Pillar Two: A new era in Global Tax Compliance

The introduction of Pillar Two signifies a monumental shift in global tax regulations by establishing a Global Minimum Tax Rate of 15%. Navigating its complexities, increased data requirements and reporting demands has become a reality for Multinational Enterprise Groups (“MNE Groups”) as well as Large Scale Domestic Groups with a total consolidated turnover exceeding €750 million per annum. This article aims to reflect on the Pillar Two rules and highlight key considerations for Cyprus companies within these MNE Groups or Large Scale Domestic Groups, presenting a high-level analysis of their unique challenges and considerations moving forward.

Legislative developments in Cyprus

On 12 December 2024, the Cyprus Parliament approved the draft domestic bill ("the Law") implementing the provisions of the EU Pillar Two Directive ("the Directive"). Effective for fiscal years starting on or after 31 December 2023, the Law introduces an interconnected set of rules:

1. Income Inclusion Rule (“IIR”): Imposes a top-up tax at the level of the Ultimate Parent Entity (“UPE”), Intermediate Parent Entity (“IPE”), or Partially Owned Parent Entity (POPE) for low-taxed Constituent Entities (“CEs”).
2. Undertaxed Payments Rule (“UTPR”): The backstop rule allocates top-up taxes to countries based on tangible assets and employees when the IIR is not applied.
3. Domestic Minimum Top-up Tax (“DMTT”): Allows Cyprus to collect the top-up tax itself, rather than permitting another jurisdiction to charge top-up taxes.

The IIR is effective for accounting periods beginning on or after 31 December 2023, whereas UTPR and DMTT take effect for accounting periods starting on or after 31 December 2024.

Deloitte has created a Global Pillar Two Legislative Tracker, which reports the status of Pillar Two legislation around the world, and can help those affected keep abreast of any such changes.

Key implications for in-scope MNE groups

In-scope MNE Groups and Large Scale Domestic Groups may face significant challenges and consequences, such as:

• Increased cash taxes
• Substantive changes to tax provision and compliance processes and systems
• Re-evaluation of corporate structures
• Elevated tax compliance costs

Data processing and compliance requirements

Applying these rules to in-scope Groups entails comprehensive jurisdictional Global Anti-Base Erosion (“GloBE”) Income calculations and precise computation of top-up taxes, necessitating substantial data from various sources. Complex tax adjustments are essential to ensure accurate compliance and operational decisions.

The Cyprus law, in line with the Directive and OECD's Administrative Guidance, provides several Transitional Country by Country Reporting Safe Harbours (“TCSH”) which represent a temporary mechanism to help in scope Groups gradually familiarize themselves with the principles; therefore, it is not necessary to carry out complex calculations in accordance with the GloBE rules, but only use the data sources available from Country by Country (“CbC”) reporting and separate financial statement of the Constituent Entities. The TCSH applies for fiscal years beginning on or after 31 December 2026 and ending on or before 30 June 2028. During the transition period, the top-up tax in Cyprus or in other jurisdiction in which the Group operates, will be deemed to be zero if the tested jurisdiction meets certain criteria.

Reporting and filing obligations

Cyprus law mandates several reporting and filing requirements for Constituent Entities, including:

• A top-up tax information return
• A top-up tax due return
• Various notifications to be filed with the tax authorities

Additionally, the draft EU Directive on Administrative Cooperation in the field of taxation (the “DAC9 Directive”), aims to streamline the process for MNE Groups by allowing them to file a centralised top-up tax information return for the entire group. This will facilitate the exchange of relevant information across the affected member states.

Going forward, it’s imperative for in-scope groups to proactively assess their potential implications under Pillar Two and evaluate the applicability of TCSH to their organisation. Accurate estimation of their quantitative Pillar Two impact is crucial for determining the most efficient and cost-saving compliance strategy.

Comprehensive and updated local Pillar Two developments can be found on Deloitte’s news and information platform tax@hand.

• By Stella Koustai, Director, and Sotirios Kanarakis, Assistant Manager in the Business Tax team at Deloitte