Pillar Two – what next?

Groups with consolidated group revenue above €750 million in at least two of the previous four accounting periods need to consider the Pillar Two rules, which may ‘top up’ amounts to be taxed either in the UK or in other jurisdictions. The UK’s implementation of this international initiative includes both a multinational top-up tax (MTT), for ultimate parent entities or intermediate UK parent companies of multi-national groups, and a domestic top-up tax (DTT) for UK subsidiaries of such groups or UK-only groups. Both MTT and DTT apply for accounting periods beginning on or after 31 December 2023. In practice, this means that for many companies, their year ending 31 December 2024 will be the first year in scope.

Although the primary legislation implementing both the MTT and DTT is already in place, the full framework of law and supporting guidance is not yet finalised. Here, we look at the latest developments.

What’s new? Further UK legislation and regulations

Years ended 31 December 2024 onwards

UK regulations have been laid out which list the territories that have implemented a qualifying income inclusion rule (IIR), a qualifying domestic minimum top-up tax (QDMTT), and the taxes and territories accredited for QDMTT safe harbour purposes. The UK regulations give HMRC the power to specify additional territories or taxes in the future by publishing a notice. Only territories and taxes named by the regulations or in a subsequent HMRC notice will be recognised as qualifying. The regulations are effective from April 2025, enabling safe harbour elections to be made for certain territories under Schedule 16A of the Finance (No.2) Act 2023.

Years ended 31 December 2025 onwards – UTPR

The Finance Act 2025 sets out the legislation for the UK’s implementation of the final charging mechanism under Pillar Two, the undertaxed profits rule (UTPR). The UTPR will effectively operate as a secondary and backstop charging mechanism supporting the UK’s MTT. The UTPR will apply for accounting periods commencing on or after 31 December 2024 and will operate where not all relevant top-up amounts are allocated under the MTT (or foreign equivalent). This may, for example, be in point where there is no MTT equivalent in the jurisdiction of the ultimate parent company of a multi-national group. We recommend that groups seek advice now on the UTPR legislation, which also includes a transitional safe harbour, to understand how they may be impacted for accounting periods starting in this calendar year.

Over 135 countries are adopting Pillar Two but some significant economies – notably the US, China and India – are not. Other jurisdictions are implementing the main Pillar Two charging mechanisms a year after the UK. The UTPR could allow a tax authority in a subsidiary jurisdiction to collect top-up tax from a parent jurisdiction entity. In the case of the US, the new rules are likely to have little effect initially, as the UTPR transitional safe harbour – which can apply where the ultimate parent entity (UPE) is resident in a jurisdiction with a corporate tax rate of at least 20% – can take US multi-nationals out of the rules in early periods. With the US administration having already signalled its dislike of the Pillar Two rules more generally, however, this is an area to watch.

HMRC registration – initial deadline 30 June 2025

Any group within the Pillar Two rules and with at least one group entity located in the UK must register with HMRC within six months of the end of the accounting period to which MTT or DTT applies. Groups will need to consider which company registers for UK Pillar Two filings. The default “filing member” is the UPE. This works for many organisations where information is held and organised centrally. However, groups can nominate another group entity if they prefer, including a UK entity. Other groups may prefer nominating a designated entity in the wider group that manages the group’s tax, reporting and finance functions.

Once a group has decided on the appropriate entity, it will need to choose one or two individuals to provide contact details so that HMRC can contact them on anything from a technical conclusion to administrative delivery or deadlines. A single registration covers both MTT and DTT and needs to be completed by 30 June 2025 for a year ended 31 December 2024.

What next – safe harbours and UK financial statements

The MTT and DTT rules both include a “transitional safe harbour”, which is available for accounting periods beginning on or before 31 December 2026, provided certain conditions and threshold tests are met. Falling within a safe harbour means that the full top-up tax calculations will not be required and no top-up amounts will be allocated. However, falling within a safe harbour does not exclude groups from the requirement to register with HMRC and file returns. Nonetheless, groups should consider their eligibility soon, as the safe harbour rules operate on a “once out, always out” basis, so it is not possible to go back to these safe harbours after a full calculation has been submitted to HMRC.

Accounting disclosures

Pre-enactment exemptions from 2023 no longer apply, as MTT and DTT are fully enacted in UK legislation and effective for accounting periods starting in 2024. UK subsidiaries or UK-only groups should consider how to disclose for DTT. A UK UPE may also need to consider MTT disclosures, as may UK intermediate parents where the global ultimate parent jurisdiction has not yet implemented Pillar Two at all (e.g. US/India/China) or has not implemented for the period in question.

Under FRS 102, companies are required to state “current tax expense (income) relating to Pillar Two income tax”, and a similar requirement applies to those accounting under IFRS. There is, however, an exception when measuring the deferred tax effects, which, at the point of writing, do not need to be recognised in respect of Pillar Two deferred tax assets and liabilities.

EU developments – DAC9

The above is focused on the UK but there have been some helpful simplifications for EU groups via DAC9 on 14 April 2025. DAC9 updates the existing EU Directive on Administrative Cooperation (DAC) by expanding tax transparency rules. It will simplify reporting by enabling the central filing of a top-up tax information return (TTIR). One company will file for the whole group concerned, instead of local filing of each company separately, via a standard form for filing the TTIR across the EU. Member states will have to adopt and publish, by 31 December 2025, the laws, regulations and administrative provisions necessary to comply with this directive. The first top-up tax reporting remains due by 30 June 2026, with tax authorities required to share this information by 31 December 2026.

How can Moore Kingston Smith assist me?

If you have any questions or would like to discuss Pillar Two further, please get in touch with our specialist tax team at Moore Kingston Smith.