MTT09150 - Miscellaneous pages: Meaning of 'Pillar Two rules'
Source: gov.uk (2025-08-05)


The ‘Pillar Two rules’ are the OECD Pillar Two Model Rules (and the related OECD documents such as Commentary), which set out the Income Inclusion Rule (IIR) and the UTPR (Undertaxed Profits Rule), generally known as the GloBE rules.

The Pillar Two rules are considered to apply to a member of a group (the ‘relevant member’) in an accounting period where certain conditions are met.

The effect of these conditions is that, broadly, where the relevant member is part of a subgroup that has its effective tax rate and top-up amount calculated, either under MTT or a foreign IIR or UTPR, Pillar Two rules are considered to apply to that member. However, there are additional rules around safe harbours, and the conditions are altered in certain cases where the term ‘Pillar Two rules apply’ is used.

In the legislation, this concept is primarily used to identify what is described in OECD documents as the ‘transition year’ of a member, territory, or group.

This is set out in section 255 of Finance (No.2) Act 2023.

Conditions

Unless otherwise specified, the following conditions must all be met in order for the Pillar Two rules to be considered to apply to a member (the ‘relevant member’).

Condition A
- the group is a qualifying multinational group, or
- it would be such a group but there is no member located in the UK.
Condition B
- the ultimate parent is located in a territory with a qualifying IIR and is not an excluded entity,
- an intermediate parent:
- is located in a territory with a qualifying IIR and is not an excluded entity,
- is not located in the same territory as the relevant member, and
- has an ownership interest in the relevant member, or a member located in the same territory as the relevant member, or
- any member of the group is located in a territory where a qualifying UTPR applies.
Condition C

No transitional safe harbour election applies to the relevant member, including both an election under MTT or a foreign qualifying IIR.

Effect of Pillar Two rules applying to a member

The concept of ‘Pillar Two rules applying’ is generally used to identify a group, territory or entity that is in scope of the rules. For example, a de-merger will be qualifying where the Pillar Two rules apply to any member of the group.

Additionally, certain transitional rules apply in the first accounting period where the Pillar Two rules apply to a member:

Deferred tax accounting

Special rules apply in the first years that the Pillar Two rules apply to a member in order to bring existing deferred tax assets and liabilities into the regime, in accordance with section 185 of the Act (see MTT27300 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt27300)).

A special loss deferred tax asset election under section 187 must be made for the first period in which Pillar Two rules apply to a member in the territory (see MTT27010 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt27010)).

Intra-group transfers before entry into regime

Special transitional rules apply in relation to intra-group transfers that took place before entry into the regime. This rule has effect where the transfer occurs before Pillar Two rules apply to the transferor, but the meaning of ‘Pillar Two rules apply’ is altered for this purpose (see MTT49010 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt49010)).

Where Condition B is met in relation to an intermediate parent, the intermediate parent must have an ownership interest in the transferor itself. If the intermediate parent only has an interested in a member in the same territory as the transferor, Pillar Two rules are not considered to apply for this purpose.

Investors in tax equity partnerships

The election to use the proportional amortisation method must be made from the first period for which Pillar Two rules apply for the member.

‘Subject to Pillar Two IIR tax’

The term ‘Pillar Two rules apply’ is different to the term ‘subject to Pillar Two IIR tax’, which is a term primarily used for the purposes of the Income Inclusion Rule charging mechanism (see MTT61030 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt61030)). An entity is subject to Pillar Two IIR tax if it is not an excluded entity and is in the UK or another territory with a qualifying IIR tax for the relevant period. This term considers qualifying IIRs specifically and not the UTPR. This is set out in section 128(7) of the Act.

Domestic Top-up Tax

For Domestic Top-up Tax purposes, the concept of Pillar Two rules applying is not used in relation to sections 185 and 187 of the Act. Instead, those provisions have effect for the first period for which the entity is a qualifying entity (i.e is subject to Domestic Top-up Tax, see MTT10020 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt10020)).

Additionally, where there has been an intra-group transfer before entry into the regime (see MTT49010 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt49010)), the value of the asset is to be adjusted at the time the transferee enters the regime. For Domestic Top-up Tax purposes, this time is not the time at which Pillar Two rules first apply, but when the transferee becomes a qualifying entity.

This is set out in section 273A of the Act.