities in this country are subject to an effective tax rate lower than 15%.
The Income Inclusion rule
The Income inclusion rule means an additional tax that will be imposed on the ultimate parent company of the group in case a foreign subsidiary of the group is effectively taxed at a rate lower than 15%. This top-up tax in the country of the parent company ensures that group enterprises cannot have an effective tax rate under 15% in any jurisdiction they operate.
The Undertaxed Payments Rule
But what happens if the ultimate parent company of a large multinational is located in a jurisdiction that has not implemented Pillar 2? In that case, the Undertaxed Payment Rule acts as a back up. This rule allocates the right to impose a top-up tax to the different jurisdictions in which subsidiaries are located and that have implemented Pillar 2. This is done in accordance with two indicators, namely the number of employees (expressed in full-time equivalents) and the number of tangible assets of the group in those jurisdictions.
