Global Minimum Tax (Pillar Two): What It Means for Offshore Structures

The OECD's Global Minimum Tax — formally known as the GloBE Rules under Pillar Two of the BEPS Inclusive Framework — represents the most significant change to international taxation in a generation. It establishes a minimum effective tax rate of 15% on the profits of multinational enterprise (MNE) groups with consolidated revenue of EUR 750 million or more. For qualifying MNEs, the era of zero-tax offshore subsidiaries is effectively over. For the vast majority of entrepreneurs, small businesses, and HNW individuals, the rules do not directly apply — but their indirect effects on offshore jurisdictions, corporate service providers, and compliance expectations are significant.

How Pillar Two Works

The GloBE Rules operate through three interlocking mechanisms:

Income Inclusion Rule (IIR)

The IIR imposes a top-up tax on the parent entity of an MNE group when a constituent entity (subsidiary) in any jurisdiction has an effective tax rate (ETR) below 15%. The parent pays the difference between the jurisdiction's ETR and 15%.

Example: A UK parent company owns a subsidiary in Cayman (0% tax). The Cayman subsidiary earns EUR 10 million in profit. The ETR is 0%. Under the IIR, the UK parent pays a top-up tax of 15% on EUR 10 million = EUR 1.5 million.

Undertaxed Profits Rule (UTPR)

If the parent jurisdiction has not implemented the IIR (or is itself a low-tax jurisdiction), the UTPR allows other jurisdictions where the MNE has operations to impose the top-up tax, allocated based on the number of employees and tangible assets in each jurisdiction.

Qualified Domestic Minimum Top-up Tax (QDMTT)

Offshore jurisdictions can pre-empt the IIR and UTPR by imposing their own 15% minimum tax on constituent entities located in their jurisdiction. This keeps the tax revenue in the offshore jurisdiction rather than allowing the parent jurisdiction to collect it.

Status of QDMTT adoption:

• Bermuda: Enacted the Corporate Income Tax Act 2023, implementing a 15% QDMTT effective January 2025 for MNE groups within scope
• Cayman Islands: Enacted the International Tax Co-operation (Economic Substance and Minimum Tax) Act 2024, imposing a 15% QDMTT
• Jersey/Guernsey: Implemented QDMTT regimes
• BVI: Under consultation but expected to implement QDMTT
• UAE: The 9% corporate tax already applies; QDMTT provisions are being considered for in-scope MNEs

Who Is In Scope

The rules apply to MNE groups (and large domestic groups in jurisdictions implementing the rules domestically) with:

• Consolidated annual revenue of EUR 750 million or more in at least two of the four preceding fiscal years
• At least one constituent entity in a jurisdiction other than the ultimate parent entity's jurisdiction (for MNE groups)

Excluded Entities

Certain entities are excluded from the GloBE calculations:

• Government entities and international organisations
• Non-profit organisations
• Pension funds
• Investment funds and real estate investment vehicles that are Ultimate Parent Entities (UPEs)
• Entities that are at least 95% owned by excluded entities

What This Means for Entrepreneurs

The EUR 750 million revenue threshold means that the vast majority of entrepreneurs, small businesses, and even mid-market companies are entirely outside the scope of Pillar Two. If your group's global revenue is below EUR 750 million, the GloBE Rules do not apply to you.

However, this does not mean Pillar Two is irrelevant to smaller businesses. The indirect effects are significant.

Indirect Effects on Smaller Businesses

Offshore Jurisdiction Changes

The introduction of QDMTT regimes in Bermuda, Cayman, and Jersey means that these jurisdictions are no longer "zero tax" for in-scope MNEs. While the tax only applies to entities within qualifying groups, the administrative infrastructure — corporate tax registration, filing systems, tax audit capability — is being built and may expand over time.

Enhanced Scrutiny

Tax authorities in high-tax jurisdictions are using Pillar Two as a catalyst to strengthen enforcement against smaller taxpayers:

• Transfer pricing audits: Increased resources directed at transfer pricing enforcement, often starting with Pillar Two compliance reviews of large groups and expanding to smaller taxpayers
• Substance reviews: Tax authorities are applying economic substance standards more rigorously, influenced by the Pillar Two emphasis on real economic activity
• CFC enforcement: The technical infrastructure developed for GloBE ETR calculations (jurisdiction-by-jurisdiction financial data) is being repurposed for CFC enforcement

Service Provider Costs

Corporate service providers in offshore jurisdictions are increasing fees to cover the compliance costs of QDMTT regimes, even for clients outside Pillar Two's scope:

• Registered agent fees have increased 10% to 25% in Cayman and BVI since 2023
• Accounting and compliance costs are rising as service providers invest in tax compliance infrastructure
• New filing requirements (even for entities outside scope) require annual assessment and documentation

Investor and Counterparty Expectations

Institutional investors, banks, and commercial counterparties are increasingly asking about Pillar Two exposure as part of due diligence:

• Fund investors may ask whether the fund structure is affected by GloBE Rules
• Banks may request confirmation of Pillar Two status during account opening
• Acquirers in M&A transactions will assess Pillar Two exposure as part of tax due diligence

Technical Details: ETR Calculation

The GloBE effective tax rate is calculated on a jurisdiction-by-jurisdiction basis:

ETR = Adjusted Covered Taxes / GloBE Income

GloBE Income

Based on the financial accounting net income or loss, with specific adjustments:

• Excluded dividends and equity gains (to avoid double counting)
• Excluded international shipping income
• Adjustments for stock-based compensation
• Adjustments for asymmetric foreign currency gains/losses

Adjusted Covered Taxes

Based on the current tax expense in the financial accounts, with adjustments for:

• Deferred tax adjustments (to recognise timing differences)
• Uncertain tax positions
• Credits and incentives that reduce cash tax payments

Substance-Based Income Exclusion (SBIE)

A carve-out that excludes a portion of income attributable to genuine economic substance:

• 5% of the carrying value of eligible tangible assets
• 5% of eligible payroll costs

This exclusion means that entities with significant physical assets and employees in the jurisdiction will have a higher income threshold before Pillar Two top-up tax applies. For capital-intensive operations with real substance, the effective impact of Pillar Two may be minimal.

What Pillar Two Does Not Change

For entrepreneurs and businesses below the EUR 750 million threshold:

• CFC rules still apply: Pillar Two does not replace or modify CFC rules. Your home jurisdiction's CFC regime remains the primary constraint on offshore structures
• Transfer pricing still applies: Arm's length pricing requirements are unchanged
• Substance requirements still apply: Economic substance legislation operates independently of Pillar Two
• Zero-tax jurisdictions remain available: For entrepreneurs outside Pillar Two's scope, the UAE, Cayman, BVI, and other jurisdictions continue to offer 0% corporate tax (subject to QDMTT for in-scope MNEs only)
• Personal tax planning is unaffected: Pillar Two applies to corporate groups, not individuals. Personal tax residency, capital gains planning, and asset protection structuring are unchanged

Key Takeaways

• Pillar Two imposes a 15% global minimum effective tax rate on MNE groups with EUR 750 million+ consolidated revenue — the vast majority of entrepreneurs and small businesses are entirely outside scope
• Bermuda, Cayman, Jersey, and Guernsey have implemented Qualified Domestic Minimum Top-up Taxes (QDMTTs) to retain tax revenue that would otherwise flow to parent jurisdictions under the IIR
• The Substance-Based Income Exclusion (5% of tangible assets + 5% of payroll) means that entities with genuine economic substance face reduced Pillar Two exposure
• Indirect effects — increased compliance costs, enhanced tax authority scrutiny, and rising service provider fees — affect businesses of all sizes in offshore jurisdictions
• CFC rules, transfer pricing, and economic substance requirements remain the primary constraints on offshore structures for businesses below the EUR 750 million threshold
• For individual entrepreneurs and HNW individuals, personal tax planning, residency structuring, and asset protection are entirely unaffected by Pillar Two