The EU Minimum Tax Directive, officially known as Council Directive (EU) 2022/2523, adopts the OECD Global Anti-Base Erosion (GloBE) Model Rules within EU secondary legislation. The Directive prescribes a global minimum effective corporate tax rate of 15% for multinational enterprises (hereinafter - MNEs) and large-scale domestic groups operating within the Union. The said Directive shall have a significant impact worldwide, taking its toll on non-EU states as well, because the affected groups will have to revise their business operation and funds allocation.
In the paragraphs that will follow we shall delve deeper into specifics and key points of such new tax surroundings.
Overview of the Directive
Like we mentioned in our introductory lines above, an agreed minimum effective tax rate of 15% is introduced.
Furthermore, it imposes the obligation on Member States to apply two rules that are interconnected, and one rule as an option. Those rules are:
- the Income Inclusion Rule (hereinafter - IIR) for fiscal years beginning on or after December 31, 2023, and
- the Undertaxed Profits Rule (hereinafter - UTPR) for fiscal years beginning on or after December 31, 2024.
- third and final rule is not a rule per se, but an option – the Member States can opt-in to implement a Qualified Domestic Top-up Tax (hereinafter - QDMTT), without specifying an application date.
In order for these rules to be applicable, the entities that operate within the subject groups above (MNEs and large-scale domestic groups) must be located within the EU and to achieve an annual income surpassing EUR 750 mil.
Now, we shall set out the imposed rules in more detail.
The IIR essentially prescribes that if a parent company of a MNE group or a large-scale domestic group located in an EU Member State pays its proportional part of additional tax for the low-taxed entities within the group, it implies that the parent company needs to cover the gap between what the low-taxed group entity would have paid if the tax rate was 15% from the start and the actual lower amount paid.
The secondary rule, but no less important one, is the UTPR – it ensures the collection of tax by the intermediate parent entity of the group where the primary rule does not apply (for example, because the parent entity’s jurisdiction is outside the scope of application of the Directive). To provide more clarity, if the parent company is situated/operates in a jurisdiction outside of the EU where the outlined taxation rules do not apply, EU Member States in which the group entities are based then apply this secondary rule and will collect the top-up tax pursuant to it. That means that the MNE group will be taxed for the respective difference if any entity of the group operates within the jurisdiction where the effective tax rate is lower than 15%.
Finally, the Member States can adopt domestic taxes in order to ensure that a minimum taxation of 15% applies in the jurisdictions where the group companies operate, which shall be deducted from the group's global taxation (third rule as an option or QDMTT). In simpler terms, these domestic taxes will ensure that the minimum tax is paid in the countries where the operating subsidiaries make profits, not necessarily where the parent company is located.
There are some exceptions, however. By the provisions of the Directive, the IIR and UTPR do not have to apply on MNE groups in their first five years of their intenrational activity during the initial phase of their business. As for the large-scale domestic groups – they are excluded from IIR in the first five years, starting from the first day of the fiscal year in which they fall within the scope of the Directive for the first time. The said five-year exclusions are relevant because they refer to exclusively national groups, or which are in their initial stages of their international expansion.
Finally, there is an additional option – by Article 50 of the Directive the Member States in which no more than twelve ultimate parent entities of groups within the scope of this Directive are located may elect not to apply the IIR and the UTPR for six consecutive fiscal years beginning from 31st December 2023. The Member States that opted for such an option had to notify the Comission by the said deadline (31st of December 2023).
Major Challenges
The Directive will have several serious implications on affected groups.
The most notable one would be additional tax burden. Namely, in countries where these groups operate, and in some of those countries the tax rate is below 15%, the said groups will have to pay more tax until this minimum threshold is upheld. The same goes for tax incentives which reduce their effective rates to below that threshold. Therefore, the impact analyses, better optimization of business performance etc. are in place, and they all put additional burden on enterprises.
The second one would be complexity – calculations of the minimum tax rate are rather complex and it requires enterprises to perform an extremely diligent and detail analysis of data, as well as their identification and compilation beforehand.
The final implication would be implementation into national legal systems of Member States, i.e. how well the implementation has been carried out. The Directive uses rather technical terms by using ones from the mathematics, accounting or the economy when outlining the methodology in detail – legal terms and concepts are rather scarce in that regard. In order to explain better, imagine having to transpose those terms and calculations where you already have numerous tax treaties which the new rules have to align with. Or maybe how to view the legal nature of the tax – is it complementary to or separate from corporate income tax? Also, how to adapt the State Aid and incentives rules to the new tax surroundings imposed?
This raises a question of uniformity within the EU. The example can be seen in fines for example: The EU Directive does not determine the scope and value of penalties to be applied in case of non-compliance, the Member States are only instructed to lay down rules on penalties that are effective, proportionate and dissuasive. The result – fines vary significantly in each country in case of non-compliance, incomplete or delayed fulfilment of reporting or notification requirements. Bearing that in mind penalties, depending on the type of breach, can go up to EUR 100,000.00 (Austria) or even up to EUR 1,030,000.00 (the Netherlands). In other cases, different deadlines for filing of tax returns may also apply depending on each country’s legislation. The implications are numerous.
Effect on Serbia
One can safely deduct that the said Directive applies only to EU Member States. However, this does not mean the Non-EU ones are not affected – the consequences arising out of the Directive are actually of global influence. In case of Serbia specifically, if a Serbian entity is a part of the affected group, the parent entity or other entities within that group (depending on which rule above applies) may be obliged to pay additional tax since Serbia could be considered as a country with a low effective tax rate.
One might think that no problem should arise because Serbia’s nominal tax rate for corporate income tax is 15%. However, the country provides incentives in various occasions (e.g. Research and Development Incentives) which can reduce the tax rate below said threshold.
The consequence of such “state of play” is that Serbia may not be regarded anymore as attractive market for big investments, and may even (because of that) be forced to change its legislation to be more in line with the EU standards, including incentives.
Concluding Remarks
Bearing in mind all of the above, the Directive will have a huge impact on the world as a whole, because it is designed to combat base erosion and profit shifting to more desirable tax regimes.
In terms of Serbia, it remains to be seen how will it adapt to these new standards, but an implementation and amendment of certain, if not numerous, tax provisions will have to occur in order to stay as competitive and attractive as was the case in previous years.
The good thing is that the exception rules allow for a certain transition period so the countries outside the EU have time to develop new strategies and to align their legislation with the EU one. This especially refers to Serbia because it is an EU candidate, and is expected to harmonize its laws with the ones of the EU. Otherwise, a rough period awaits ahead.
Time can only tell how the things will work in practice, because even the Directive itself needs time to be fully implemented in reality and then to analyze its results.
Author:
Aleksandar Čermelj, Senior Associate
aleksandar.cermelj@lexquire-ivvk.rs
*The information in this document does not represent legal advice and is provided for general informational purposes only.
**Partner, Senior Associate, Associate and/or Junior Associate refers to Independent Attorney at Law in cooperation with IVVK Lawyers in Cooperation with LexQuire.
07/02/2024
