Pillar Two – a new reality for the tax position of MNEs

NL Law

As of 1 January 2024, large-scale domestic and multinational groups within in the EU will face a minimum effective tax rate of 15%, as a result of the agreement reached by the EU Member States on the Directive implementing Pillar Two (the Directive). This may have a significant impact on the tax position of large-scale groups.

Background of Pillar Two

On 8 October 2021, 137 jurisdictions of the OECD/G-20’s Inclusive Framework reached agreement on a two-pillar solution, followed by a set of model rules (the Global Anti-Base Erosion (GloBE) Rules). Both Pillars aim to tackle remaining base erosion and profit shifting (BEPS) issues, and tax competition between jurisdictions. Pillar One proposes a partial re-allocation of taxation rights. Pillar Two introduces a minimum effective taxation for large multinational groups and is implemented in the Directive. The objective of Pillar Two is to guarantee a minimum level of taxation by introducing rules that grant jurisdictions additional taxation rights, and to limit tax competition between jurisdictions. As a result, the new rules should reduce the risk of tax base erosion and profit shifting. A minimum tax rate of 15% was agreed. See also our previous Tax Alerts of 24 December 2021, 31 October 2022 and 21 December 2022.

On 22 December 2021, the European Commission published a proposal for a directive (2021/0433 (CNS)), which included the OECD GloBE Rules. Almost one year later, on 12 December 2022, as a result of the proposed directive being blocked by Hungary for some time, the EU Council announced that the EU Member States had reached an agreement to implement Pillar Two. The agreement on Pillar Two was formally ratified on 15 December 2022.

Directive on a minimum effective tax rate of 15%

In short, the Directive aims to target both international and domestic groups whose consolidated group revenue exceeds EUR 750 million in at least two of four consecutive years, and introduces a minimum effective tax rate of 15%. Compared with the OECD GloBE Rules, the scope of the agreed Directive is extended by the inclusion of large-scale domestic groups, to ensure compliance with EU freedoms (especially the freedom of establishment). The aim is for the rules to be implemented in all 27 EU Member States by 31 December 2023, effective 1 January 2024. As a result, the European Union will be the frontrunner in applying the global OECD/G-20 agreement on Pillar Two.

Based on Pillar Two, the Directive introduces certain technical rules to ensure the effective tax rate of 15%, the so-called ‘Income Inclusion Rule’ and the so-called ‘Undertaxed Payments Rule’. The Income Inclusion Rule imposes a top-up tax if the effective tax rate for entities in a certain jurisdiction does not meet the 15% minimum. In short, the Income Inclusion Rule applies to a parent entity in the EU in respect of low-taxed group entities (‘constituent entities’) to bring the taxation in line with the minimum effective tax rate of 15%. Under the Income Inclusion Rule, the minimum effective tax rate is paid at the level of the ultimate parent entity, in proportion to its ownership rights in subsidiaries that are taxed at a low effective tax rate (i.e. lower than 15%). Briefly stated, the effective tax rate is calculated by dividing the corporate tax due by the net qualifying income. The Undertaxed Payments Rule functions as a backstop rule, in addition to the Income Inclusion Rule. The Undertaxed Payments Rule applies in situations where, for example, a group is based in a non-EU country and that country does not impose the minimum rate. The share of the top-up tax is calculated based on a formula proportionate to the relative share of assets and employees. In addition, the Directive contains an optional introduction of a Qualified Domestic Minimum Top-up Tax, whereby any top-up tax to be paid by domestic entities with an effective tax rate of less than 15% that are part of an in-scope group will be collected by their own government (instead of by the ultimate parent entity in another jurisdiction).

In other words, the basic mechanism of the rules is that if the group which is in scope of the Directive is subject to an effective tax rate that does not meet the minimum standard in a country where the group carries out activities, Member States will collect a ‘top up’ tax by means of either the Income Inclusion Rule or the Undertaxed Payments Rule (potentially in the country where the minimum standard is not met based on the Qualified Domestic Minimum Top-up Tax).


The Directive provides for some exceptions. Certain entities will not be in scope, including government entities, international organisations, non-profit organisations, pension funds and investment funds that are the parent entity of a multinational group. Second, the Directive includes an exception for minimal amounts of income (‘de minimis income exclusion’). This exception should reduce the compliance burden. An exclusion furthermore applies to a fixed amount of income relating to substantive activities, such as buildings and people (a ‘substance carve-out’), based on which companies may exclude an amount of income that is equal to the sum of 5% of the value of certain tangible assets (such as property and equipment) and 5% of eligible payroll costs.

The Netherlands

Pending the agreement at EU level, the Dutch government has already initiated steps to avoid delay in the national implementation of Pillar Two. A public consultation was held for that reason from 24 October until 5 December 2022. The text of the draft bill largely corresponded with the EU Draft Directive, showing the intention of the Netherlands to align its national legislation with the European regulations.

On 16 December 2022, a day after the European formal ratification of Pillar Two, the Dutch State Secretary for Finance sent a letter to the Lower House. The letter shows that the Dutch government intends to present the final legislative proposal, the Minimum Tax Rate Act 2024, in spring 2023. This effectively means that, although much has already been worked out on both a European and a national level, the exact content and scope of the Dutch implementation of Pillar Two remains uncertain for the time being. Based on the required implementation date in the Directive, the Minimum Tax Act 2024 will likely enter into force on 1 January 2024.


Prior to the agreement at EU level, the Belgian federal government had already intervened legislatively to assure a minimum taxation of 15% of companies in Belgium as of income year 2023 onwards. To this end, the Belgian legislature modified the rules regarding the deduction of carried-forward tax losses and other tax attributes. Until 31 December 2022, a company could offset its losses and other tax attributes against its profits, for an amount of EUR 1 million + 70% of the profits exceeding this threshold of EUR 1 million. This meant that a company was effectively taxed on 30% of its profits exceeding EUR 1 million, at a tax rate of 25%. 

However, following the law of 26 December 2022, companies will be allowed to offset only 40% (instead of 70%) of their profits over EUR 1 million against the carried forward tax losses and other tax attributes, meaning that companies with profits exceeding EUR 1 million will be effectively taxed on 60% of their profits exceeding EUR 1 million. Since the corporate income tax rate is currently 25%, such companies will de facto be subject to an effective taxation of 15% on the profits exceeding EUR 1 million. 

The limitation of the deduction of carried-forward tax losses and other tax attributes to 40% of the profits exceeding EUR 1 million applies until the EU directive is implemented in Belgian law. Once the EU directive is transposed in Belgian legislation, the deduction limitation will, in principle, be brought back to 70% of the profits exceeding EUR 1 million.

It remains to be seen how the Belgian legislature will transpose the content of the EU directive, as no texts are currently available. However, given the fact that a minimum taxation of 15% has de facto been introduced in Belgium by the law of 26 December 2022, we can expect the EU directive to be implemented without significant issues.


The Luxembourg government has not yet formally communicated on the recent adoption of the Directive. Although the content of the Luxembourg law implementing the Directive is unknown at this stage, the process is unlikely to encounter major obstacles as, in the words of its current Minister of Finance, “Luxembourg will strive for a swift implementation of the global tax reform”.

A certain number of Luxembourg companies belonging to multinational groups will most likely fall under the scope of Pillar Two rules. This being said, the impact should be more limited for the investment fund industry, representing a major part of the Luxembourg financial sector, due to specific exclusions provided under the Directive. In particular, an investment fund should be excluded from the scope of the Directive if, among other things, (i) it is the ultimate parent entity of a group, (ii) it requires its investors to be unrelated, and (iii) it is subject to investment fund regulation in the place of its establishment. This exclusion also provides for a case in which the regulation is imposed on the fund manager, therefore extending the exclusion to alternative investment funds (AIF) as well as reserved alternative investment funds (RAIF) for which the regulatory burden is in the fund manager. Additionally, holding companies of such funds are also excluded from the scope of the Directive.

Concluding remarks

As a result of the agreement being reached by the EU Member States, Pillar Two will become reality in all EU Member States, and other, non-EU countries are likely to follow. It is important now for multinational and large-scale domestic groups to assess the potential impact of Pillar Two on the group and the Benelux entities. More specifically, it is essential to analyze whether Pillar Two could lead to top-up tax being due and which reporting obligations may exist.