Minimum effective tax rate comes into force in EU member states

The 15% rate applies to multinational companies active in EU member states; the European Commission says Pillar Two rules limit a ‘race to the bottom’ in tax rates.

New rules that entered into force on Monday provide a minimum effective tax rate of 15% for multinational companies active in European Union (EU) member states, according to a news release Monday from the European Commission.

The entry into force of these rules, which the EU member states agreed to unanimously in 2022, formalises the EU’s implementation of Pillar Two rules. Those rules were part of a global deal on international tax reform reached in 2021.

Almost 140 jurisdictions worldwide have now signed on to Pillar Two, which the European Commission said limits countries’ ability to create a “race to the bottom” by lowering their corporate income tax rate to attract investment.

The rules for a minimum tax rate will apply to multinational enterprise groups and large-scale domestic groups in the EU with combined financial revenues of more than €750 million a year. They will apply to any large group, both domestic and international, with a parent company or a subsidiary located in an EU member state.

According to the news release, the directive:

  • Includes rules on how to calculate and apply a top-up tax due in a particular country if the effective tax rate is below 15%;
  • Includes rules on what happens if a subsidiary company is not subject to the minimum effective tax rate in a foreign country where it is located (in that case, the member state of the parent company will apply a top-up tax); and
  • Ensures effective taxation in situations where the parent company is located outside the EU in a low-tax jurisdiction that does not apply equivalent rules.

With the taxation rule becoming effective, the EU has fulfilled its pledge to be among the first to implement the Organisation for Economic Co-operation and Development tax reform, the news release said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.

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