The measure
The government has announced that amendments to the UK’s multinational top-up tax and domestic top-up tax will be made to maintain alignment with the OECD Inclusive Framework’s continuing work on Pillar Two. Draft legislation on some of the changes was published for consultation over summer 2025. It is stated that changes will include updates to the rules on:
- pre-regime deferred tax assets;
- clawback provisions that apply to tax equity partnerships;
- simplified calculations for non-material members;
- reducing the profits of a flow-through ultimate parent entity;
- an election to exclude intra-group transactions;
- recognition of payments for group relief as a covered tax for domestic top-up tax;
- the test of whether de-merged groups meet the revenue threshold;
- the application of the rules to permanent establishments;
- the method for converting domestic top-up tax amounts into sterling;
- changes to the test of whether an instrument is to be regarded as equity or debt;
- a provision under multinational top-up tax which disapplies another jurisdiction’s qualified domestic minimum top-up tax safe harbour where the qualified domestic minimum top-up tax does not apply to securitisation vehicles;
- a provision which ensures no liability under the undertaxed profits rule can be applied to a securitisation vehicle;
- a provision which removes profits and losses relating to real estate investment trusts from adjusted profits for the purposes of domestic top-up tax;
- a provision for certain overseas undertaxed profits taxes to have qualifying status in the UK prior to the making of UK regulations and ahead of the outcomes of the ongoing process for international agreement on qualification of undertaxed profits taxes;
- adjustments to cater for foreign qualified income inclusion rules and qualified domestic minimum top-up taxes whose application is subject to an election or claim;
- clarification of the location of a stateless entity;
- resolving double counting in relation to tax transparent investment entities;
- cross-border allocation of deferred tax;
- allocation of controlled foreign company mobile income; and
- clarification on the meaning of ‘underlying profits’ and ‘underlying profits accounts’.
Who will be affected?
Large multinational groups within the scope of the UK Pillar Two rules i.e. generally those with annual consolidated group revenue of at least EUR750 million and UK-located group members. Domestic top-up tax may also apply to wholly domestic UK groups above the Pillar Two revenue threshold.
When will the measure come into effect?
The measures will largely take effect for accounting periods beginning on or after 31 December 2025, but it is also suggested that businesses will have the option to elect to apply most of the measures from an earlier date. Changes to the treatment of pre-regime deferred tax assets will take effect for accounting periods ending on or after 21 July 2025.