On January 1, 2024, the Organization for Economic Co-operation and Development (OECD) ushered in a new era for corporate taxation with its Pillar Two tax regime — otherwise known as the global minimum tax.
While the massive undertaking — unveiled in more than 50 jurisdictions, including all G7 economics except for the United States — was introduced to ensure large multinationals pay a minimum tax rate of at least 15% in the jurisdictions in which they operate, the regime will also impact companies much smaller in size, including private enterprises and family offices.
At first sight, many may not expect Pillar Two to apply to these smaller companies, as they are not ordinarily required to prepare consolidated financial statements (or may only be required to do so at the level of their investments). However, in some cases, Pillar Two requires “deemed” consolidated financial statements to be prepared, resulting in certain privately-owned businesses or wealth management structures being considered a multinational within the scope of the new tax regime.
These companies should take the following steps to determine whether, and how, Pillar Two will impact their business today:
Step 1: Determine applicability
The first step is to assess whether your company is subject to Pillar Two. Consider the following factors:
- Multinational operations: Determine if your company has operations in multiple countries or any foreign entities. If “no” nothing further needs to be done as you aren’t subject to Pillar Two, if “yes,” the next step is determining whether your company meets the revenue threshold.
- Revenue threshold: Evaluate whether your combined revenue, when considering all potentially related/commonly controlled entities, is close to $810 million (equivalent to the €750 million threshold). Understanding how the deemed consolidation rules apply to your company and whether you fall within the scope of the regime is crucial at this stage. If “no,” nothing further needs to be done as you aren’t subject to Pillar Two. If “yes,” then move on to determine whether you operate in a country that has adopted Pillar Two.
- Country adoption: Identify if any of your operations are in countries that have adopted aspects of Pillar Two. Note that different countries may be at different stages of adoption. If none of the countries in which your company operates have adopted Pillar Two, nothing further needs to be done. However, if any countries have adopted the new tax rules, further compliance action is required.
Step 2: Assess the impact
Once you establish that your company is subject to Pillar Two, it is essential to evaluate the potential tax consequences and understand any next steps. Consider the following broad scenarios:
- Compliance requirements: Determine the compliance requirements your company may need to meet in 2024, such as ensuring your foreign-controlled entity pays tax at the minimum 15% rate.
- Low-tax jurisdiction: If your company operates in a low-tax jurisdiction (e.g., Ireland, Cayman Islands, UAE), you may face additional tax liabilities.
- Flow-Through Structures: If your company operates using flow-through structures in the U.S., Pillar Two may impose minimum taxes where there are passthroughs or disregarded entities in the structure — even if individual owners are already paying significant amounts in taxes (i.e., ESOPs, grantor trusts, S-corps or partnerships). This could result in a material additional tax liability.
As the Pillar Two tax regime takes effect, it is important for private enterprises and family offices to proactively assess their exposure, scenario plan and take the necessary steps to comply with the new regulations. By determining applicability and understanding potential tax consequences, businesses can mitigate risks, optimize their tax strategies and stay not one, but two steps ahead.