Why all top-up tax variants in the EU Pillar Two Directive collide with the EU’s fundamental freedoms (and how to solve this)

Maarten de Wilde[1] and Ciska Wisman[2]

Summary

In this contribution, the authors operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the notions of the internal market and the fundamental freedoms. The various top-up tax mechanisms under the Directive impose differences in tax treatment between domestic and cross-border business operations within the internal market. These differences result in unjustified de facto restrictions of the freedoms of movement. The core of this legal deficit lies in the chosen approach under the Directive in which top-up taxation is determined on a per country basis (jurisdictional blending). This, while the internal market is about creating an area without internal frontiers within which factors of production and goods and services should be able to move freely (regional blending). Possible means to solve the issues created include the introduction of EU regional blending or even global blending, or the repeal of the EU Pillar Two Directive. The latter, if chosen, may be accompanied by a simultaneous introduction of a harmonised competitive corporate tax system for the internal market. If no measures are taken, it seems only a matter of time before the Court of Justice of the European Union will rule the top-up taxation mechanisms under the Pillar Two Directive essentially incompatible with EU law.

1 Introduction

As per 31 December 2023, the Member States of the European Union (EU Member States) are legally required to operate a 15% minimum level of corporate taxation for large businesses under their domestic tax systems. The basis for this lies in the EU Directive of 14 December 2022 to ensure a minimum level of taxation[3], also known as the EU Pillar Two Directive.[4] Via this instrument of secondary EU law, the EU Member States have incorporated the so-called[5] Global Minimum Tax (Pillar Two)[6] in the EU. The Global Minimum Tax is part of the Global Tax Deal, the 2021 political agreement within the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on a global company tax reform for large multinationals to address the tax challenges of a digitizing economy.[7]

There are various tax-technical and tax policy related questions and discussions surrounding the Global Minimum Tax (Pillar Two).[8] One of the concerns focuses on the question of the compatibility of the 15% minimum tax with the fundamental freedoms of movement as guaranteed by the Treaty on the Functioning of the European Union (TFEU). At the time of the OECD’s first round of public online consultations on the plans at the time, in the spring of 2019, we wrote on the tension of the possible top-up taxes with the EU treaty freedoms: “… that would seem problematic. And that is even without the EU law difficulties that implementing the GLOBE measures within the European Union would unavoidably cause. The GLOBE measures (i.e. the income inclusion rule and the tax on base erosion payments), as they currently stand, are likely to be incompatible with the EU treaty freedoms in view of the European Court of Justice’s judgments in cases such as Cadbury Schweppes (C-196/04) and Eurowings (C-294/97), not to mention the tax treaty-related difficulties that would arise. Furthermore, the tax on base erosion payments could also conflict with the non-discrimination provisions in tax treaties (see article 24(5) of the OECD Model Convention).”[9] At the time of the drafting of the proposal for the EU Pillar Two Directive the European Commission looked into primary EU law matters as well. To keep the Directive in line with the EU treaty freedoms, the operational scope of the EU’s version of the Global Minimum Tax was extended to also cover large domestic firms, that is in addition to the political agreement on the taxation of large multinational enterprises within the Inclusive Framework.[10] And indeed, today, the EU Pillar Two Directive does not only apply to multinational enterprises but also to large domestic groups.[11] According to the European Commission, this neutralizes any possible tension between the directive and the freedoms.[12] We don’t think this is the case.

In this contribution, we operationalize a concrete numerical example to explain why all the top-up taxation (TuT) variants from the EU Pillar Two Directive collide with the very notions of the internal market and the fundamental freedoms of movement as guaranteed under the TFEU. The problem of Pillar Two in the EU, when seen from an internal market perspective, lies in the chosen approach of jurisdictional blending, i.e., the per country approach. The internal market, however, is about the creation of an area without internal frontiers where production factors and goods and services must be able to move freely and unimpeded (regional blending or EU blending) and where capital movements to and from the EU are universally liberalized (global blending). If the top-up taxes under the EU Pillar Two Directive, indeed, were to impede the right to free movement, these tax measures are likely to be ineffective due to their incompatibility with primary EU law: null and void that is. Given the limited policy maneuvering room of the individual EU Member States when it comes to the implementation of the EU Pillar Two Directive in their domestic legal systems, the same applies a fortiori and on an equal footing for the Directive’s equivalent provisions in the Pillar Two implementing legislation in the individual EU Member States.[13] For the sake of completeness, it is noted at this place that secondary EU law, too, must be compatible with primary EU law.[14] The reality of this puts all Pillar Two top-up tax levies of the EU Member States under severe primary EU law pressure.

2 Why Pillar Two top-up taxation collides with EU treaty freedoms, and how to solve this

2.1 Global Minimum Tax; I’ll tax if you don’t[15]

With the EU Pillar Two Directive, the EU Member States are following up in a coordinated manner on the political agreements made in 2021 within the Inclusive Framework to introduce a global 15% minimum corporate tax level for groups with an annual turnover of more than €750 million. A common approach has been agreed to this end within the Inclusive Framework.[16] As is also apparent from the wording of the provisions of the EU Pillar Two Directive, the EU Member States have only very limited policy space when it comes to the implementation of the Directive into their domestic tax systems.[17] The Netherlands, for instance, the authors’ home country, has meticulously transposed the Pillar Two rules in the Dutch Minimum Tax Act of 2024,[18] to be fully compliant with the obligation to achieve the results anticipated under the Inclusive Framework’s political Global Tax Deal and the EU’s Pillar Two Directive implementing the new minimum tax rules in the EU via legally binding secondary EU law instrumentation as a corollary.[19]

Pillar Two aims to further address base erosion and profit shifting (anti-tax avoidance) and to establish a floor on tax competition between countries (anti-tax competition).[20] The means to achieve these objectives pursued is a top-up tax of up to 15% on a globally coordinated taxable base. And indeed, an alternative minimum tax that effectively results in a worldwide minimum company tax burden meets both objectives in practical terms.[21] The EU Pillar Two Directive requires that if the effective tax rate (ETR) in a tax jurisdiction falls below 15%, top-up taxation will be levied, in short, up to the minimum level.[22] The effective tax rate of a group for a reporting year is calculated for this purpose on a per country basis (jurisdictional blending),[23] by reference to an effective tax rate calculation by means of a fraction.[24] In short, the numerator of this fraction includes the corporate taxes of all group entities established in the jurisdiction for which the calculation is made.[25] The denominator, in short, includes the profits of all group entities established in the jurisdiction for which the calculation is made.[26] Top-up taxation is due to the extent that the effective tax rate in a jurisdiction is lower than the 15% minimum rate.[27] The top-up tax is then calculated by multiplying the percentage point difference[28] between the effective tax rate and the 15% minimum rate with the excess profit, i.e. the profit minus a top-up tax-free amount: the so-called Substance-Based Income Exclusion (SBIE) that applies by reference to the group’s tangible presence in the jurisdiction involved, and which is calculated as a fixed return on the costs of labour and fixed assets.[29] The top-up tax is then levied successively according to the mechanisms of the Qualified Domestic Minimum Top-up Tax (QDMTT; if introduced by the low-taxing jurisdiction involved),[30] the qualified Income Inclusion Rule (IIR),[31] or the qualified Undertaxed Profit Rule (UTPR).[32] The question of when exactly an additional levy is ‘qualifying’ for Pillar Two purposes will not be further discussed.[33]

2.2 Domestic versus cross-border scenarios

2.2.1 Domestic and cross-border scenarios outlined

The effective operation of the EU Pillar Two Directive through the respective EU Member State’s implementing legislation initiates divergences in terms of tax burdens imposed in domestic and cross-border scenarios. We illustrate this with a numerical example, starting with a domestic fact pattern as a base scenario. We then elaborate on some cross-border variants of this base case in three scenarios, in which we link each scenario to one of the Pillar Two top-up tax variants: scenario a) income-inclusion rule (IIR); scenario (b) domestic minimum top-up tax (QDMTT), and; scenario (c) undertaxed profit rule (UTPR).

2.2.2 Domestic scenario (base case)

Group. Co1, Co2 and Co3 belong to the same group. All are based in EU Member State Q (‘Query’). Co1 is the ultimate parent entity.
EU MS Q. The sum of the (profit) taxes involved (T) in EU MS Q is €1,500 (Co1: €400, Co2: €600 and Co3: €500) The sum of their income (Y) in EU MS Q is €10,000 (Co1: €2,000, Co2: €3,000, Co3: €5,000). The effective tax rate in EU MS Q is 15% (1,500/10,000)*100%=15%). EU MS Q is not a low-taxing jurisdiction. Co1, Co2 and Co3 are not low-taxed group entities.
TuT EU MS Q. There is no top-up tax up to the 15% minimum level.

In this case, EU Member State Q subjects the entities resident in its jurisdiction to €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,500. See also Figure 1.

Figure 1. Domestic scenario (base case)

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2.2.3 Cross-border scenario a): income-inclusion rule (IIR)

Co1, Co2 and Co3 belong to the same group. Co1 and Co2 are located in EU Member State Q. Co3 is located in EU Member State X. Co1 is the ultimate parent entity.
EU MS Q. The sum of the covered taxes (T) involved in EU MS Q is €1,000 (Co1: €400 and Co2: €600). The sum of their income (Y) in EU MS Q is €5,000 (Co1: €2,000 and Co2: €3,000). The effective tax rate in EU MS Q is 20% (1,000/5,000)*100%=20%). EU MS Q is not a low-taxing jurisdiction. Co1 and Co2 are not low-taxed group entities.
EU MS X. The sum of the covered taxes (T) of Co3 in EU Member State X is €500. The sum of the income (Y) of Co3 in EU Member State X is €5,000. The effective tax rate in EU Member State X is 10% (500/5,000)*100%=10%). EU Member State X is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).
TuT EU MS Q. Say, EU Member State X does not have a qualified domestic minimum top-up tax. Then, EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co1, under the application of the income inclusion rule. The top-up tax payable by Co1 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).

In this case, EU Member State Q subjects the entities resident in its jurisdiction to €250 top-up taxation, where in the base case scenario EU Member State Q levies €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,750, where in the base case scenario the total corporate taxes amount to €1,500. See also Figure 2.

Figure 2. Cross-border scenario a): income-inclusion rule (IIR)

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2.2.4 Cross-border scenario b): domestic minimum top-up tax (QDMTT)

Co1, Co2 and Co3 belong to the same group. Co1 and Co2 are established in EU Member State X. Co3 is based in EU Member State Q. Co1 is the ultimate parent entity.
EU MS X. The sum of the covered taxes (T) involved in EU Member State X is €1,000 (Co1: €400 and CO2: €600). The sum of their income (Y) in EU Member State X is €5,000 (Co1: €2,000 and Co2: €3,000). The effective tax rate in EU Member State X is 20% (1,000/5,000)*100%=20%). EU Member State X is not a low-taxing jurisdiction. Co1 and Co2 are not low-taxed group entities.
EU MS Q. The sum of the covered taxes (T) of Co3 in EU Member State Q is €500. The sum of the income (Y) of Co3 in EU MS Q is €5,000. The effective tax rate in EU MS Q is 10% (500/5,000)*100%=10%). EU MS Q is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).
TuT MS Q. EU MS Q has a qualified domestic minimum top-up tax. EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co3, applying the domestic minimum top-up tax. The top-up tax payable by Co3 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).

In this case, EU Member State Q subjects the entity resident in its jurisdiction to €250 top-up taxation, where in the base case scenario EU Member State Q levies €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,750, where in the base case scenario the total corporate taxes amount to €1,500. See also Figure 3.

Figure 3. Cross-border scenario b): domestic minimum top-up tax (QDMTT)

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2.2.5 Cross-border scenario c): undertaxed profit rule (UTPR)

Co1, Co2 and Co3 belong to the same group. Co1 is located in EU Member State A. Co2 is based in EU Member State Q. Co3 is located in EU Member State X. Co1 is the ultimate parent entity.
EU MS A. The sum of the covered taxes (T) of Co1 in EU Member State A is €400. The sum of income (Y) in EU Member State A is €2,000. The effective tax rate in EU Member State A is 20% (400/2,000)*100%=20%). EU Member State A is not a low-taxing jurisdiction. Co1 is not a low-taxed group entity.
EU MS Q. The sum of the covered taxes (T) of Co2 in EU Member State Q is €600. The sum of income (Y) in EU MS Q is €3,000. The effective tax rate in EU MS Q is 20% (600/3,000)*100%=20%). EU MS Q is not a low-taxing jurisdiction state. Co2 is not a low-taxed group entity.
EU MS X. The sum of the covered taxes (T) of Co3 in EU Member State X is €500. The sum of the income (Y) of Co3 in EU Member State X is €5,000. The effective tax rate in EU Member State X is 10% (500/5,000)*100%=10%). EU Member State X is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).
TuT EU MS Q. EU Member State A does not have a qualified income inclusion rule. EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co2, applying the undertaxed profit rule. The top-up tax payable by Co2 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).

Figure 4. Cross-border scenario c): undertaxed profit rule (UTPR)

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2.3 Pillar Two top-up taxation compatible with EU treaty freedoms?

2.3.1 Top-up taxation mechanisms incompatible and non-binding

A comparison of the domestic scenario with cross-border scenarios a), b) and c) raises the question of whether the top-up taxation under the EU Pillar Two Directive in the various cross-border variants is compatible with the EU treaty freedoms. We believe it is not. Where no additional levy would be levied domestically, the EU Member State involved introduce a Pillar Two additional levy in all equivalent cross-border scenarios. All things considered, this results in a de facto restriction. According to settled case law of the Court of Justice of the EU (CJEU), a restriction of the fundamental freedoms is only permissible if such is justified by overriding reasons in the public interest and under the condition that the restriction’s operation is appropriate to ensuring the attainment of the objective pursued and does not go beyond what is necessary to attain that objective (proportionality).[34] The existing justification grounds as formulated by the CJEU do not seem to provide a sufficient basis to justify the restrictions imposed under the EU Pillar Two Directive. This means that, all things considered, the Pillar Two top-up taxation is incompatible with the fundamental freedoms and therefore non-binding, and this holds under the various top-up tax mechanisms. This would hold in court under primary EU law, unless the CJEU would come to the aid of the EU Member States with a newly and yet to be developed justification ground under its rule of reason. Such would require, as the authors see it, for the CJEU to consider, and contrary to the notion of the envisaged internal market and its level playing field rationale, that the EU Pillar Two Directive would operate in the apparent general interest of the EU as a whole, whereby the Directive to that extent and for that reason alone should not be assessed as incompatible with EU law.[35] In the authors’ view, such an outcome seems rather unlikely, or at least such would be hard to understand, mostly because the Directive does not actually establish a level playing field within the EU’s internal market.

2.3.2 Assessment of the directive against the freedoms

According to settled case law of the CJEU, the assessment of the compatibility of a national or secondary EU law tax measure with the EU treaty freedoms is based on the decision model as established by the CJEU in its settled case law.[36] Insofar as relevant here, it is examined whether it is possible to assess the measure at hand against primary EU law. In the present case, the matter would involve an assessment of the EU Pillar Two Directive (secondary EU law) against the EU treaty freedoms (primary EU law). Under this review, it is examined whether the fact pattern concerned falls within the scope of operation of the fundamental freedoms of movement – (a) access (see section 2.3.3 below). It is then examined whether the measure at hand imposes an obstacle – (b) restriction / discrimination (see section 2.3.4 below). Subsequently, and finally, it is examined whether such a restriction or discrimination is eligible to be justified, including an assessment of whether the justification in question is suitable or appropriate for achieving the objective pursued (effectiveness) and does not go beyond what is necessary (proportionality) – (c) justification (see section 2.3.5 below).

The EU Pillar Two Directive can be assessed against EU treaty freedoms, just as any instrument of secondary EU law can be assessed against primary EU law.[37] This is evident from established case law of the CJEU where the court has assessed directives and regulations against the Charter, EU state aid law, EU treaty freedoms and EU principles; all sources of primary EU law.[38] It can also be deduced from the preamble to the EU Pillar Two Directive that the EU Member States (rightly) consider that the content of the EU Pillar Two Directive needs to be compatible with the fundamental freedoms.[39] It should be noted that it is not entirely clear whether, and if so, to what extent, the EU legislature has some discretion in the exercise of its legislative powers with regard to directives in direct taxation matters, for instance when it comes to safeguarding primary EU law parameters, including the EU treaty freedoms. As it appears from CJEU case law, the EU legislator, under conditions and in specific cases, has allowed the EU legislature some discretion while in other cases it has not. [40] The CJEU has held that: “… it is understood that, when the EU legislature adopts a tax measure, it is called upon to make political, economic and social choices, and to rank divergent interests or to undertake complex assessments. Consequently, it should, in that context, be accorded a broad discretion, so that judicial review of compliance with the conditions set out in the previous paragraph of this judgment must be limited to review as to manifest error.”[41] The EU legislature’s discretion, however, is not unlimited. For example, the CJEU has explicitly stated that with regard “… to judicial review of compliance with those conditions, where interferences with fundamental rights are at issue, the extent of the EU legislature’s discretion may prove to be limited, depending on a number of factors, including, in particular, the area concerned, the nature of the right at issue guaranteed by the Charter, the nature and seriousness of the interference and the object pursued by the interference.”[42] In addition, the EU legislator must always take into account the principle of proportionality, which requires ‘acts of the EU institutions be appropriate for attaining the legitimate objectives pursued by the legislation at issue and do not exceed the limits of what is appropriate and necessary in order to achieve those objective’. [43]

The infringement of the EU Pillar Two Directive with the fundamental freedoms however, is so flagrant and binary (just consider the maths), as we will elaborate on below, that in the authors’ view it seems rather unlikely that the CJEU will allow for such under the EU legislator’s margin of appreciation, if any. Note that an argument based on the circumstance that the EU Member States[44] are following up on an international political agreement with the EU Pillar Two Directive cannot serve as a justification either. Previously, with regard to some obligations of a public international law nature arising from the ‘principles governing the international legal order established within the framework of the United Nations’, the CJEU observed that these cannot lead to a derogation ‘from the principles of liberty, democracy and respect for human rights and fundamental freedoms … as a foundation of the Union’ [emphasis added, MdW/CW)’.[45] If such applies for the framework of the United Nations we think that this should be held equally applicable with regard to some international political agreements on corporate tax policy matters involving the OECD/G20 Two-Pillar Solution.[46]

The question of whether it is the national implementing legislation or the EU Pillar Two Directive itself that would be subject to review against primary EU law seems to be determined by whether the EU legislative instrument concerned calls for some ‘exhaustive harmonisation’.[47] National implementing measures that relate to a matter that has been exhaustively harmonised at EU level are generally assessed against the harmonisation measure in question, the Directive that is, rather than primary EU law.[48] However, such a secondary EU law legislative instrument can be tested against primary EU law itself regardless.[49] As a side note, we wonder whether the EU Member States, even in an area which has been the subject of exhaustive harmonisation, would still have their own responsibility to ensure that their legislation operates in line with primary EU law, i.e., when transposing exhaustively harmonizing EU Directives into their domestic legislation. This, for example, for reasons of Union loyalty and loyal cooperation.[50] We believe that it could be argued that even if EU Member States only have some limited discretion in transposing EU legislation into their national legal systems, they should still continue to monitor and ensure the compatibility of their legislative activities with primary EU law requirements. Be that as it may, it seems to us that the assessment of the EU Pillar Two Directive against primary EU law is appropriate in any case. Moreover, any national implementing legislation will be held non-binding – null and void – as well, regardless, and on the same basis as the Directive on which that domestic legislation is based, that is, if and to the extent that the CJEU declares the EU Pillar Two Directive to be incompatible with EU primary law.

The EU legislator cannot escape the operation of EU primary law in the exercise of its legislative powers and responsibilities; this, for example, by pointing at some limitations the EU legislator may have had, or may not have had, when it comes to some maneuvering room available in the establishment of some underlying corporate tax policies in this regard, i.e., with a reference to some political decision-making that had taken place outside the EU institutional framework within a forum lacking EU legislative authority.[51] In the documents accompanying the proposed Pillar Two Directive, the European Commission indicates that the EU had little policy space, because political decision-making had already taken place within the Inclusive Framework, while non-IF member Cyprus had also committed itself to the Global Tax Deal in a press release.[52] However, the Inclusive Framework is not a body with any democratically legitimised legislative powers, and the Inclusive Framework is also not otherwise part of the institutional framework of the EU and its law-making institutions and processes.[53] There is no basis in EU law on which the EU legislator, when drafting EU legislation, could escape its responsibilities under the rule of law that guarantee and safeguard the principles and parameters of primary EU law. If some non-institutional democratic non-legitimate actor such as the Inclusive Framework were to be made part of the EU legislative process, such would utterly undermine the rule of law and the democratic foundations and values on which the legal orders of the EU Member States and those of the EU as well have been based. Therefore, we find it hard to imagine that the CJEU would go along with any such ‘it was the IF that decided’ argumentation. Indeed, it is true that the CJEU has considered in the past that the judicial review of any acts of the EU legislator in tax matters must be limited to an assessment of whether the EU legislator has made a ‘manifest error’.[54] And indeed, the conflicts with the fundamental freedoms and the fragmentation of the internal market that arises from the top-up tax under the Pillar Two Directive’s jurisdictional blending model, in our opinion, could be seen as such a ‘manifest error’.[55]

An example where the CJEU does not consider itself bound by any expressions of actors outside the EU legislative process, is found in the recent judgment in the Nordcurrent-case.[56] In Nordcurrent, the CJEU applies the general anti-abuse rule (GAAR) of Article 1(2) EU Parent Subsidiary Directive in relation to the operation of a participation exemption regime in one of the EU Member States company tax systems. The CJEU does not make any reference to the statement of the European Commission, issued en marge of the EU legislative process when the amendments to the Directive introducing the general anti abuse rule were drafted, that these amendments “are not intended to affect national participations exemption systems in so far as these are compatible with the Treaty provisions”.[57] If a statement by an EU institution outside the legislative procedural order, in this case the European Commission, cannot be attributed any interpretative value, then this applies all the more – a fortiori – to some declarations or some other documents releases by some actors lacking any EU institutional role, such as the Inclusive Framework. In other words, the Inclusive Framework is not an EU legislator and everything that happens within it consequently is not part of the acquis communautaire. It should be noted that en marge of the EU Pillar Two Directive legislative process, some informal maneuverings were initiated by the European Commission as well, as it appears, through the issuance of some declarations to guide some expressions from the Inclusive Framework into the acquis communautaire.[58] Of course, that is not possible, and following the recent Nordcurrent case, these declarations seem to irrevocably suffer the same fate as the European Commission’s statement on the GAAR in Article 1(2) EU Parent Subsidiary Directive: legally irrelevant and non-binding.

2.3.3 Access

In order to achieve access to the protection of the EU treaty freedoms, treaty standing that is, the economic operator concerned and its operations, according to settled case law of the CJEU, must fall within the scope of operation of the freedoms of movement. The present set of facts must fall within: (i) the personal scope; (ii) the geographical scope and (iii) the material scope of operation of the EU treaty freedoms. Notably, at that point, the CJEU does not take into account any tax saving considerations or any tax avoidance considerations on the part of the economic operator concerned.[59]

Re (i) Personal scope. Legal entities located in any of the EU Member States that are subject as a constituent entity to the Pillar Two rules under the Pillar Two Directive have access to the protection of the treaty freedoms,[60] i.e., insofar as it concerns legal entities established or governed by the company laws of any of the EU Member States involved (personal scope).[61] In the fact patterns involved – cross-border scenarios a), b) and c) – it is a legal person (Co), established under the laws of EU Member State Q and a resident of EU Member State Q, that is subject to the top-up tax measure at issue in EU Member State Q. Co1 is subject to top-up taxation under the IIR, Co2 is subject to top-up taxation under the UTPR, and Co3 is subject to top-up taxation under the QDMTT. Co1 and Co2 and Co3 all fall within the personal scope of the freedoms as a national that is a resident of one of the EU Member States, in this case EU Member State Q.

Re (ii) Geographical scope. Legal entities within the personal scope of operation of the freedoms that move across the national borders of the EU Member States within the internal market by engaging into economic activities in other EU Member States through subsidiaries or branches, fall within the geographical scope of the TFEU’s freedoms of movement.[62] Each of the fact patterns concerned – scenarios a) to c) that is – constitute a cross-border movement of an economic operator in the internal market. In every instance it is Co1 that conducts economic activities in another EU Member State through a subsidiary company. In scenario a), the EU Member State Q based Co1 operates via Co3 in EU Member State X. In scenario b), the EU Member State X based Co1 operates via Co3 in EU Member State Q. In scenario c), the EU Member State A based Co1 operates via Co2 in EU Member State Q and via Co3 in EU Member State X. All three scenarios involve cross-border economic activities within the internal market and therefore all fall within the geographical scope of operation of the treaty freedoms under the TFEU.

Re (iii) Material scope. The material scope of operation focuses on the question of the applicable treaty freedom. This question is relevant because in third-country situations – movements across the EU’s external borders – the fundamental freedoms do not apply, except for the freedom of movement of capital.[63]^–[64] In third-country scenarios only capital movements are protected. For the sake of completeness, this holds save for the application of the standstill clause in respect of any distortive measures impeding direct investments, amongst others, that have been materially in place as per year-end 1993 (carve-out).[65] In the event of a possible simultaneous application of several EU treaty freedoms, the CJEU uses a balancing approach when weighing up the freedom of movement of capital on the one hand and the free movement of goods,[66] services[67] and workers on the other[68].[69] There, the CJEU assesses the question of the applicable freedom by reference to the freedom of movement that is predominantly encroached upon by the measure involved. In weighing up the freedom of movement of capital and the freedom of establishment[70], the CJEU uses a decision tree approach, looking at the rationale of the legislation at issue and the set of facts and circumstances at hand.[71] In the case of minority interests (no decisive influence[72]), the freedom of movement of capital applies.[73] Third-country situations are then protected (save for the application of the standstill clause).[74] In the case of majority interests (decisive influence[75]), the CJEU assesses the rationale of the relevant measure in the light of the facts and circumstances of the case.[76] If the tax measure at hand is aimed at the taxation of corporate groups, the measure is tested against the freedom of establishment resulting in the third-country scenario in question not being protected.[77] If the tax measure at hand focuses on taxing portfolio investment returns, the measure is tested against the freedom of capital.[78] If the tax measure seeks to combat tax avoidance, the measure is tested against the freedom of movement of capital.[79] If the tax measure is of a generic nature, the freedom of movement of capital applies and any third-country scenarios involved are then protected under the TFEU (subject to the application of the standstill clause).[80]

In the present fact patterns there is a movement across national borders within the EU, which unquestioningly falls within the material scope of operation of the EU treaty freedoms. In third-country situations, matters seem to come down to a stand-off between establishment (no protection) and capital movement (protection). Whether the protection of the freedom of movement of capital can be invoked in third-country scenarios seems legally uncertain. The reason for this lies in the ambiguity of the pursued objectives underlying the Global Minimum Tax.[81] The Pillar Two rules apply to groups, where the constituent entities involved are mutually connected via a controlling interest of an ultimate parent entity (consolidation). This implies establishment. The Pillar Two rules aim to combat abuse. This implies capital movements. The Pillar Two rules aim to curb competition. This implies establishment. Perhaps the ambiguity in terms of the pursued objectives under the Pillar Two top-up tax system should lead to the conclusion that the measures have a generic rationale. That would imply capital movements and protection of any investments via group entities located in third-country situations under the EU treaty freedoms.[82] What we also know is that the application of the standstill clause in the TFEU is not an issue in any case, now that the Global Minimum Tax dates from later than year-end 1993. For the remaining part, access to the protection of the EU treaty freedoms in third-country situations is mainly legally uncertain. Of course, this does not alter the fact that it is absolutely clear that intra-EU scnearios involving the operation of the Pillar Two Directive are protected by the fundamental freedoms of movement.

2.3.4 Restriction/discrimination

According to established case law of the CJEU, the EU treaty freedoms protect against restrictive and discriminatory measures.[83] It is relevant in this regard to assess whether the measure in question treats cross-border scenarios more disadvantageously from a company tax point of view in comparison to equivalent domestic scenarios.[84] For the sake of completeness, it should be noted that the CJEU sometimes examines the equality of cases in the light of the object and purpose of the measure in question.[85] However, in our opinion, such an approach is analytically erroneous. This is because the measure at issue, including its rationale or objective upon which the difference in treatment is based, is the subject of the analysis involved and therefore analytically cannot be considered part of the reasoning potentially justifying any such a difference in treatment. If the rationale of a discriminatory measure at hand could serve as a justification of its discriminatory nature, any difference in treatment accordingly would not constitute discrimination or an obstacle under EU law rendering the protection of the EU treaty freedoms obsolete (‘you are not being discriminated against, since you are intended to be treated differently’). This is analytically (and in our opinion also in a more legal-philosophical sense) rather problematic, as it transforms the problem into an argument for denying the problem.

The restrictive and discriminatory effect of the Pillar Two additional levies in the facts patterns concerned are binary and hence evident, at least to us. Domestic and foreign group entities (Co1, Co2, Co3) are comparable since they all fall within the operational scope of the EU Pillar Two Directive. Both domestic and multinational groups are subject to the Pillar Two rules, and in both situations, the Pillar Two rules provide for top-up taxes levies where considered appropriate under the jurisdictional blending model.[86] The cross-border situations in scenarios a), b) and c) are nevertheless all treated differently by the EU Member State involved (EU Member State Q) as compared to the domestic situation. Top-up tax is levied in the cross-border scenario, but not in the equivalent domestic scenario. In scenario a), the EU Member State Q based Co1 is restricted from investing in EU Member State X via Co3, due to the operation of the income inclusion rule (IIR).[87] In scenario (b), the EU Member State Q based Co3 is discriminated against on the basis that its EU Member State Q investing parent company, Co1, is resident in EU Member State X (second-tier discrimination), due to operation of the domestic minimum top-up tax (QDMTT).[88] In scenario (c), the EU Member State Q based Co2 is discriminated against on the basis that its parent company, Co1, which invests in EU Member State X through Co3 is established in EU Member State A, due to the operation of the undertaxed profit rule (UTPR) (second-tier discrimination).[89]

An equal level of taxation at home and across borders within the EU is not achieved.[90] In the domestic scenario, 1,500 (100%) tax is levied and in the cross-border scenarios 1,750 (116.67%; 1750/1,500*100%). A distinction is made between domestic and cross-border investments within an internal market without internal borders. The imposition of differential treatment has its foundation in the application of the concept of jurisdictional blending instead of regional blending.[91] A differential tax treatment arises on the sole ground that Co3 operates in another EU Member State (Co3, cross-border scenario) instead of EU Member State Q (Co3, domestic scenario). Domestically, the 5 percentage points of headroom in the hands of Co1 and Co2 (effective rate 20%) is available to compensate for the stand-alone low-tax burden of Co3 (stand-alone effective rate of 10%). Domestically, no top-up taxation is levied, neither in the hands of Co1 nor elsewhere in the group (total tax 1,500). Across national borders, however, the 5 percentage points headroom in the hands of Co1 and Co2 is not available to compensate for the stand-alone low-tax burden of Co3. Across national borders, top-up taxation is levied, in scenario a) in the hands of Co1, in scenario b) in the hands of Co3, and in the hands of Co2 in scenario c). This is done by imposing the top-up tax under the income inclusion rule, domestic minimum top-up tax, and undertaxed profit rule respectively (250 additional tax each). The Pillar Two top-up tax imposed by the Member State concerned in the domestic scenario is nil and 250 in the cross-border scenario. The total combined corporate income tax and Pillar Two tax in the cross-border scenario is therefore 1,750 instead of the 1,500 in the domestic situation. The math is quite clear.

There is no equal treatment, while there are equal circumstances. The difference in treatment compared to the domestic base case scenario arises solely because of the drawing of EU internal borders between Co1 and Co2 and Co3 in the various cross-border scenarios. In an internal market without internal frontiers under the fundamental freedoms of movement, the introduction of such a variable should not have any effect in terms of top-up taxes imposed by EU Member State Q. In the present facts, due to the Pillar Two top-up taxation for Co1, Co3 and Co2 respectively, the cross-border group involved is confronted with tax-inequality from the perspective of the investment jurisdiction (no import neutrality). The cross-border group involved is also confronted with tax-inequality from the perspective of the investor jurisdiction (no export neutrality). The Pillar Two Directive accordingly distorts both inbound and outbound investment within the internal market, an area where a level playing field supposedly is protected against government induced impediments.

The Pillar Two top-up taxation in the three cross-border scenarios resulting from the IIR, QDMTT and UTPR respectively, makes it less attractive for groups to operate within the internal market. The EU Pillar Two Directive impedes cross-border investment (capital, establishment) through controlled subsidiaries in the territories of the EU. This is a clear breach of the fundamental right to free movement under the TFEU. It should be noted that in some specific circumstances, the effective tax rate for Pillar Two purposes needs to be calculated on a stand-alone basis in the hands of a single constituent entity, Co 3 for instance, in domestic scenarios as well. This applies, for example, to investment entities. However, such a single constituent entity effective tax rate calculation for Pillar Two purposes is the exception, not the rule. This means that the EU Pillar Two Directive imposes at least a de facto restriction/discrimination of the freedoms of movement.[92]

2.3.5 Justification

According to settled case law of the CJEU, under the rule of reason, any restrictive or discriminatory tax measures (in addition to the treaty exceptions that are less relevant in the direct tax domain) can be ‘justified by overriding reasons in the public interest’, provided that ‘they are appropriate for ensuring the attainment of the objective pursued’ and ‘do not go beyond what is necessary to achieve that objective’.[93] Under EU law as it currently stands, the CJEU essentially recognises three types of justification grounds: (i) integrity of the tax base, (ii) combating tax abuse and (iii) effectiveness of tax audits (fiscal supervision).

Re (ii) Integrity of the tax base. By the justification ground referred to in this paper as ‘integrity of the tax base’, we refer to the collection of justifications as accepted by the CJEU in its case law under various terms such as ‘territoriality principle’,[94] ‘coherence of the tax system’ (fiscal coherence),[95] ‘need to safeguard symmetry’,[96] ‘balanced allocation of taxing powers’,[97] whether or not in combination with the ‘risk of tax avoidance’.[98] As we see it, the terms included in this collection all amount to more or less the same thing.[99] In all these cases, the CJEU finds it justified for the EU Member States to take measures in their tax systems to ensure that domestic income is effectively taxed and foreign income is effectively not taxed. Put differently, the CJEU allows the EU Member States to include domestic ‘losses’ and ‘profits’ in their tax jurisdiction. And, the CJEU allows the EU Member States to keep foreign ‘losses’ and ‘profits’ out of it.[100] Territoriality, therefore, or the right of an EU Member State to, to certain extent, fence off its tax base.[101] In all cases, however, the chosen measure must be appropriate and proportionate.[102]

In the present fact patterns, however, the integrity of the domestic tax base is not at stake, and not at all actually, and hence is ineligible to be invoked. On top, any arguments based on the integrity of the tax base cannot serve to justify arbitrary taxation in view of the proportionality test which applies as well. The Pillar Two top-up taxation in scenarios a) and c) concern extraterritorial additional levies (IIR, UTPR). In these scenarios, EU Member State Q effectively levies taxes on foreign profit components of group entities located abroad, albeit that the top-up taxation technically is collected in the hands of a resident constituent entity. In scenario a) this is done via the application of the IIR, and in scenario c) this is done via the application of the UTPR. The extraterritorial nature of the Pillar Two top-up taxes under the aforementioned top-up tax mechanisms (taxation of foreign source income) entails that these cannot be qualified as an appropriate and proportionate tax levy aimed at protecting the integrity of the domestic tax base of the EU Member State (in this case, the base of EU Member State Q). After all, it is not the domestic basis that is envisaged to be protected here, it is the foreign tax base that is sought to be subject to a minimum level of taxation.[103]

Interestingly, the integrity of the domestic tax base is also not at stake in the case of the QDMTT imposed in scenario b). It is true that top-up taxes are levied in this matter on domestic profit components (at least for Pillar Two purposes[104]), but this is done in an arbitrary manner, for being based on discriminatory grounds.[105] Moreover, no domestic tax base is lost here. Please let us illustrate this. Let’s assume that EU Member State Q would replace the 250 domestic minimum top-up tax imposed on Co3 in the cross-border scenario for a regular corporate tax levy of 250. If this were done only in the cross-border situation, such would undoubtedly constitute a discriminatory corporate tax measure in contradict with the TFEU’s freedoms of movement, this time however in the EU Member State’s corporate income taxation, i.e., as such a tax would not be levied domestically. In order to neutralize such a discriminatory corporate tax treatment in the corporate income tax, EU Member State Q would need to proceed to also levy 250 corporate income tax in the purely domestic benchmark scenario. Of course, EU Member State Q would be completely free to make such a decision in view of its autonomous taxing powers, however, only as long as such would be in compliance with primary EU law, i.e., not being imposed on discriminatory grounds. Be that as it may, it cannot be said here that without the aforementioned 250 tax impost solely in cross-border scenarios, any domestic corporation tax base would all of a sudden be lost. Viz., the aforementioned 250 company tax is merely added. If we were to then apply the Global Minimum Tax in that case, the Pillar Two top-up tax in the hands of Co3 would be zero. After all, the effective rate for Co3 would then be 15% ((500+250)/5,000*100%). This not only illustrates that the integrity of the domestic tax base is not at stake at all in scenario b) too, it also illustrates the arbitrariness of the Global Minimum Tax in this regard. A neutralisation of a difference in domestic/international tax treatment through corporate income taxation (250 additional corporate tax in the hands of Co3) would eliminate the Pillar Two top-up tax under the QDMTT in the cross-border scenario b). This illustrates that the analytical problem of discriminatory Pillar Two top-up taxation – only imposed in cross-border scenarios – is also rather evident in the domestic minimum top-up tax. We also note that the CJEU has held in the past that any “…compensatory tax arrangements prejudice the very foundations of the single market”.[106]

Re (ii) Combating tax abuse. According to established case law of the CJEU, the fight against tax avoidance, in abstracto, is considered justified and necessary.[107] However, in concreto, the tax measure in question must specifically address and target abusive situations (anti-abuse objective), while it must also function in an appropriate and proportionate manner to achieve that objective.[108] This applies equivalently to both direct and indirect taxes,[109] and also in the same manner with regard to both the EU directives and the EU treaty freedoms and other sources of primary EU law.[110] When it comes to combating tax abuse, all roads lead to Rome, or perhaps the CJEU in Luxembourg. Anti-tax abuse considerations – although admittedly a moving target substantively – are not so easily eligible to be invoked according to settled case law of the CJEU (ultimum remedium). Matters must involve a (merely) tax induced use of (wholly) artificial transactions and/or structures or arrangements (subjective element; intent) contrary to the object and purpose of EU law (objective element; spirit of the law).[111] The (EU) legislator may make use of presumptions of evidence and include the presumption of an abusive motive involving artificial arrangements (‘objective test’, part of the subjective element of the CJEU’s ‘tax abuse’- analysis), although the measure at hand must be sufficiently specific and allow for a rebuttal of the presumption.[112] In that regard, it is primarily for the tax authorities of the relevant EU Member State involved to establish the existence of tax abuse by means of an artificial arrangement in a given case. Subsequently, taxpayers must be given the opportunity to refute any tax avoidance motives by means of a rebuttal mechanism (‘subjective test’, part of the subjective element of the CJEU’s ‘tax abuse’- analysis).[113] The CJEU requires a case by case analysis based on all relevant facts and circumstances, which also needs to be performed on a continuous basis.[114]

In the present fact patterns, top-up taxes are levied in a restrictive and discriminatory manner, while abuse by no means is an unabated matter. Above, we set forth that the objective of the Global Minimum Tax is somewhat ambiguous. The top-up tax measures seek to address tax avoidance while also envisaging a curbing of tax competitive responses by countries and companies. Company tax harmonisation is sought to be achieved by means of a lower limit of taxation by reference to a minimum effective tax rate on a per-country basis, while an arbitrary top-up tax has been put in place that differs in treatment between cross-border scenarios vis-á-vis domestic scenarios in the internal market. The ambiguity of objectives raises the question of whether the Global Minimum Tax, actually, is sufficiently aimed at combating abuse, at least to such an extent that it can be questioned whether this justification becomes available in the first place – from a primary EU law perspective that is. According to settled case-law of the CJEU, for a restriction on the fundamental freedoms to be justified on the ground of the prevention of abuse, the measure at issue must be targeted to “… prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.”[115] Is the Global Minimum Tax sufficiently tailored for such? We are not sure. And assuming that the Global Minimum Tax is sufficiently tailored to tackle tax abusive practices, then the subsequent question arises whether the chosen set of instrumentation – the Pillar Two top-up tax mechanisms – to achieve this end operates in an appropriate and proportionate manner. We honestly do not think this is the case (let alone the various planning opportunities identified in the Pillar Two domain[116]). The Global Minimum Tax operationalises an irrebuttable presumption of proof of ‘abuse’ solely based on the calculation of an effective tax rate for Pillar Two purposes in the various scenarios. No analysis is made based on facts and circumstances. No reference is made to a test based on the intention of the taxpayer (or group) to unduly obtain a tax advantage, nor is there any possibility available for a rebuttal of the presumption of abuse. All this starkly contradicts settled case-law of the CJEU on this matter.[117] Notably, also the Substance-Based Income Exclusion[118] is based on an irrefutable presumption that abuse is there in the presence of intangible capital and intangible asset utilization by the multinational company involved in any jurisdiction, while the Substance-Based Income Exclusion is designed in such a way that it implies that, even in the presence of labour and fixed assets in a jurisdiction, tax avoidance is deemed present beyond a cost-plus yield on wage costs and fixed asset book values. In our opinion, this can hardly be called sufficiently specific. After all, proceeds from intangible capital, intangible assets and excess profits are not necessarily artificially tax-evaded investment returns. In addition, the EU Pillar Two Directive does not allow taxpayers to refute the assumption of avoidance nor are they given the opportunity to provide evidence demonstrating the existence of economic, financial or any other commercial reasons. In that light, the Global Minimum Tax reveals itself as operating rather disproportionally, as a quite bluntly operating one size fits all top-up tax mechanism rather than the tailor made solution to target abusive tax practices as the proportionality test requires under settled case law of the CJEU.

Re (iii) Effectiveness of tax audits. According to established case law of the CJEU, the necessity for the EU Member States to be able to effectively supervise taxpayer behaviour may provide a justification for an imposed restriction as well.[119] The acceptance of this basis for justifying a restriction or discrimination imposed lies in the appreciation under EU law of any administrative difficulties that the tax authorities of the EU Member States concerned may incur in their attempts to effectively collect taxes due to secure needed resources for government spending. This justification ground is particularly relevant in relation to third countries. Within the EU, the room available for invoking this justification ground is rather limited though. The CJEU allows EU Member States to require taxpayers to provide evidence for verification purposes. However, the rules of evidence must be clear and precise.[120] In doing so, the EU Member States may not impede the freedoms of movement too much, as the rules of evidence need to operate proportionally.[121] Categorical obstructions on administrative grounds is not permitted.[122] In third-country scenarios, there is more room for this justification ground to be invoked by the EU Member States, as third-country scenarios and intra-EU situations occur within a different legal context according to the CJEU.[123] Under the EU treaty freedoms as they currently stand, any restrictions and discriminations imposed in third-country scenarios can in principle be justified if no administrative cooperation mechanisms have been put in place in relation to the third country concerned on the basis of some public international law instruments. The basis for the justification is that the tax authorities otherwise do not have an appropriate enforcement tool available in such cases to be able to exercise their supervisory tasks.[124] Within the EU such an argument is unavailable in view of the mutual assistance in direct tax matters under the Adminsitrative Cooperation Directive.

In the present facts patterns, any concerns about the lack of control possibilities in the Pillar Two domain, however, are not present, at least not within the EU, since all relevant information needed to monitor taxpayer behaviour is already readily available. The EU Pillar Two Directive provides for an top-up tax information return, a standardised administrative form developed within the Inclusive Framework that in-scope multinationals must complete and provide to the tax authorities. The Top-up tax return provides an information collection framework as a basis for tax authorities to be able to verify Pillar Two calculations provided, to determine Pillar Two top-up tax obligations and to perform appropriate risk analyses. The tax authorities then exchange the data with each other on the basis of a multilateral information-sharing framework. Within the EU, the information exchange has been organised through an amendment to the Administrative Cooperation Directive, on which the EU Member States reached a political agreement on 11 March 2025.[125] For third-country situations, the Inclusive Framework published a multilateral information exchange framework based on the Convention on Mutual Administrative Assistance in Tax Matters, a so-called Multilateral Competent Authority Agreement (MCAA), on 15 January 2025.[126] There, too, access to tax information and data seems to be guaranteed, at least in relation to those Inclusive Framework member jurisdictions that join the MCAA in line with the political agreement under the 2021 Global Tax Deal. As a result, the path to this justification ground seems at best to be a declining matter, at least already within the EU it is, and in third-country situations too under the freedom of movement of capital depending on whether the third countries concerned join the international exchange framework.

2.3.6 Anticipating some new justification grounds?

The justification grounds available under the rule of reason as it currently stands seem insufficient to justify the impediments imposed under the Pillar Two Directive’s top-up taxation mechanisms. It cannot be ruled out however that the CJEU in due course, if requested, will develop some new justification grounds or alter some of the existing justification grounds to justify the distortive effects of the operation of the EU Pillar Two Directive.

Perhaps the CJEU at some point will develop an argument aimed at protecting the ‘integrity of the EU tax base’, or perhaps the achievement of an ‘EU minimum level of taxation for reasons of anti-tax competition and anti-tax abuse’. A complicating element, however, is that the Pillar Two Directive also under such a justification ground still not actually create a level playing field in the internal market. On the contrary, the fragmentation under the jurisdictional blending model would still distort a proper functioning of the internal market without internal frontiers. Cross-border scenarios would still be treated less favorably than domestic scenarios, even in the light of such newly developed justifications, and that simply stands at odds with the principle of proportionality under EU law[127] – even under some potential considerations of establishing some EU company tax base that would need to be protected or whatever other to be devised argument to justify the discriminatory and restrictive top-up tax treatment. In that light, it would perhaps be more apparent to envisage that the CJEU, when called upon, will require the EU Member States to actually equalize the minimum level of taxation within the internal market, i.e., via some sort of regional blending for Pillar Two purposes instead of some market fragmenting jurisdictional blending model as the EU Pillar Two Directive has currently put in place. Only then a level playing field in EU company taxation would actually be achieved.

If at some point the CJEU were to refer to anti-competition considerations as a newly devised justification ground at some point, notwithstanding any aforementioned level-playing field considerations, such would raise the question as to the sustainability of such a line of argument. This is in the light, for example, of the recent developments at EU institutional levels since the Draghi report on Europe’s loss of competitiveness and the renewed ambitions of the EU institutions to revive the competitiveness of the internal market, through deregulation, tax simplification and the introduction of tax incentives based on a more flexible EU state aid framework.[128] A minimum company tax system fragmenting the internal market alongside domestic tax borders just does not fit nicely in the narrative here. If any newly developed rule-of-reason justifications were to be formed along the lines of competitiveness reasonings, the EU Pillar Two Directive does not seem to us to be the most appropriate and proportionate instrument to achieve such objectives.

2.4 Solutions

We’ll see. For the time being, the top-up tax mechanisms under the EU Pillar Two Directive seems to be incompatible with the fundamental freedoms under primary EU law as it currently stands, as these top-up taxes discriminate cross-border economic activities against domestic economic activities. The restrictive tax treatment is most evident in the top-up taxation under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). And on some closer inspection the same applies for the Qualified Minimum Domestic Top-Up-Tax (QDMTT). Note that the same issues (the de facto unjustifiable obstacle) arise in various other mechanisms in the EU Pillar Two rulebook. The distortive effect of jurisdictional blending can for instance also be seen, amongst others, in the calculation of the Substanced-Based Income Exclusion. This is because only the costs for local use of labour (i.e., not: use of labour in other EU Member States) and tangible assets (i.e., not: use of assets in other Member States) are included in the calculations of the top-up tax free allowance. This puts pressure on the utilization of labour and capital within the internal market in cross-border scenarios. There, too, the lack of regional blending in the EU Pillar Two Directive takes its toll.

So, how could all this be solved? A rather simple solution could be to recognise the EU as a single jurisdiction for Pillar Two purposes (EU jurisdictional blending). If the free movement of capital would prove to be eligible to be invoked as well, which does not seem inconceivable to us, then a global blending model would have to be introduced to alleviate any primary EU law tensions. Whatever the matter, in both cases the EU Pillar Two Directive will have to be amended, at least in such a manner that the EU is considered a single jurisdiction for Pillar Two purposes. Only under a regionally blended model no top-up taxes would be levied in any of the cross-border scenarios a), b) and c) mentioned above, akin to the manner in which no top-up taxes would be due in any of the equivalent domestic scenarios. And in order to persuade third countries to respect all of this and not start top-up taxing themselves, the OECD Pillar Two Model Rules and the Commentary to the Pillar Two Model Rules devised within the Inclusive Framework would need to be adapted accordingly as well. The same would hold for any of the domestic Pillar Two rulebooks in the various Pillar Two implementing countries outside the EU. A further modification of the rules towards a global blended model, we note, would secure a full appreciation of the application of the freedom of capital in third-country scenarios. The advantage of this approach, perhaps, would be that the EU’s Pillar Two rules would accordingly be moving towards mirroring the American minimum tax variant, the US GILTI rules.

An alternative, second, approach would be to do nothing and sit still and wait for developments to come. Maybe the CJEU will come to the aid of the EU Member States in due course, with a newly devised justification ground under the rule of reason. For now, we find that hard to imagine nor do we think this would be a preferable option, for the simple reason that such would allow for a tax-induced fragmentation of the internal market hindering intra-EU investment. Taxpayers who are confronted with a breach of their fundamental freedoms under EU law on this scale should not be forced to engage in years of legal proceedings. And EU Member States should be given the opportunity to correct the flaws identified, for example, for reasons of Union loyalty and loyal cooperation.

A third solution, and this would be our preference, would be to annul the EU Pillar Two Directive and replace it with something that does work. A fault confessed is half redressed. Although we recognize of course that a lot of European political capital has been invested into the Pillar Two Directive, abolishing EU legislation is not impossible. In the past, for example, the Savings Interest Directive was abolished in view of the changes made to the Administrative Cooperation Directive (common reporting standard).[129] As far as we are concerned, it would be preferable if the EU Member States would then first return to the drawing board in order to reform their corporate tax systems towards a competitive EU-wide corporate tax system on the basis of well-considered policy considerations and tax law design and drafting. Then the EU Member States would have to agree on the proper foundational building blocks for such an EU company tax framework. Questions worth asking, then, would be the following. Who should become the taxpayer under such a framework? Do we want to tax bodies corporate (separate accounting) or do we want to tax economic entities, corporate groups (unitary combination)? What should the tax base be? Do we want to use profit as a basis, excess profit (economic profit), gross profit (EBIT), turnover (turnover), or cash flows (cash flows)? How should the tax base then be distributed among jurisdictions? Do we want to distribute tax base along the supply side (production factors; origin) or perhaps (also?) along the demand side (market; destination)? Do we want to apply an endogenous distribution key (transfer pricing) or do we want to use an exogenous distribution key (formulary apportionment)? Do we want to harmonise the rates, or do we prefer to leave that to the individual Member States?

3 Final remarks

In this contribution, we operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the very notions of the internal market and the fundamental freedoms as matters currently stand. Under both the IIR and UTPR as well as the QDMTT, we have highlighted some stark differences in top-up tax treatment between domestic and cross-border scenarios. These differences result in unjustified de facto restrictions of the freedoms of movement. Seen from an internal market perspective, the core of the legal deficit in the Global Minimum Tax and with that the Pillar Two Directive lies in the chosen approach of jurisdictional blending on the basis of which top-up taxation is determined on a per country basis, while the internal market is about creating an area without internal borders within which factors of production and goods and services should be able to move freely (regional blending).

Some possible means to solve the issues created under the Pillar Two Directive as it currently stands include the introduction of regional blending (EU blending) or even global blending for that matter, to secure compliance with the freedom of movement of capital. Or, perhaps better, the abolition of the EU Pillar Two Directive with a subsequent introduction of a well-designed adequately functioning harmonised corporate tax framework for the internal market.[130] We believe that the solution to the international company tax issue lies in fundamental system redesign, a putting in place of a fair and neutral business tax system validated on the basis of a democratically legitimised tax legislative process that is guaranteed by the rule of law. Any such transformation requires a well-thought-out company tax reform initiative. Without such fundamental and well-thought-out tax system design, there is a risk, we fear, of cutting and pasting from all those directive proposals that have passed by in recent years such as CCCTB/BEFIT, Unshell, DEBRA, HOTS, TP, and the Digital Tax Package from 2018,[131] all of which initiate various kinds of problems of their own. We’ll see.

[1] Erasmus University Rotterdam (EUR) and PwC Rotterdam. The author can be reached via dewilde@law.eur.nl.

[2] University of Amsterdam (UvA). The author can be reached via c.wisman@uva.nl. The copy was closed on 10 June 2025. A Dutch language version of the article has been published in a Dutch law journal (NL Fiscaal Wetrenschappelijk, NLF-W 2025/18) under the title ‘Waarom alle bijheffingsvarianten in de EU Pijler 2-Richtlijn botsen met de EU-verdragsvrijheden (en hoe dit op te lossen)’.

[3] See Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (EU Pillar Two Directive).

[4] An overview of the national transposition measures as communicated by the EU Member States is available via https://eur-lex.europa.eu/legal-content/EN/NIM/?uri=oj%3AJOL_2022_328_R_0001.

[5] See, for example, points 3 to 6 Preamble of the EU Pillar Two Directive.

[6] See OECD/G20 Base erosion and profit shifting project, Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, 8 October 2021 (October 2021 Statement). For a commented overview of the developments from the proposals and the political agreement to the present, see, for example, in Dutch, M.F. de Wilde, ‘Van BEPS tot de Wet minimumbelasting 2024, Een kroniek in commentaren’, Den Haag, SDU.

[7] The OECD/G20 Inclusive Framework currently consists of 147 states.

[8] See, among others, L. De Broe and M. Massant, ‘Are the OECD/G20 Pillar Two GloBE-Rules Compliant with the Fundamental Freedoms?’, EC Tax Review, Volume 30, Issue 3 (2021) pp. 86 – 98, D. Weber, ‘Some remarks about the difference in the EU legality review between unilateral measures of the EU Member States and multilateral measures of the EU legislator, with special attention to the EU GLoBE Directive’, in P. Pistone (ed.), Building Global International Tax Law; essays in honour of Guglielmo Maisto, IBFD, Amsterdam, 2022, pp. 471-481, J. Englisch, ‘Dynamic References to International Soft Law Agreements: Flexibility With Limits’, EC Tax Review, Volume 33, Issue 1 (2024) pp. 2 – 7, G. Kofler, The ‘Decluttering’ of EU Direct Tax Law, EC Tax Review, Volume 34, Issue 1 (2025) pp. 2 – 7, J. English, ‘Non-harmonized Implementation of a GloBE Minimum Tax: How EU Member States Could Proceed’, EC Tax Review, Volume 30, Issue 5/6 (2021) pp. 207 – 219, W. Haslehner, ‘The Costs of Pillar 2: Legitimacy, Legality, and Lock-in’, Intertax, Volume 51, Issue 10 (2023) pp. 634 – 637, F. Debelva en L. de Broe, ‘Pillar 2: An Analysis of the IIR and UTPR from an International Customary Law, Tax Treaty Law and European Union Law Perspective’, Intertax, Volume 50, issue 12 (2022), pp. 898-906, V. Chand, A. Turina en K. Romanovska, ‘Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the Various Challenges’, World Tax Journal 2022 (Volume 14), No. 1, M.P. Devereux en J. Vella, ‘The Impact of the Global Minimum Tax on Tax Competition’, World Tax Journal 2023 (Volume 15), No. 3, J.F. Pinto Nogueira, ‘GloBE and EU Law: Assessing the Compatibility of the OECD’s Pillar II Initiative on a Minimum Effective Tax Rate with EU Law and Implementing It within the Internal Market’, World Tax Journal 2020 (Volume 12), No. 3, Nogueira, J. F. P. & Turina, A., Feb 2021, Global minimum taxation?: an analysis of the anti-base erosion initiative. Perdelwitz, A. & Turina, A. (eds.). Amsterdam: International Bureau of Fiscal Documentation (IBFD), p. 283-314 32 p. (IBFD Tax Research Series). T.M. Vergouwen, ‘De reikwijdte van de verplichting tot (bij)heffing op grond van de Pijler 2-richtlijn in relatie tot derde staten in het licht van het arrest Generalstaatsanwaltschaft München’, NLF-W 2023/25, S. Pancham, ‘De Pillar 2-heffing en belastingverdragen. Toch geen strijdigheid?’, NLF Opinie 2023/4, L. van Heijningen, ‘Ongeschreven internationaal fiscaal gewoonterecht, de Nederlandse rechtsorde en de UTPR’, NLF-W 2024/11, M.J.A.M. van Gijlswijk en L. van Heijningen, ‘De (ir)relevantie van de wetsgeschiedenis bij de uitleg van implementatiebepalingen’, NLF-W 2022/18, G.K. Fibbe en M.M. Makkinje, ‘De Wet minimumbelasting 2024 en de verhouding tot artikel 1 EP EVRM’, WFR 2023/32, J. R. Goudsmit en L.C. van Hulten, ‘Pijler 2: enkele verdragsaspecten’, WFR 2023/41, L. den Ridder, ‘Europeesrechtelijke knelpunten van de Income Inclusion Rule (Pillar 2)’, WFR 2021/104, H. Vermeulen, ‘Heffingsvarianten van de Wet minimumbelasting 2024’, TFO 2024/192.1, T.M. Vergouwen, ‘De interactie tussen richtlijnen en belastingverdragen: drie casusposities’, MBB 2024/45, S.R. Panham en G.K. Fibbe, ‘Pillar 2: de CFC-regeling in de Wet minimumbelasting 2024’, MBB 2023/33 and M.M. De Reus, D. Salehi, H. Vermeulen en C. Wisman, ‘De Wet minimumbelasting 2024 (Pijler 2)’, FED Fiscale Brochures, Kluwer.

[9] See M.F. de Wilde and C. Wisman, ‘OECD Consultations on the Digital Economy: “Tax Base Reallocation” and “I’ll Tax If You Don’t”?’ In P. Pistone & D. Weber (eds.), Taxing the Digital Economy: The EU Proposals and Other Insights (pp. 3-26). (EATLP International Tax Series). IBFD, August 2019. Also see M.F. de Wilde en C. Wisman, ‘OESO-consultatie digitale economie: ‘grondslagherverdeling’ en ‘ik belast wat jij niet doet’?’, NLF-W 2019/1.

[10] See Preamble EU Pillar Two Directive point 6: “This Directive should also apply to large-scale purely domestic groups. In that way, the legal framework would be designed to avoid any risk of discrimination between cross-border and domestic situations.”.

[11] See Articles 1 and 2 of the EU Pillar Two Directive.

[12] See Proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union {SWD(2021) 580 final, Brussels, 22.12.2021 COM(2021) 823 final, 2021/0433 (CNS), p. 3 and 8: “Finally, the measures to implement the OECD Model Rules have to be enacted in accordance with primary law and follow a common line across the Union, to provide taxpayers with legal certainty that the new legal framework is compatible with the EU fundamental freedoms, including the freedom of establishment. … … While the Directive, in general, closely follows the OECD Model Rules, it extends its scope to large-scale purely domestic groups, in order to ensure compliance with the fundamental freedoms.”.

[13] See, for example, CJEU 8 March 2017, Case C-14/16 (Euro Park Service). For an analysis of the scope for reviewing the implementing legislation of the EU Member States or secondary EU law against primary EU law, see, for example, H. Vermeulen, ‘Het Unierechtelijke en anderszins verdragsrechtelijk gewaarborgde evenredigheidsbeginsel. Alle wegen leiden naar Rome’, NTFR 2023/1839.

[14] See, for example, CJEU 26 October 2010, Case C-97/09 (Ingrid Schmelz), paragraph 50: “It should be noted, in addition, that the prohibition on restrictions on freedom to provide services applies not only to national measures but also to measures adopted by the European Union institutions (see, by analogy in relation to the free movement of goods, Case C‑114/96 Kieffer and Thill [1997] ECR I‑3629, paragraph 27 and case‑law cited). ‘; And more recently, CJEU 8 December 2022, C-694/20 (Orde van Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA).

[15] See M.F. de Wilde & C. Wisman, ‘OECD Consultations on the Digital Economy: “Tax Base Reallocation” and “I’ll Tax If You Don’t”?’, In P. Pistone, & D. Weber (Eds.), Taxing the Digital Economy: The EU Proposals and Other Insights (pp. 3-26). (EATLP International Tax Series). IBFD, August 2019

[16] See October 2021 Statement: “The GloBE rules will have the status of a common approach. This means that IF members: • are not required to adopt the GloBE rules, but, if they choose to do so, they will implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two, including in light of model rules and guidance agreed to by the IF; • accept the application of the GloBE rules applied by other IF members including agreement as to rule order and the application of any agreed safe harbours“. See OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris, http://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-december-2023.pdf, p. 4.

[17] The Dutch legislator itself speaks of ‘very limited national policy space’, see, for example, Parliamentary Papers II, 36 369, no. 3, p. 3 and 55. The legislator also indicates that this limited policy space for the individual EU Member States can be explained by the fact that the EU Pillar Two Directive is largely based on the OECD Model Rules and the international political agreement on them. See Parliamentary Papers II, 36 369, no. 3, p. 59.

[18] Ibidem.

[19] See Article 288 TFEU, “A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.“.

[20] See for example “… designed to address the continued risk of profit shifting“, OECD/G20 Base Erosion and Profit Shifting Project Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note, 23 January 2019 and “…establishes a floor on corporate tax competition“, OECD/G20 Base Erosion and Profit Shifting Project Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy 11 July 2023. See ” … to put an end to tax practices that allow MNEs to shift profits to jurisdictions where they are not taxed or are taxed very low, … create a floor for competition with corporate tax rates.’, point 2, Preamble EU Pillar Two Directive. The Dutch legislator also refers to these as the objectives of Pillar 2, see Parliamentary Papers II, 2022–2023, 36 369, no. 3, p. 2. The possible budgetary impact seems to have played hardly any role for the Netherlands, Parliamentary Papers I, 2023–2024, 36 369, C, p. 5.

[21] See also C. Wisman, ‘Over de Unierechtelijke (on)houdbaarheid van het ‘effectief belastingtarief’ en de ‘bijheffing’ van de WMB 2024’, TFO 2024/192.2.

[22] See Articles 26 and 27 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law law via Articles 8.1 and 8.2 of the WMB 2024.

[23] Under certain circumstances, the group must make multiple calculations for one state, for example in the case of the presence of Investment Entities. See Article 41 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 10.4 WMB 2024.

[24] See Article 26 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 8.1 WMB 2024.

[25] See Article 20 et seq. of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Chapter 7 of the WMB 2024.

[26] See Article 15 et seq. jo. Article 20(2) EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Chapter 6 WMB 2024.

[27] See Article 27 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law law via Article 8.2 WMB 2024.

[28] Note that the EU Pillar Two Directive does not comment on possible rounding, while the OECD Model Rules stipulate rounding to 4 decimal places, Article 5.1 OECD Model Rules. The Netherlands, for example, adheres to the OECD Model Rules in this and prescribes rounding to 4 decimal places, see Article 8.1 WMB 2024. See also C. Wisman, paragraph 6.2.3.1 in M.M. De Reus, D. Salehi, H. Vermeulen and C. Wisman, ‘De Wet minimumbelasting 2024 (Pijler 2)’,, FED Fiscale Brochures, Kluwer, Deventer, 2024.

[29] See Article 27 jo. 28 EU Pillar Two Directive. The application is optional, see Article 45 of the EU Pillar Two Directive.

[30] See Article 1(2) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 3.1 WMB 2024.

[31] See Article 1(1)(a) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 4.1 WMB 2024.

[32] See Article 1(1)(b) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 5.1 WMB 2024.

[33] However, we do note that an additional levy can only be regarded as a ‘qualified’ additional levy if “… does not provide any benefits that are related to those rules “, see the definitions in Article 3, sections 18, 28, and 43 of the EU Pillar Two Directive. This is also known as the ‘no benefits requirement’.

[34] See for example CJEU 20 January 2021, Case C‑484/19 (Lexel AB), para. 46.

[35] Cf. CJEU 25 January 1977, Case 46/76, (Bauhuis), para. 27 et seq.

[36] See, for example, CJEU 4 October 2024, C-585/22 (X BV) and CJEU 8 December 2022, C-694/20 (Orde van de Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA).

[37] See, for example, CJEU 8 December 2022, C-694/20 (Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA). The Dutch Supreme Court also ruled that it is possible to review EU Directives against free movement, see, in Dutch, Supreme Court 20 December 2024, ECLI:NL:HR:2024:1883. As aptly stated by Advocate General (AG) Kokott: “The hierarchy of norms is clear. The Parent-Subsidiary Directive is to be measured against the fundamental freedoms, and not vice versa.”, see AG Opinion Kokott, 14 October 2021, Case C‑556/20 (Schneider Electric SA), para. 36.

[38] See, for example, CJEU 26 October 2010, C-97/09, (Ingrid Schmelz), para. 50, in which the CJEU notes in a case about the VAT Directive that the prohibition of obstacles to the free movement of services: “… applies not only to national measures but also to measures adopted by the European Union institutions.‘. Previously, the CJEU ruled in a case concerning the Regulation on statistics relating to the trading of goods that the prohibition on hindering the free movement of goods “applies not only to national measures but also to measures adopted by the Community institutions “, see CJEU 25 June 1997, C-114/96 (Kieffer and Thill), para. 27 with references to Case 15/83 (Denkavit Nederland) and Case C-51/93 (Meyhui v Schott Zwiesel Glaswerke). The CJEU also held with regard to the EU Parent Subsidiary Directive and the freedoms of movement: “It must none the less be ascertained whether restricting the scope of Directive 90/435 to exclude, from the outset, other companies which might be created in accordance with national law, as is the case with Article 2(a) of Directive 90/435 and point (f) of the annex thereto, may be regarded as invalid in the light of the articles of the Treaty which guarantee the freedom of establishment or the free movement of capital..”, CJEU 1 October 2009, C-247/08 (Gaz de France), para. 53. See also CJEU 10 December 2002, C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd) in which the CJEU held: “As a preliminary point, it ought to be borne in mind that the principle of proportionality, which is one of the general principles of Community law, requires that measures implemented through Community provisions should be appropriate for attaining the objective pursued and must not go beyond what is necessary to achieve it (see, inter alia, Case 137/85 Maizena [1987] ECR 4587, paragraph 15; Case C-339/92 ADM Ölmühlen [1993] ECR I-6473, paragraph 15, and Case C-210/00 Käserei Champignon Hofmeister [2002] ECR I-6453, paragraph 59).”, para. 122.

[39] If the directive could not be assessed against the EU treaty freedoms, it would not have been legally necessary to extend the scope to domestic groups in order to avoid incompatibility with the freedoms on this point.

[40] The CJEU does not seem to allow for any discretion in some cases, for example CJEU 8 December 2022, C-694/20 (Vlaamse Balies ) and in other cases to a certain extent it does, for example CJEU 14 October 2004, C-299/02 (Commission v. the Netherlands) and CJEU 10 December 2002, C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd), in which it stated: “With regard to judicial review of the conditions referred to in the previous paragraph, the Community legislature must be allowed a broad discretion in an area such as that involved in the present case, which entails political, economic and social choices on its part, and in which it is called upon to undertake complex assessments. Consequently, the legality of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution is seeking to pursue (see, to that effect, Case C-84/94 United Kingdom v Council [1996] ECR I-5755, paragraph 58; Case C-233/94 Germany v Parliament and Council [1997] ECR I-2405, paragraphs 55 and 56, and Case C-157/96 National Farmers’ Union and Others [1998] ECR I-2211, paragraph 61).”, para. 123.

[41] See CJEU 7 March 2017, Case C-390/15 (RPO), CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) and Imperial Tobacco) and CJEU 17 October 2013, Case C-203/12 (Billerud Karlsborg and Billerud Skärblacka).

[42] CJEU 8 April 2014, joined Cases C‑293/12 and C‑594/12 (Digital Rights Ireland Ltd), para. 47.

[43] In this respect it must be noted that the CJEU also stated that “ In so far as concerns the proportionality of the interference found to exist, the Court recalls that, according to settled case-law, the principle of proportionality requires that measures adopted by European Union institutions do not exceed the limits of what is appropriate and necessary in order to attain the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued (Case C‑343/09 Afton Chemical [2010] ECR I‑7027, paragraph 45, and Joined Cases C‑581/10 and C‑629/10 Nelson and Others [2012] ECR, paragraph 71 and the case-law cited).”, 22 January 2013, Case C‑283/11, (Sky Österreich GmbH), para. 50.

[44] Note that Cyprus, an EU Member State, is not a member of the OECD/G20 Inclusive Framework.

[45] See CJEU 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi), ECLI:EU:C:2008:461, paragraphs 299-304.

[46] See also C. Wisman, ‘Over de Unierechtelijke (on)houdbaarheid van het ‘effectief belastingtarief’ en de ‘bijheffing’ van de WMB 2024’’, TFO 2024/192.2.

[47] See, for example, CJEU 24 February 2022, Case C-257/20, (Viva Telecom Bulgaria) and CJEU 20 April 2023, Case C-348/22 (Autorità Garante della Concorrenza e del Mercato), CJEU 8 March 2017, Case C-14/16 (Euro Park Service) and CJEU 12 November 2015, Case C-198/14 (Visnapuu).

[48] Ibidem.

[49] See CJEU 8 December 2022, Case C-694/20 (Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA) and CJEU 26 October 2010, Case C-97/09 (Ingrid Schmelz).

[50] See Article 4 TEU.

[51] For example, it can be deduced from CJEU 3 April 2025, C-228/24 (Nordcurrent). See also the above-mentioned considerations of the CJEU of 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi).

[52] In the text accompanying the draft directive, the European Commission noted that “All EU Member States which are members of the Inclusive Framework have already agreed on the main aspects of Pillar 2 and committed to apply the OECD Model Rules. The EU would have no policy options to choose from as key elements of the framework, such as the scope or tax rates and base, have already been prescribed and agreed on.”, Proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union, COM/2021/823 final, p. 5.

[53] For the ordinary legislative procedure, see Article 289 in conjunction with Article 289. 295 TFEU and see Article 115 TFEU.

[54] See CJEU 7 March 2017, Case C-390/15 (RPO), CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) and Imperial Tobacco) and CJEU 17 October 2013, Case C-203/12 (Billerud Karlsborg and Billerud Skärblacka).

[55] See CJEU 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi), paragraphs 299-304.

[56] See CJEU 3 April 2025, C-228/24 (Nordcurrent).

[57] See https://data.consilium.europa.eu/doc/document/ST-5547-2015-ADD-1/en/pdf). See also C. Wisman, EU GAAR in deelnemingsvrijstelling en irrelevante EC statements, TaxLive, 23 April 2025.

[58] See, for example, the Council Statement and the Statement By The European Commission on the Safe Harbours, Annex I and Annex II to Brussels, 30 October 2023 (OR. en), 14732/1/23 REV 1. In this context, see also the letters from Cyprus, Consent letter of 22 March 2023 from Cyprus authorities on the qualifying international agreements referred to under Article 32 and Consent letter of 23 October 2023 from Cyprus authorities on the qualifying international agreements referred to under Article 32, available at https://taxation-customs.ec.europa.eu/taxation/business-taxation/minimum-corporate-taxation_en.

[59] See, for example, CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes), para. 35-37: “It is true that nationals of a Member State cannot attempt, under cover of the rights created by the Treaty, improperly to circumvent their national legislation. They must not improperly or fraudulently take advantage of provisions of Community law … However, the fact that a Community national, whether a natural or a legal person, sought to profit from tax advantages in force in a Member State other than his State of residence cannot in itself deprive him of the right to rely on the provisions of the Treaty …As to freedom of establishment, the Court has already held that the fact that the company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of that freedom”.

[60] See Article 54 TFEU.

[61] Ibid., and see CJEU 14 September 2017, Case C-646/15 (Trustees of the P Panayi Accumulation & Maintenance Settlements).

[62] See, for example, CJEU 1 April 2008, Case C-212/06 (Flemish care insurance). See also CJEU 13 June 2017, Case C-591/15 (The Gibraltar Betting and Gaming Association Limited v The Queen), as well as CJEU 15 November 2016, Case C-268/15 (Ullens de Schooten).

[63] The free movement of capital and payments is laid down in Articles 63 to 66 TFEU.

[64] See, for example, CJEU 6 November 2007, Case C-415/06 (Stahlwerk).

[65] See Article 64 TFEU.

[66] The free movement of goods is laid down in Articles 28 to 37 TFEU.

[67] The free movement of services is enshrined in Articles 56 to 62 TFEU.

[68] The free movement of persons (workers) is laid down in Articles 45 to 48 TFEU.

[69] See CJEU 3 October 2006, Case C-452/04 (Fidium Finanz).

[70] The free movement of persons (establishment) is laid down in Articles 49 to 55 TFEU.

[71] See CJEU 13 November 2012, Case C-35/11 (FII 2).

[72] See CJEU 13 April 2000, Case C-251/98 (Baars).

[73] See CJEU 12 December 2006, Case C-446/04 (FII 1) and CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).

[74] See Article 64 TFEU.

[75] See CJEU 13 April 2000, Case C-251/98 (Baars).

[76] See CJEU 13 November 2012, Case C-35/11 (FII 2).

[77] See CJEU 13 April 2000, Case C-251/98 (Baars), CJEU 12 December 2006, Case C-446/04 (FII 1), CJEU 26 June 2008, Case C-284/06 (Burda) and CJEU 13 November 2012, Case C-35/11 (FII 2).

[78] See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen), CJEU 17 December 2009, Case C-182/08 (Glaxo) and CJEU 13 November 2012, Case C-35/11 (FII 2).

[79] See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen), CJEU 17 December 2009, Case C-182/08 (Glaxo) and CJEU 13 November 2012, Case C-35/11 (FII 2).

[80] See CJEU 13 November 2012, Case C-35/11 (FII 2), CJEU 3 October 2013, Case C-282/12 (Itelcar) and CJEU 11 September 2014, Case C-47/12 (Kronos).

[81] It should also be noted that the general objectives are not necessarily reflected in the specific rules. This point, among others, was discussed by C. Wisman during the EFS, Erasmus University Rotterdam Autumn Conference 2024. For the report, see W. Boei & L.K. Voogt, Conference Report: EFS Congress, Do Pillars I and II Have a Future? EC Tax Review, Volume 34, Issue 3 (2025) pp. 111 – 116.

[82] See CJEU 13 November 2012, Case C-35/11 (FII 2).

[83] See, for example, CJEU 28 January 1986, Case 70/83 (Avoir Fiscal), CJEU 13 December 2005, Case C-446/03 (Marks & Spencer), CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes).

[84] See, for example, CJEU 25 February 2010, Case C-337/08 (X Holding).

[85] In its case law, the CJEU regularly points out that in order to ensure the comparability of the domestic and cross-border situations, it is necessary to take into account “the aim pursued by the national provisions at issue”, see CJEU 12 June 2018, Case C-650/16 (Bevola), para. 32. At the same time, according to the CJEU, it cannot be the case that if “national tax legislation treats two situations differently, they cannot be regarded as comparable”, see Bevola, para. 35. Otherwise, the right to free movement would be deprived of ‘its substance’, Bevola para. 35. According to the CJEU, “Consequently, the comparability of the situations must be assessed with regard to the purpose of the national provisions at issue, in accordance with the case-law”, Bevola, para. 35. This approach seems problematic to us. If, in an investigation into the comparability of cases, the objective pursued by the national legislation is taken into consideration, you will irrevocably get stuck because you always end up with the consideration that the circumstances differ because the regulation treats these circumstances differently and the different treatment does not discriminate for that reason. An analytical circle. In this way – in the words of the CJEU itself –the principle of equality would be deprived from its meaning which gives the Member States the space to impede/discriminate freely. Perhaps, the CJEU should conclude that ‘therefore’ you should not look at the intention of the scheme for the fairly simple reason that that scheme (and the intention) is the subject of research and thus cannot serve as a valid criterion or argument for assessing the objective comparability of situations. Notably, for an example in literature of the logic tension involving the EU Pillar Two Directive in this regard, see Weber, supra note 8, at 6, claiming that the Directive does not violate primary EU law, arguing it should not be considered “manifestly inappropriate” or a “manifest error” by referring to the objective pursued by the EU Pillar Two rules and considering: “[t]he fact that the EU GloBE Rules only aim to tackle tax competition that exists between Member States and not any competition within a Member State”.

[86] Cf. CJEU 22 September 2022, C538/20 (W AG) and CJEU 17 December 2015, Case C-388/14 (Timac Agro) where subjection gives rise to a finding that the circumstances would differ. This is also problematic from an analytical point of view, since it would give the EU Member States an instrument, the tax treaty, to steer the comparability of the cases (e.g. domestic and foreign branches) and thus the scope of the EU freedoms. This would allow the Member States to evade the effective functioning of the freedoms through tax treaties. Moreover, tax treaties, instruments of public international law, would effectively be giving a higher hierarchical status than supranational EU law, which infringes EU law. See for example . Nevertheless, we see it happening in the case law of the CJEU. See M.F. de Wilde, ‘Dislocation refuted?’, in Marres and Weber (Eds.), Liber Amicorum prof. Peter Wattel, Rara Avis, Kluwer, Deventer, 2022.

[87] Cf. CJEU 13 December 2005, Case C-446/03 (Marks & Spencer).

[88] See CJEU 18 July 2007, Case C-231/05 (Oy AA).

[89] See CJEU 18 July 2007, Case C-231/05 (Oy AA).

[90] See CJEU 12 December 2006, Case C-446/04 (FII 1), CJEU 13 November 2012, Case C-35/11 (FII 2), CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).

[91] Cf. CJEU 13 December 2005, Case C-446/03 (Marks & Spencer), CJEU 25 February 2010, case C-337/08 (X Holding) and CJEU 2 September 2015, Case C386/14, (Groupe Steria).

[92] Cf. CJEU 4 October 2024, case C-585/22 (X BV).

[93] See, for example, CJEU 30 November 1995, Case C-55/94 (Gebhard).

[94] See, for example, CJEU 29 November 2011, Case C-371/10 (National Grid).

[95] See CJEU 28 January 1992, Case C-204/90 (Bachmann).

[96] See, for example, CJEU 17 July 2014, Case C-48/13 (Nordea Bank).

[97] See, for example, CJEU 13 December 2005, Case C-446/03 (Marks & Spencer).

[98] See, for example, CJEU 13 December 2005, Case C-446/03 (Marks & Spencer) and CJEU 20 January 2021, C-484/19 (Lexel).

[99] See, for example, CJEU 17 December 2015, Case C-388/14 (Timac Agro).

[100] We will not discuss the final loss-doctrine of the CJEU, e.g. CJEU 13 December 2005, C 446/03 (Marks & Spencer), CJEU 27 February 2020, Case C-405/18 (AURES Holdings), CJEU 15 May 2008, Case C-414/06 (Lidl Belgium), CJEU 22 September 2022, Case C-538/20 (W AG), CJEU 19 June 2019, Case C-607/17 (Memira Holding AB), CJEU 19 June 2019, Case C-608/17 (Holmen AB), CJEU 5 July 2018, Case C-28/17 (NN A/S), EFTA 13 September 2017, Case E-15/16 (Yara International), CJEU 7 November 2013, Case C 322/11 (K.), CJEU 29 March 2007, Case C 347/04 (Rewe Zentralfinanz).

[101] See also P.J. Watttel, ‘General EU Law Concepts and Tax Law’, in Sjoerd Douma, Otto Marres, Hein Vermeulen, Dennis Weber (Eds.), Terra/Wattel, European Tax Law, Volume I – General Topics and Direct Taxation, 8th Ed., Wolters Kluwer, Deventer, 2022, para. 3.2.2.

[102] See CJEU 30 November 1995, Case C-55/94 (Gebhard), and see – in the context of the EU law principle of proportionality in a VAT case – CJEU 14 November 2024, Case C-613/23 (Herdijk).

[103] That is, not in the meaning of the CJEU case law.

[104] The geographical allocation of Pillar 2 profit components differs in some cases from the geographical allocation (sourcing) of profit components in tax treaty law. Where the allocation rules allocate the basis to the treaty partner and the Netherlands is obliged to provide for a reduction to prevent tax according to the exemption method, domestic additional taxation is in conflict with the tax treaties (unless further provisions are made in the treaty to keep Pillar 2 in line with the treaty in question). From a treaty perspective, even the domestic additional tax can in some cases result in an extraterritorial tax. This remains undiscussed.

[105] Notably, even in the case of the QDMTT, the collection of top-up taxation does not necessarily take place in the hands of the entity producing the underlying profits that are low-taxed for Pillar Two purposes. This effect, which occurs under all top-up tax mechanisms, either the QDMTT, or IIR and UTPR, raises questions as to the compatibility of these top-yup taxes with Article 1 of the first Protoctol to ECHR, which guarantees the right of possession. This point, among others, was discussed by C. Wisman during the EFS, Erasmus University Rotterdam Autumn Conference 2024. For the report, see W. Boei & L.K. Voogt, Conference Report: EFS Congress, Do Pillars I and II Have a Future? EC Tax Review, Volume 34, Issue 3 (2025) pp. 111 – 116.

[106] CJEU 26 October 1999, Case C-294/97 (Eurowings Luftverkehrs), para. 45.

[107] See CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes), CJEU 20 January 2021, Case C-484/19 (Lexel), CJEU 26 February 2019, joined Cases C-115/16 (N Luxembourg 1), C-118/16 (X Denmark), C-119/16 (C Danmark I) and C 299/16 (Z Denmark), on the Interest and Royalties Directive, as well as CJEU 26 February 2019, Joined Cases C-116/16 (T Danmark) and C-117/16 (Y Denmark), concerning the Parent-Subsidiary Directive. More specifically, Cases C-115/16 (N Luxembourg 1) and Others concern the interpretation of the term ‘beneficial owner‘ for the purposes of the Interest and Royalties Directive. Cases C-116/16 (T Danmark) and Others concern more specifically the interpretation of the concept of ‘abuse’ for the purposes of the Parent-Subsidiary Directive. These cases, all rendered by the CJEU on 26 February 2019, are usually referred to in terms of ‘Danish Cases’ or also ‘Beneficial ownership cases’ or a combination of these.

[108] The CJEU itself indicates when a regulation can be considered to be aimed at combating abuse, regardless of the interpretation by the national legislator itself. CJEU 13 March 2025, C-135/24 (John Cockerill), para. 47: “In that regard, it is apparent from the case-law of the Court that, in order for national legislation to be regarded as seeking to prevent fraud and abuse, its specific objective must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the aim of which is unduly to obtain a tax advantage”. See also the interpretation of ‘artificiality’ in CJEU 4 October 2024, C-585/22 (X BV), para. 88: ‘ By contrast, where the loan is, in itself, devoid of economic justification and, but for the relationship between the companies and the tax advantage sought, would never have been contracted, it is consistent with the principle of proportionality to refuse the deduction of the whole of the said interest, since such a wholly artificial arrangement [emphasis MdW/CW] must be ignored by the tax authorities when calculating the corporate tax due”.

[109] Cf. e.g. CJEU 21 February 2006, Case C-255/02 (Halifax) and CJEU 21 February 2008, Case C-425/06 (Part Service) for the VAT Directive, CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes) for the freedoms.

[110] See CJEU 10 November 2011, Case C-126/10 (Foggia) and CJEU 8 March 2017, Case C-14/16 (Euro Park Service) for the Merger Directive, as well as CJEU 7 September 2017, Case C-6/16 (Eqiom) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding) for the Parent-Subsidiary Directive.

[111] See CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes) and CJEU 20 December 2017, joined cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).

[112] See CJEU 17 September 2009, Case C-182/08 (Glaxo), as well as CJEU 7 September 2017, Case C-6/16 (Eqiom) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).

[113] See CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).

[114] See for example, CJEU 3 April 2025, Case C‑228/24 (Nordcurrent), para. 36 “… it cannot be ruled out that an arrangement, initially put into place for valid commercial reasons which reflect economic reality, has to be regarded as not genuine from a certain point onwards, on account of the fact that that arrangement has been maintained despite a change in circumstances.”.

[115] CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes), para. 55.

[116] See e.g., Maarten de Wilde, ‘Is There a Leak in the OECD’s Global Minimum Tax Proposals (GLOBE, Pillar Two)?’, KluwerTax Blog, March 1, 2021, article 3.2.7. OECD Model Rules, as well as the various other specific anti-mismatch and anti-arbitration measures that have found their way into the commentaries on the OECD Model Rules through the various tranches of administrative guidelines published by the OECD during 2023-2025.

[117] See for example, See CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes), CJEU 3 April 2025, Case C‑228/24 (Nordcurrent) and CJEU 20 December 2017, joined cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).

[118] Article 28 EU Pillar Two Directive.

[119] See, for example, CJEU 10 February 2011, Joined Cases C-436/08 and C-437/08 (Haribo and Salinen). See CJEU 18 December 2007, case C-101/05 (A.), CJEU 19 November 2009, Case C-540/07 (Commission v Italy) and CJEU 28 October 2010, Case C-72/09 (Rimbaud).

[120] See CJEU 15 May 1997, Case C-250/95 (Futura), in which the Court allowed Luxembourg to require foreign taxpayers to keep records for the purposes of vertical loss relief.

[121] See CJEU 11 June 2009, Case C-157/08 (Passenheim-Van Schoot) on the extended recovery period for, in short, foreign income. There, the Court of Appeal ruled that the extended recovery period in the case of concealed foreign income is in order under EU law. In cases where the tax authorities have indications that the taxpayer has foreign income, the extended recovery period is compatible with EU law to the extent that it is necessary ‘to make useful use of the mutual assistance arrangements’.

[122] See CJEU 27 November 2008, Case C-418/07 (Papillon) and CJEU 11 October 2007, Case C-451/05 (ELISA).

[123] See CJEU 18 December 2007, Case C-101/05 (A.), CJEU 19 November 2009, Case C-540/07 (Commission v Italy) and CJEU 28 October 2010, Case C-72/09 (Rimbaud).

[124] See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).

[125] See Council Directive (EU) 2025/872 of 14 April 2025 amending Directive 2011/16/EU on administrative cooperation in the field of taxation.

[126] See more https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html.

[127] See Article 5 TEU, see also CJEU 8 December 2022, Case C-694/20 (Vlaamse Balies) and CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd).

[128] See, for example, Draghi report The future of European competitiveness, Part A | A competitiveness strategy for Europe and Draghi report The future of European competitiveness Part B | In-depth analysis and recommendations, September 2024, available at https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en#paragraph_47059, Communication from the Commission, A Competitiveness Compass for the EU, COM(2025) 30 final, Brussels 29 January 2025, the proposals of ‘Omnibus I’ and ‘Omnibus II’, available at https://commission.europa.eu/publications/omnibus-i_en and https://commission.europa.eu/publications/omnibus-ii_en. Council Conclusions on a tax decluttering and simplification agenda which contributes to the EU’s competitiveness – Council conclusions (11 March 2025), 6748/25, FISC 44, ECOFIN 232. Compare also Tax Decluttering in the common European market Informal thoughts by Germany and the Netherlands, 11 December 2024, available at https://open.overheid.nl/documenten/375fc1b4-3300-417e-972e-154d680afd44/file.

[129] See Council Directive (EU) 2015/2060 of 10 November 2015 repealing Directive 2003/48/EC on taxation of savings income in the form of interest payments.

[130] We do not see any direction for a solution in the recent proposals from, for example, the Polish Presidency of the Council to amend the EU Pillar Two Directive in favour of the economic interests of the United States and to the detriment of the interests of the EU Member States. Moreover, any preferential treatment of the United States and American industry for Pillar Two purposes would, of course, encounter all kinds of legal objections, for example under the principle of equality under EU law. Disadvantaged European and other non-US companies could play the horizontal discrimination card before the courts in the various EU Member States, escalating to the CJEU, by invoking the judgment of the CJEU in the Sopora case (C-512/13). They could also file a state aid complaint with the European Commission, which would then have to be taken up by the European Commission. Finally, directives can also violate state aid rules, as we have known since the judgment of the CJEU in the Wolfgang Heiser case (C-172/03). The proposals, so far, also have hardly any political traction within various EU Member States. See, for example, Sophie Petitjean, ‘EP Committee Split Over How to Ease U.S. Pillar 2 Qualms’, TaxNotes International, May 6, 2025.

[131] See Proposal for a Council Directive laying down rules for preventing the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (UNSHELL), COM(2021) 565 final, Proposal for a Council Directive on Transfer Pricing (TP), COM(2023) 529 final, Proposal for a Council Directive on a framework for the taxation of business income in Europe (BEFIT), COM/2023/532 final, Proposal for a Council Directive laying down rules for compensation to reduce debt-equity inequalities and limiting the deductibility of interest for corporate income tax purposes (DEBRA), COM/2022/216 final, Proposal for a Council Directive establishing a tax system for micro, small and medium-sized enterprises under the rules of the Member State of their head office and amending Directive 2011/16/EU (HOTS), COM/2023/528 final and see the press release Digital Taxation: Commission proposes new measures to ensure that all companies pay fair tax in the EU Brussels, 21 March 2018.

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1 Introduction

2 Why Pillar Two top-up taxation collides with EU treaty freedoms, and how to solve this

3 Final remarks

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