Does the 'Initial Phase Relief' Make the EU’s Pillar Two Directive Invalid?

Abstract

The Pillar Two OECD Model Rules provide for a so-called “initial phase relief” for a five-year period, which prevents the application of the UTPR in order to ensure that the development of cross-border activities by initially purely domestic enterprises that benefit from low taxation in their home jurisdiction is not discouraged. The EU’s Pillar Two Directive mirrors the OECD Model Rules in that respect, but – due to its application of the IIR to domestic CEs, including the UPE itself – additionally takes a more indirect approach to the “initial phase relief” by foreseeing a mandatory exclusion from the IIR in certain domestic settings.

This non-application of the IIR regarding domestic CEs in the initial phase of an MNE’s international activity and to so-called “large scale domestic groups”, however, triggers the question whether the fundamental freedoms are breached. To answer that question, we will first briefly explore the OECD Model Rules (Chapter I) and their transposition in the EU’s Pillar Two Directive (Chapter II), before we analyze the potential implications from the perspective of EU primary law in general (Chapter III) and in the specific case of the cumulative application of the “initial phase relief” for large-scale domestic groups that subsequently extend beyond the border (Chapter IV). We conclude with a summary and recommendations for legislatures (Chapter V).

JEL Classification: K34