To all publications

OECD-IF minimum taxation

08.07.2021

OECD Two-Pillar Approach on the Taxation of the Digitalisation of the Economy

On July 1, 2021, the OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) published a statement on the planned two­-pillar approach for adjusting the taxation of large multinational enterprises (MNE). Pillar One deals with the market taxation of MNEs with a turnover of over EUR 20 billion and a profitability of over 10%. Pillar Two deals with a minimum tax rate of 15% and applies to MNEs with a turnover of over EUR 750 million. The following statements deal with the expected effects of Pillar Two on Liechtenstein as a tax location for corporate entities.

Design of the rules on the 15% tax rate

The goal of Pillar Two is that the profit of a MNE is taxed at least with 15% corporate income tax in every country where it is active. To this end, the following rules are to be introduced in the IF countries:

  1. The profit of a low taxed subsidiary should be subject to top­-up tax at the level of the parent company (Income Inclusion Rule);
  2. Payments to a low tax entity should not qualify as tax deductible expenses in the source country (Undertaxed Payment Rule);
  3. Certain payments (e.g. interest and royalties) to a related, low taxed entity should be subject to withholding tax in the source country (Subject to Tax Rule)

The effective minimum 15% tax rate test is to be calculated by reference to the accounting standard applied by the parent of the MNE (IFRS or equivalent). The planned rules will provide for a formulaic substance carve­out that will exclude an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll. The current implementation schedule stipulates that the minimum tax rate should apply from tax year 2023.

Expected Implications for Liechtenstein

Liechtenstein‘s tax law is in many aspects not easy to adapt to the IF‘s ideas about the minimum tax rate.

However, it is not to be expected that the Liechtenstein tax law will be completely rewritten for all companies and structures subject to tax in Liechtenstein. Instead, it can be assumed that new rules will be introduced for MNE with a turnover of more than EUR 750 million. These new rules will apply the IF expectations regarding the tax base as well as the profit tax rate of 15%. This means that Liechtenstein will have separate taxation rules for MNE with a turnover of over EUR 750 million.

It can be assumed that Liechtenstein will adopt the IF rules into national tax law at an early stage (i.e. in line with the schedule on the entry into force, but at the earliest for the tax year 2023) as part of the early adopter strategy.

Liechtenstein­-based subsidiaries of MNEs with a turnover of more than EUR 750m are recommended to deal with the planned Pillar Two regulations already now in order to be able to assess the impact for their own group.