Pillar 2 and M&A transactions: navigating the new Global Minimum Tax regime

The OECD Pillar 2 Rules (also referred to as the "Global Anti-Base Erosion" or “GloBE” Rules) ensure that large multinational groups (with revenues in excess of €750 million) pay a minimum 15% corporate tax rate level of tax in each jurisdiction where they operate ("the Global Minimum Tax" or "Top-up Tax").

The Pillar 2 Rules have been implemented by countries across the world, including in member states of the EU (through Council Directive (EU) 2022/2523. A notable exception to this wide implementation, however, is the US, especially under its current administration.

These Pillar 2 rules entail significant complexities and result in new issues to consider when approaching the tax aspects of deals and transactions. In particular, this new tax landscape requires buyers and sellers to reassess transaction structures, tax liabilities, and due diligence processes.

Impact on M&A

Under the Pillar 2 system, Top-up Tax is collected through the following interconnected rules:

• An Income Inclusion Rule (IIR) which, very broadly, requires that the ultimate parent company of the group will be liable for any Top-up Tax due, if the tax paid by all the subsidiaries in any jurisdiction where the group operates falls below the minimum 15% threshold.
• An Undertaxed Profits Rule (UTPR) which applies where the Top-Up Tax cannot be collected via the IIR - for example where the ultimate parent entity is in a jurisdiction which does not apply Pillar 2 rules. In such a case, the UTPR reallocates the taxing right to the jurisdictions where the group subsidiaries are located.
• A Qualified Domestic Minimum Top-up Tax (QDMTT) which allows countries to locally collect the Top-Up Tax rather than leaving it to be collected by the jurisdiction of the ultimate parent entity.

The Pillar 2 rules are mostly expected to have a compliance impact rather than to give rise to significant additional tax liabilities. As the compliance requirements are burdensome and data-intensive, the Pillar 2 Rules include a transitional period of three years (2024, 2025 and 2026), which applies on a jurisdiction by jurisdiction basis, to simplify formalities. During this transitional period, groups can rely on information they already collect (via country-by-country reporting) and are exempted from "full" Pillar 2 data collection, computations and formalities, provided one of three straightforward tests is passed (known as the Transitional Safe Harbour – TSH).

M&A transactions and deals will be affected in several ways:

1. The due diligence process when considering an acquisition of a target will need to be more rigorous. Buyers must assess whether the target’s tax position aligns with Pillar 2 requirements and anticipate future tax liabilities.
2. Valuations of a target may also be impacted by the operation of Pillar 2 rules as Top-Up Tax liabilities (or assets) can have a direct impact in valuations. Additional aspects (beyond Top-Up Tax liabilities) may also have an impact: for instance, the target's and the buyer's prior presence in a specific jurisdiction may have additional implications and may reduce the attractiveness of certain targets.
3. Pillar 2 aspects should also be taken into account when considering deal structuring and post-deal integration transactions, to ensure both tax optimisation and continued compliance.

The due diligence process and valuation issues

When considering Pillar 2 implications in the context of deals the parties will need to consider  the "starting point" for both buyer and seller: are both parties already within the scope of Pillar 2? How does the transaction affect such starting point?

An acquisition may bring the buyer into the scope of Pillar 2 rules and therefore require a considerable additional investment for the buyer group to be "Pillar 2 ready". Similarly, certain buyers (for example, investment funds) may be excluded from Pillar 2 rules and therefore may have a commercial advantage over buyers which are  affected by the Pillar 2 rules. In particular  during the first three years of the rules, groups will need to be mindful as to whether a transaction impacts on their ability to rely on the TSH provisions in a particular jurisdiction.

Pillar 2, therefore, adds complexity to tax due diligence, requiring a deeper analysis of current and future effective tax rates (ETR) of the target entities in each jurisdiction. It is also possible that a group will find itself in a jurisdiction with a nominal tax rate above 15% but with an ETR below 15% for Pillar Two purposes. The rules are complex and there is the potential for inconsistent application in different jurisdictions.

Another issue which needs to be monitored under Pillar 2 relates to deferred tax assets (DTAs) and liabilities. As a general rule, Pillar 2 calculations build on accounting principles, but groups are allowed to include DTAs in the effective tax rate calculations to reduce timing impacts. However, the rules include a recapture mechanism (designed to impact mainly intangibles and goodwill) so that certain timing differences must be reverted within 5 years.

Additionally, given that Pillar 2 rules give rise to cross-border liabilities, understanding such liabilities and whether the target may carry some Pillar 2 liabilities into the new group will be important. This assessment implies that the seller's group will likely need to share additional information, over and above the usual disclosures.

In light of the results of the due diligence, buyers may need to adjust EBITDA and cash flow projections to account for higher tax costs. On the upside, target companies or groups may allow the buyer to shelter some of its own subsidiaries from Pillar 2 impacts as a result of the jurisdictional blending.

Structuring the deal

Certain one-off transactions may have specific Pillar 2 implications; for instance, any pre-deal carve-outs or reorganisations will need to be taken into account. One specific example is the treatment of participation exemption regimes under Pillar 2. As a broad statement, the policy objectives behind the granting of participation exemption are respected under Pillar 2. However, an "excluded gain or loss" (that is the amount which will not be taken into account for the purposes of calculating the ETR) is defined as a gain or loss arising from a disposal of an ownership interest carrying a right to at least 10% of the profits. In other words, there is a set shareholding percentage which may not align with local participation exemption requirements. Additionally, there is no minimum holding period and there is no activity analysis on the company being traded. In effect, therefore, local participation exemption and Pillar 2 requirements may not align and some transfers of shares exempted under local participation exemption regimes may be recaptured under Pillar 2 rules.

Another issue to consider on transactions will be the tax treatment of debt releases. OECD guidance on Pillar 2 recognises that a debt release may result in income recognition without corresponding taxation for the borrower. Potential Top-Up Tax liabilities have been addressed but very narrowly: the guidance allows the borrower to elect to exclude the debt release income from the ETR calculations. However, in order for the election to be available, certain conditions must apply to the debt release (essentially the release must happen under legal or bankruptcy proceedings) which effectively means that Pillar 2 implications of intra-group debt waivers will need to be assessed.

Finally, buyers will be required to integrate Pillar 2 tax calculations into their financial reporting and they may need enhanced tax governance frameworks to monitor ongoing compliance with Pillar 2.

Osborne Clarke comment

Pillar 2 is already having an impact on M&A deals and the risks and issues around Pillar 2 are starting to  be  addressed in the language of the deal agreements. Warranties and representations specific to Pillar 2 are being included in agreements and greater post-deal cooperation between the seller and buyer to address specific Pillar 2 concerns also is also being required.

There is no clear-cut "market practice" yet, given that the rules are both new and very complex and all the issues arising need to be assessed on a case-by-case basis.

A version of this article was first published in the International Tax Review on 4 April 2025