Groundbreaking new EU rules come into effect today, introducing a minimum effective tax rate of 15% for multinational companies operating in EU Member States.

The framework will bring fairness and greater stability to the tax landscape in the EU and worldwide, while also modernizing and adapting it better to today’s globalized digital world. The entry into force of the minimum effective taxation rules, agreed unanimously by member states in 2022, formalizes the EU’s implementation of the so-called ‘Pillar 2’ rules, which were adopted as part of the global agreement on international tax reform in 2021 .

Globally, almost 140 jurisdictions have now acceded to these rules, but the EU has been a pioneer in turning them into binding law. By reducing companies’ incentives to shift profits to low-tax jurisdictions, Pillar 2 limits so-called “competition to the bottom” — that is, the battle between countries to lower corporate income tax rates in order to attract investment. There have already been results, with some zero-tax jurisdictions announcing the introduction of corporate income tax for companies that fall within the scope of the rules.

More detail

The rules will govern multinational business groups and large-scale domestic groups in the EU with a combined financial income of more than €750 million per year. They will apply to every large group, domestic and international, with a parent or subsidiary company established in an EU member state.

The Directive includes a common set of rules on how to calculate and apply the ‘additional’ tax due in a particular country where the effective tax rate is below 15%. If a subsidiary company is not taxed at the minimum effective rate in the foreign country in which it is established, the parent company’s Member State also applies an additional tax to the parent company. In addition, the directive ensures effective taxation in cases where the parent company is located outside the EU, in a low-tax country that does not apply equivalent rules.

Record

With this historic piece of legislation, the EU’s commitment to be among the first to implement OECD tax reform is fulfilled. Ensuring a global minimum level of corporate taxation is one of the two pillars of the OECD global agreement (Pillar 2) — the other being the partial redistribution of tax entitlements (Pillar 1).

Under the latter, international rules on how the corporate profits of the largest and most profitable multinationals are apportioned between countries will be adjusted to reflect the changing nature of business models and the ability of companies to operate without a physical presence.

Athena Papakosta