Suppose a multinational enterprise (MNE Group) that is currently out of scope of the global minimum tax rules (Pillar Two) plans to acquire new companies in 2025. What Pillar Two issues should be considered when conducting the acquisition? This article covers three key questions:
Could a corporate acquisition cause an acquiring MNE Group to become in-scope under an accelerated schedule?
If the acquired companies belong to an MNE Group already in-scope of Pillar Two, how should reporting and potential top-up tax payments for the period before the acquisition be handled?
If the acquisition causes the buyer to become in-scope, how should ‘earnout’ liabilities be treated in the Pillar Two effective tax rate calculation?
Accelerated in-scope treatment after an acquisition
Under Pillar Two’s default scope rule, an MNE Group becomes subject to the rules if it has consolidated annual revenues of at least €750 million in at least two of the four fiscal years preceding the relevant year. Following this rule, an MNE Group acquiring new companies in early 2025 – causing consolidated revenues to exceed the €750 million threshold – would typically fall within the scope of the rules from fiscal year 2027.
However, there is an alternative scope rule that could bring the group into scope as early as 2025. Under this rule, the revenue threshold is assessed on a combined basis as the revenues of the acquiring group and the acquired companies are added together for the four preceding fiscal years.
For example, if the acquiring group and the acquired companies had consolidated revenues of €400 million each for the four preceding years, their combined revenues would exceed the threshold for these years, causing the newly formed MNE Group to be in scope from fiscal year 2025.
However, this alternative scope rule does not apply in all cases. It is relevant when;
All, or substantially all, the companies of an existing group are acquired; or
Standalone entities (that are not part of a group) are acquired.
By contrast, if only a few companies from an existing group are acquired, the rule seems not to apply, according to the OECD guidelines.
Acquiring companies from an in-scope MNE group
When acquiring companies from an MNE Group already in scope of Pillar Two, a question arises: who is responsible for reporting and paying any top-up tax for the period prior to the acquisition?
For the period before the acquisition, the acquired companies would be considered part of the divesting in-scope group. The Pillar Two filings and payments for this period would typically be due in mid-2026, after the entities have been transferred to the acquiring group.
Since Pillar Two calculations are performed on a jurisdictional basis, aggregating all of the divesting group’s companies in the relevant country, the divesting group would be the party with access to the data necessary to perform the calculations for the pre-acquisition period. In addition, payments of any jurisdictional top-up tax would generally be made by a designated filing entity, which is not necessarily the acquired company itself.
In light of these factors, it might be advisable for the share purchase agreement to include provisions to ensure that:
The divesting group (the seller) has primary responsibility for the Pillar Two calculations and filings for the pre-acquisition period; and
The divesting group is responsible for handling any related top-up tax payments for the period in which the acquired entities were part of the divesting group.
The treatment of earnout liabilities
It is common for acquisition consideration to include conditional elements such as earnout payments. An earnout payment is a contingent future payment to the seller, dependent on the acquired companies meeting financial or operational targets post-acquisition. The consideration is recognised as a liability by the acquiring group (the buyer) as part of the acquisition.
Under IFRS 3, such contingent consideration is normally:
Initially recorded at its fair value at the acquisition date; and
Subsequently remeasured at fair value, with changes recorded through the profit or loss statement.
If the acquired companies fail to meet their targets, the final payment would be lower than the initially recorded liability, resulting in a reversal of the liability and a gain recorded in the profit or loss statement. Importantly, these gains are usually not taxable for regular tax purposes.
The Pillar Two rules do not include a specific adjustment mechanism to exclude these effects. It is therefore possible that these effects – gains as well as losses – could be included in the Pillar Two income when calculating the effective tax rate. There is an adjustment rule relating to ‘purchase price accounting’ effects that could be analogously applied to exclude such re-measurement effects from earnouts. However, there is no guidance on this matter yet. Given the absence of an adjustment rule for these earnouts, significant gains from earnout reversals could negatively affect the Pillar Two effective tax rate.
