The OECD’s global minimum tax agreement, known as “Pillar Two,” represents a major change in international corporate taxation. This framework, agreed upon by over 135 countries, establishes a minimum effective tax rate of 15% for large multinational enterprises with annual revenue exceeding €750 million. The agreement marks an historic moment in global tax cooperation and significantly impacts both the European Union and individual member states, including Cyprus.
The Global Minimum Tax operates through precisely defined mechanisms, with the Income Inclusion Rule (IIR) serving as its primary enforcement tool. Let us examine how the IIR works in practice: When a parent company has subsidiaries in various jurisdictions, it must calculate the Effective Tax Rate (ETR) for each jurisdiction where its subsidiaries operate. This calculation is performed by dividing the aggregate of adjusted covered taxes by the aggregate of GloBE income or loss for all constituent entities located in that jurisdiction.
For example, consider a Cyprus-based parent company with a subsidiary in a jurisdiction where the Effective Tax Rate is 10%. The IIR requires the parent company to pay an additional 5% tax (the difference between the minimum 15% and the subsidiary’s local rate of 10%) on the subsidiary’s income. This top-up tax is calculated and paid in Cyprus, effectively ensuring a minimum 15% tax on the subsidiary’s income.
The IIR follows a specific ordering rule: it is applied at the ultimate parent entity level first. However, if the ultimate parent jurisdiction has not implemented the IIR, the responsibility cascades down to the next intermediate parent company in a jurisdiction that has implemented these rules. This creates what is known as the “top-down approach.”
To illustrate with a numerical example: if a subsidiary earns €1,000,000 and pays local tax of €100,000 (10% effective rate), the parent company in Cyprus would calculate the top-up tax as follows: First, determine the minimum tax required (15% of €1,000,000 = €150,000), then subtract the taxes already paid (€100,000), resulting in a top-up tax liability of €50,000 that must be paid in Cyprus.
This mechanism is complemented by the Undertaxed Payments Rule (UTPR), which serves as a backstop when the IIR cannot be applied. The UTPR denies deductions or requires equivalent adjustments on payments to low-taxed entities, ensuring that income is effectively taxed at a minimum of 15% somewhere in the corporate structure. The Effective Tax Rate calculation under these rules considers various factors including deferred tax accounting, timing differences, and specific industry carve-outs. The European Union has positioned itself as a leader in implementing the global minimum tax through the EU Minimum Tax Directive (2022/2523). This directive requires all member states to transpose these rules into their national law, ensuring consistent application across the single market. The EU’s approach emphasises harmonised implementation, creating a level playing field while maintaining the integrity of the single market. This coordinated effort includes common reporting frameworks and mechanisms for member states to work together effectively.
For Cyprus, traditionally known for its competitive 12.5% corporate tax rate, the global minimum tax presents a complex set of challenges and opportunities. The impact is particularly significant for large multinational enterprises (MNEs) operating through Cyprus that meet the €750 million annual revenue threshold. This includes both Cyprus-headquartered groups and international groups with significant operations in Cyprus.
The implementation requires substantial updates to tax administration systems and new compliance mechanisms for affected companies. However, Cyprus maintains significant advantages in this new tax landscape through its extensive double tax treaty network, strategic geographic location, well-developed professional services sector and EU membership benefits. The implementation of the global minimum tax is fundamentally reshaping international tax competition. For Cyprus and the EU, this transformation means moving away from rate-based competition toward efficiency-based tax competition. Countries now must focus on providing value through efficient administration, legal certainty and business-friendly environments rather than competing solely on tax rates.
This shift has prompted a greater emphasis on non-tax factors for investment decisions and increased attention to substance requirements. Tax transparency and administration have become crucial differentiators as jurisdictions compete for international business within the new framework’s constraints.
Looking ahead, both the EU and Cyprus are well-positioned to adapt to this new tax landscape. The focus has shifted from competing on tax rates to providing comprehensive value propositions for international businesses. Cyprus, in particular, can leverage its strategic advantages while complying with the new global standards. The country’s established position as a business hub, combined with its professional services infrastructure, positions it well for continued success under the new regime.
The global minimum tax represents more than just a change in tax rates; it signifies a fundamental shift in how countries approach international taxation and competition for investment. For Cyprus and the EU, success in this new environment will depend on their ability to adapt while maintaining their competitive advantages. As the implementation progresses, the emphasis on substance, efficiency, and value-added services will likely become even more pronounced, shaping the future of international business taxation.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Andrea Karageorgi, Associate, at email andrea.karageorgi@kyprianou.com
