A New Day for the Minimum Corporate Tax (Part 1): An Introduction to the EU Framework on Corporate Tax


On 22 December 2021, the European Commission ("The Commission") proposed a Directive ensuring a minimum effective tax rate (“ETR”) for the global activities of large multinational groups ("The Proposal"). The Proposal delivers on the EU’s pledge to move swiftly and be among the first to implement the recent historic global tax reform agreement.

The Proposal follows carefully the international agreement reached out by the Organisation for Economic Co-operation and Development (“OECD”) and sets out how the principles of the 15% ETR will be applied across the EU in a harmonised manner.(1)

Why did the European Commission propose these rules?

Minimum corporate taxation is one of the two work streams agreed by members of the OECD/G20 Inclusive Framework (“IF”), a working group of 141 countries that combine efforts to develop rules of the Two-Pillar Approach addressing the tax challenges arising from the digital economy. The Two-Pillar approach is a global consensus-based solution ensuring a reform of the international corporate tax arena, which culminated in a global agreement in October 2021. The discussions focused on two broad topics:

(i) Pillar 1 - the partial re-allocation of taxing rights (some argue that this represents a shift from the arm’s length principle to formulary apportionment), and

(ii) Pillar 2, the minimum level of taxation of profits of multinational enterprises (i.e., 15% minimum corporate tax rule).

In this context, the European Commission is now proposing the implementation of Pillar 2 of the global agreement through means of Directive thus, making global minimum effective corporate taxation a reality for in-scope large group companies located within the internal market.    

EU tax competences

Sovereignty of Member States in the area of direct taxation

When it comes to legislative processes at EU level, it should be noted that Member States (“MS”) have retained broad sovereignty in the area of direct taxation(2). European institutions do not have any taxing powers, nor they can exercise such with regard to direct taxes. Thus, it is for each MS to execute its own taxing powers through domestic tax laws, deciding the scope of direct taxation in the State concerned. Nonetheless, MS exercise sovereignty in the field of direct taxation consistently with their obligations under the treaties and the legislative provisions given on the basis of such treaties(3).   

Principle of conferral

The principle of conferral stems from Arts. 4-5 of the Treaty on European Union („TEU“) that the EU shall act only within the limits of the competence conferred upon it by the MS in the founding treaties to attain the objectives set out therein. All remaining competence belongs to the MS. The founding treaties do not expressly confer competence to the EU with respect to direct taxes.

Division of competence

If we interpret rigorously the competence enshrined in the treaties, the lack of explicit EU competence means that direct taxation falls within the competence of Member States(4). Nonetheless, due to the general competence of the EU, the Union also has a certain competence as direct taxation falls under the scope of divided or shared competence(5). The competence of the EU in this area, however, was considered fairly limited until now. Positive harmonisation of direct taxation in the Member States is possible, provided that it affects the realisation of the internal market, that the harmonisation actions are made unanimously and that the subsidiarity principle is followed.   


Pursuant to the principle of subsidiarity enshrined under Article 5 of the TEU, where the EU does not have exclusive competence, the latter must act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the MS but rather, by reason of the scale or effects of the proposed action, be better achieved at EU level.

Based on the Commission’s stance with respect to the minimum corporate tax Directive, the nature of the subject requires a common initiative across the internal market. It follows that action at EU level is deemed necessary, as within the EU, a market of highly integrated economies, there is a need for common strategic approaches and coordinated action, to improve the functioning of the internal market and maximise the positive impact of minimum effective taxation of business profits.

At this point, the author is of the opinion that the European Commission failed to prove how the principle of subsidiarity is complied with. That is because an impact assessment of the new measures has not been performed by the Commission. Noteworthy is the statement in the explanatory memorandum where the Commission admits that such impact assessment is not performed but rather the Proposal for a directive relies on the impact assessment performed by the OECD.

It should be noted that the OECD is comprised by jurisdictions with divergent economies in and outside of the EU, whereas the EU as previously mentioned, is a closely integrated market and it would be unjustifiable to rely on an impact assessment that does not take into account the basic characteristics of the internal market. In addition to that, it should be emphasised that there are some MS that are not part of the OECD, such as Bulgaria, and other MS, such as Cyprus, that are not part of the IF Group.   


As for the principle of proportionality, the Proposal fails to convince that the latter is complied with. Instead, it mentions the scope and indicates that due to that, the proposed Directive does not, therefore, go beyond what is necessary to achieve its objectives and respects the principle of proportionality.

Legal basis of the Directive

The term “legal base” refers to the part of one of the EU’s treaties that gives the EU the legal right to legislate and propose measures in a given field. If there is no basis in one of the treaties for EU action in a given field, then the EU cannot enact legislation on that issue.

All policy proposals from the Commission must have a legal base within one of the EU treaties and the legal base of a Commission proposal is very important, as it decides which legislative procedure is to be used (e.g., special legislative procedure, ordinary legislative procedure, consultation, or consent) and therefore how much power the various institutions will exercise during the process.

Based on the Proposal, the legal basis relied upon is Article 115 of the Treaty on the Functioning of the European Union (“TFEU”). Based on previous harmonisation this is the legal base for legislative initiatives in the field of direct taxation. Although no explicit reference to direct taxation is made, Article 115 refers to directives for the approximation of national laws as those directly affect the establishment or functioning of the internal market. For this condition to be met, it is necessary that proposed EU legislation in the field of direct taxation aims to rectify existing inconsistencies in the functioning of the internal market. The Commission submits that in the current scenario, the absence of rules ensuring minimum effective corporate taxation across the Single Market represent an inconsistency of this kind.

It should be noted that the legislative procedure for the proposed Directive is a special legislative procedure which requires unanimity. Coupled with the fact that the new rules are envisaged to be affective no later than 1 January 2023, it is rather optimistic to have the new ETR in force within the time frame envisaged by the European Commission.   

Scope of the new rules

Given that the new rules are very complex and require attention to detail, this will be the first article in the “A New Day for the Minimum Corporate Income Tax” series, which presents the proposed regulatory framework on minimum corporate taxation in the EU and OECD, examines open issues regarding competence, scope, and any other developments in the International and EU Tax arena. Thus, the below paragraphs will provide a short glimpse of the impacted MNEs, whereas the upcoming articles will dive into detail.

Be sure to regularly check the Kambourov & Partners’ website and social media accounts for analyses, news and updates regarding the regulatory world of minimum corporate income tax.   

(A) In-scope MNEs:

The new rules will potentially apply to any large group, both domestic and international, including the financial sector, with combined financial revenues of more than €750 million a year, and with either a parent company or a subsidiary situated in an EU Member State.

Generally, the responsibility for calculation of the ETR will rest with the Ultimate Parent Entity (“UPE”) unless the Group designates another entity responsible for the calculation.   

(B) Carve-outs:

Pursuant to and in line with the OECD/G20 IF agreement - government entities, international or non-profit organisations, pension funds or investment funds that are parent entities of a multinational group will not fall within the scope of the Directive either. 

(C) De minimis exclusions  

The Proposal entails an exclusion of minimal amounts of income to reduce the compliance burden. This translates to the fact that when the revenues and the profits in a given jurisdiction are under a certain minimum amount, then, no top-up tax will be charged on the profits of the group earned in this jurisdiction, even when the effective tax rate is below 15%.

In addition, in-scope entities may be able to exclude from the top-up tax an amount of income that is at least 5% of the value of tangible assets and 5% of payroll (“ substance carve-out”). The rationale behind the substance carve-out is to exclude amounts relating to substantive activities, e.g., human capital and buildings in order to foster investment in economic substance in particular jurisdictions. This is also in line with the Unshell proposal tackling economic substance which was also presented by the European Commission on 22 December 2021.   

Consistency with existing policy provisions in the area of direct taxation   

In the explanatory memorandum attached to the Proposal, the European Commission endorses the fact that the new rules could have implications for existing provisions of the Anti-tax Avoidance Directive (“ATAD”) and specifically for the Controlled Foreign Company (“CFC”) rules, which could interact with the new rules for minimum corporate tax.

Nonetheless, the conclusion of the Commission is that it is not necessary to amend the ATAD in this regard. Based on the Commission’s stance, ATAD and CFC rules will be applied first, and any additional taxes paid by a parent company under a CFC regime in a given fiscal year will be taken into consideration in the calculation of the ETR by attributing those to the relevant low-taxed entity. It is in the author’s opinion that further explanation and impact assessment is needed on how the two sets of rules will interact. If the applicability of the two sets of rules leads to double taxation without possible relief therefrom, this would immensely harm the functioning of the internal market and will lead to extensive tax planning.  

(1) https://ec.europa.eu/taxation_customs/taxation-1/minimum-corporate-taxation_en?pk_campaign=minimum_corporate_taxation&pk_source=twitter&pk_medium=social (last accessed on 23 December 2021)   

(2) Arts. 3-6 TFEU and Art. 5 TEU for the competence of the European Union  

(3) Schumacker (C-279/93), para. 21, Wielockx (C-80/94), para. 16, Asscher (C-107/94), para. 36, Futura (C-250/95), para. 19, Safir (C-118/96), para. 21, ICI (C-264/96), para. 19, Royal Bank of Scotland (C-311/97), para. 19, Gschwind (C-391/97), para. 20 and others.   

(4) https://www.ibfd.org/sites/default/files/2021-09/20_007_EU_Tax_Law_Direct_Taxation_2021_final_web.pdf  

(5) Art. 2(2) TFEU