UTPR: How the Undertaxed Profits Rule Works Under Pillar Two (2025)

Quick Answer: UTPR (Undertaxed Profits Rule)

UTPR is Pillar Two’s “backstop” charging rule: it collects residual GloBE top-up tax when low-taxed profits are not fully taxed under a Qualified IIR (and after any QDMTT impact in the low-tax jurisdiction). Instead of taxing the low-tax entity directly, UTPR allocates the remaining top-up tax to UTPR-adopting jurisdictions using a 50/50 employees-and-tangible-assets formula, then raises cash tax locally via deduction denial or an equivalent adjustment (OECD Model Rules Art. 2.4–2.6). For many EU/UK calendar-year groups, UTPR is effectively a 2025 rule (FYs beginning on/after 31 Dec 2024), but implementation timing varies by country—and EU timing has an important Article 50 nuance (explained below).

What is UTPR—and why it’s called the Pillar Two “backstop”

UTPR stands for Undertaxed Profits Rule. It is one of Pillar Two’s three core charging mechanisms alongside:

• Qualified Domestic Minimum Top-up Tax (QDMTT) (domestic “first right” to collect top-up in the low-tax jurisdiction)
• Income Inclusion Rule (IIR) (parent-level, top-down inclusion)
• UTPR (secondary, cross-border backstop)

The “backstop” label matters because UTPR is designed to prevent a structural gap: if low-taxed income isn’t picked up by a qualified parent inclusion (IIR) and the low-tax jurisdiction doesn’t collect it via a QDMTT, UTPR lets other implementing jurisdictions collect the remaining top-up tax (OECD Model Rules Art. 2.4–2.6; OECD Consolidated Commentary 2025).

Scope reminder: when a group is even “in” Pillar Two

UTPR doesn’t create a new scope test; it applies to groups already in Pillar Two scope—generally MNE Groups with consolidated revenue ≥ EUR 750 million in at least two of the four preceding fiscal years (OECD Model Rules, Scope provisions). Domestic implementations can add practical details around how to apply the test, but UTPR planning always starts with “are we in scope?”

When does UTPR apply? (Ordering vs QDMTT and IIR)

A practical way to think about Pillar Two charging order is:

1. QDMTT in the low-tax jurisdiction (where enacted and qualified) reduces the amount of top-up tax left to collect elsewhere.
2. IIR collects remaining top-up tax at the parent (or intermediate parent) level—top-down based on ownership.
3. UTPR collects any residual top-up tax—sideways across operating jurisdictions—when IIR doesn’t apply or doesn’t fully collect (OECD Model Rules Art. 2.4–2.6, especially Art. 2.5.2–2.5.3 and Art. 2.6.1).

This “priority” is not just policy intent—it is hardwired in the mechanics:

• QDMTT reduces the jurisdictional top-up tax computation at source, because the Jurisdictional Top-up Tax formula reduces for Domestic Top-up Tax payable under a Qualified Domestic Minimum Top-up Tax (OECD Model Rules Art. 5.2.3(d)).
• UTPR’s residual pool is reduced/zeroed for amounts already brought into charge under a Qualified IIR, via the UTPR Top-up Tax Amount adjustments (OECD Model Rules Art. 2.5.2–2.5.3).
• Allocation of the remaining pool to implementing countries then happens under the UTPR Percentage (OECD Model Rules Art. 2.6.1).

What triggers UTPR in real life?

UTPR exposure usually arises when one (or more) of these conditions holds:

• The UPE jurisdiction has no Qualified IIR (or no Pillar Two at all).
• There is low-taxed income in jurisdictions without a QDMTT (or with an ETR shortfall under GloBE computations).
• There are ownership structures where IIR doesn’t fully reach the low-tax entity (e.g., partially-owned entities), depending on domestic implementation and group structure.

Initial phase exclusion (OECD Model Rules Art. 9.3)

A frequently-missed modelling item—especially for newer international groups—is the “initial phase of international activity” exclusion from UTPR in the Model Rules.

In simplified terms, under OECD Model Rules Art. 9.3, an MNE Group can be treated as in its initial phase if (among other conditions):

• it has Constituent Entities in no more than six jurisdictions, and
• tangible assets outside the “reference jurisdiction” are limited (EUR 50m test).

Where the exclusion applies, UTPR (and related reductions) can be switched off for a limited period (the Model Rules set a five-year boundary, with special timing rules for groups already in scope when UTPR comes into effect).

How UTPR works mechanically: deduction denial vs “equivalent adjustment”

UTPR is implemented locally by each adopting jurisdiction. The Model Rules require an outcome: constituent entities in a UTPR jurisdiction must bear an adjustment that produces additional cash tax expense equal to that jurisdiction’s allocated share of residual top-up tax (OECD Model Rules Art. 2.4.1).

Two implementation styles you’ll see in practice

The Model Rules allow either approach as long as the jurisdiction raises the intended cash tax (OECD Model Rules Art. 2.4).

Carry-forward: when a jurisdiction can’t collect the full amount this year

If the local mechanism can’t fully impose the adjustment in the current year (e.g., insufficient deductions to deny, loss position, domestic limitations), the uncollected UTPR amount is carried forward and can be collected in later years “to the extent possible” (OECD Model Rules Art. 2.4.2).

How UTPR top-up tax is allocated across countries (the UTPR percentage)

UTPR is unusual because it allocates residual top-up tax based on substance in adopting jurisdictions, not based on where the undertaxed income arises.

The formula (50% employees, 50% tangible assets)

Under OECD Model Rules Art. 2.6.1:

UTPR % (Jurisdiction) =
  50% × (Employees in Jurisdiction ÷ Employees in all UTPR Jurisdictions)
+ 50% × (Tangible Assets in Jurisdiction ÷ Tangible Assets in all UTPR Jurisdictions)

Key consequences for practitioners:

• Groups with significant headcount or tangible assets in UTPR countries can face cash tax increases locally even if those entities are already high-taxed.
• The allocation base depends on which jurisdictions have implemented UTPR—your “denominator” can change year by year as adoption expands.
• Data definitions matter (what counts as an employee? what’s included in tangible assets? how are PEs treated?). The OECD rules include special cases (e.g., Investment Entities exclusions) (OECD Model Rules Art. 2.6 and related provisions).

What happens if a jurisdiction didn’t actually bear last year’s UTPR? (Art. 2.6.3)

There’s an important interaction between collection capacity (carry-forward) and the future allocation denominator.

Under OECD Model Rules Art. 2.6.3, if a jurisdiction had a UTPR Top-up Tax Amount allocated to it for a prior year but that allocation did not result in a corresponding additional cash tax expense, then (broadly):

• that jurisdiction’s UTPR Percentage can be deemed to be zero in a subsequent year, and
• its employees and tangible assets are excluded from the Art. 2.6.1 formula until it is “caught up” (subject to the Model Rules’ conditions and exceptions).

Why it matters: you can’t model UTPR as “pure allocation” plus “separate carry-forward” and assume denominators are stable. Denominators can change precisely because a country couldn’t collect its share last year.

UTPR effective dates (2025 in many countries, but not all)

Implementation is jurisdiction-specific. Many countries followed the “IIR first, UTPR one year later” pattern.

Common effective date patterns (selected highlights)

EU nuance: when can EU UTPR start in 2024? (Directive Article 50)

The Directive’s default timing is straightforward: Member States apply the rules for fiscal years beginning from 31 December 2023, but apply the UTPR provisions a year later (fiscal years beginning from 31 December 2024)—except for a specific Article 50 arrangement (Directive (EU) 2022/2523, Article 56 and Article 50(2)).

Here’s the nuance you need for modelling:

• Article 50(1) allows certain Member States (those with no more than 12 UPEs located there) to elect delayed application of both IIR and UTPR for six consecutive fiscal years beginning from 31 December 2023.
• Article 50(2) then requires other Member States to apply UTPR from fiscal years beginning from 31 December 2023 to groups whose UPE is located in a deferring Member State.

Plain-English consequence: if your group’s UPE sits in an EU Member State that elected the Article 50(1) deferral, you may see UTPR in 2024 (for calendar-year taxpayers) in other EU Member States where you have constituent entities—even though the general EU UTPR start date is 2025.

Mini example (calendar-year group):

• UPE in Member State X (which made an Article 50(1) election).
• Subsidiaries in Member State Y (which did not defer).
• Member State Y can apply UTPR for FY2024 to that group under Article 50(2).

UTPR vs IIR: what changes in risk, data, and controversy

IIR is parent-centric; UTPR is footprint-centric

• IIR: collects top-up tax at the parent based on ownership—often experienced as a parent-level cash tax cost.
• UTPR: collects residual top-up tax in operating jurisdictions based on employees/assets—often experienced as an operating footprint surcharge.

That difference drives two practical implications:

1. Your “UTPR risk map” is your HR/asset map, not just your low-tax entity map.
2. Disputes can increase because multiple tax authorities can assert their allocated share using a common pool and common data, but through local assessment mechanics (OECD Consolidated Commentary 2025).

What tax teams need that they didn’t need for IIR

UTPR tends to force earlier operationalisation of non-financial data:

• Employees by jurisdiction (and sometimes by entity)
• Tangible assets by jurisdiction (often net book value and classification)
• Tracking which jurisdictions are “UTPR jurisdictions” each year
• Local entity capacity for deduction denial/equivalent adjustment (including domestic limitations)

Step-by-step UTPR workflow (how to model it like an advisor)

Below is a practitioner workflow aligned to OECD Model Rules Art. 2.4–2.6 and the standard GloBE ETR computation framework:

1) Compute jurisdictional ETR and top-up tax (the same base engine as IIR)

• Compute GloBE income, covered taxes, and jurisdictional ETR.
• Identify low-tax jurisdictions and compute top-up tax amounts.

2) Determine the residual pool: the Total UTPR Top-up Tax Amount

• Start with top-up taxes of low-taxed constituent entities (Top-up Tax is determined under the Art. 5.2 framework).
• Ensure the computation reflects QDMTT impact where qualified (because the Jurisdictional Top-up Tax is reduced for Domestic Top-up Tax payable under a Qualified DMTT in Art. 5.2.3(d)).
• Reduce/zero amounts already brought into charge under a Qualified IIR (OECD Model Rules Art. 2.5.2–2.5.3).

3) Identify UTPR jurisdictions for the year

• Include only jurisdictions with a Qualified UTPR in force for the fiscal year (OECD Model Rules definition concept).

4) Build the allocation key and compute UTPR percentage per jurisdiction

• Employees and tangible assets in each UTPR jurisdiction
• Compute the 50/50 formula (OECD Model Rules Art. 2.6.1)
• Consider whether any jurisdictions are locked out of the denominator under Art. 2.6.3 (deemed UTPR Percentage of zero).

5) Allocate the residual pool

• Multiply Total UTPR Top-up Tax Amount by each jurisdiction’s UTPR percentage (OECD Model Rules Art. 2.6)

6) Convert allocated UTPR amount into local cash tax via domestic mechanics

• Apply deduction denial/equivalent adjustment to local entities
• Track any uncollected amount for carry-forward (OECD Model Rules Art. 2.4.2)

Practical Examples (with numbers and calculations)

The examples below are simplified to highlight mechanics. They ignore SBIE nuances, deferred tax complexity, and local-law idiosyncrasies; use them as modelling templates, not filing positions.

Example 1: Residual top-up tax allocated to UTPR jurisdictions (employees/assets key)

Facts

• Low-tax Jurisdiction L:
  • GloBE income: EUR 100m
  • Covered taxes: EUR 5m
  • ETR = 5%
• Minimum rate = 15% → Top-up tax rate = 10% → Top-up tax = EUR 10m
• No Qualified IIR applies at the parent level (so the EUR 10m remains in the UTPR pool, subject to the Model Rules’ Art. 2.5 adjustments).
• Two UTPR jurisdictions (A and B) with the following substance:

Step 1 — Total UTPR Top-up Tax Amount

• Residual pool = EUR 10m (OECD Model Rules Art. 2.5.1–2.5.3)

Step 2 — UTPR percentages (OECD Model Rules Art. 2.6.1)

• Employees shares:
  • A: 1,000 / 1,500 = 66.67%
  • B: 500 / 1,500 = 33.33%
• Assets shares:
  • A: 200 / 500 = 40%
  • B: 300 / 500 = 60%

UTPR % per jurisdiction:

A = 50%×66.67% + 50%×40% = 53.33%
B = 50%×33.33% + 50%×60% = 46.67%

Step 3 — Allocate the EUR 10m pool

• A: 53.33% × 10m = EUR 5.333m
• B: 46.67% × 10m = EUR 4.667m

Step 4 — Translate allocated UTPR into local cash tax Assume A raises UTPR via deduction denial and has a 25% corporate tax rate.

To collect EUR 5.333m of cash tax, A needs a taxable base increase of:

Required base increase = 5.333m ÷ 25% = EUR 21.332m

That base increase is created by denying deductions or an equivalent adjustment (OECD Model Rules Art. 2.4.1).

Example 2: UTPR carry-forward when current-year adjustments are insufficient

Facts

• UTPR Jurisdiction C is allocated EUR 3.0m of UTPR top-up tax for FY2025.
• Statutory corporate tax rate in C: 30%
• Due to local limitations, the entity can only sustain EUR 5m of base increase this year (e.g., only that amount of deductions can be denied without creating a loss or breaching limitation rules).

Step 1 — Calculate the base increase needed to collect EUR 3.0m

Required base increase = 3.0m ÷ 30% = EUR 10.0m

Step 2 — Determine current-year collection capacity

• Maximum base increase available this year = EUR 5m
• Cash tax raised this year = 30% × 5m = EUR 1.5m

Step 3 — Compute the shortfall and carry-forward

• Shortfall = 3.0m − 1.5m = EUR 1.5m
• The EUR 1.5m can be carried forward and collected in later years “to the extent possible” (OECD Model Rules Art. 2.4.2).

Transitional relief and safe harbours (what matters for UTPR in 2025)

Transitional UTPR Safe Harbour (July 2023 Administrative Guidance)

The OECD’s July 2023 Administrative Guidance introduced a Transitional UTPR Safe Harbour that is particularly relevant for groups headquartered in jurisdictions that have not adopted Pillar Two (notably the US as of Dec 2025).

What it does (narrowly): it can deem the UTPR Top-up Tax Amount calculated for the UPE jurisdiction to be zero for qualifying years—this is not a blanket “no UTPR anywhere” rule (OECD Administrative Guidance, July 2023, §5.2).

When it applies (the Transition Period):

• Only for Fiscal Years that run no longer than 12 months,
• that begin on or before 31 Dec 2025, and
• end before 31 Dec 2026 (OECD Administrative Guidance, July 2023, §5.2(2)).

A key condition: the UPE jurisdiction must have a corporate income tax that applies at a rate of at least 20% (OECD Administrative Guidance, July 2023, §5.2(1)).

Interaction with CbCR safe harbour choices

Groups may also be using CbCR transitional safe harbours. In some cases, elections and “once out, always out” dynamics can affect future eligibility (OECD Administrative Guidance, July 2023). If you’re still building your CbCR-based approach, see our CbCR Preparation Guide and the Pillar Two CbCR Hub.

US-headed groups: why UTPR is the practical flashpoint

The baseline: no US Pillar Two adoption (as of Dec 2025)

The US has not adopted Pillar Two IIR/UTPR/QDMTT. That does not eliminate exposure—because foreign jurisdictions that have implemented UTPR can apply it to a group’s footprint in their countries.

In other words: US-headed groups can face cash tax increases in the EU/UK/Australia (and other adopters) purely because undertaxed outcomes exist somewhere in the group and are not picked up under a Qualified IIR.

The political overlay: the G7 “side-by-side” concept (June 2025)

A G7 statement (28 June 2025) describes a “side-by-side” approach under which US-parented groups would be fully excluded from IIR and UTPR (domestic and foreign profits), with further work to be pursued (US Treasury release, 28 June 2025).

From a practitioner perspective, treat this as directional rather than dispositive until it is implemented through agreed rules and domestic legislation.

Implementation checklist: what to prepare before your first UTPR year

Below is a practical “UTPR readiness pack” that aligns well with Pillar Two documentation expectations and auditability.

Data you should lock down

• Employees by jurisdiction and entity (and a policy for who counts, averaging methodology, contractors, secondments)
• Tangible assets by jurisdiction and entity (NBV definitions, leased assets treatment, timing conventions)
• A year-by-year list of UTPR jurisdictions applicable to your group
• Mapping of local entities that may bear deduction denials/equivalent adjustments

Process controls and documentation

• A single source-of-truth computation for the Total UTPR Top-up Tax Amount (tie-out to IIR/QDMTT computations)
• An “allocation key file” with:
  • Inputs (employees/assets)
  • Denominators (UTPR jurisdictions included, and any Art. 2.6.3 exclusions)
  • Reconciliation to HR and fixed asset systems
• A local-law memo per major UTPR jurisdiction explaining:
  • Mechanism used (deduction denial vs equivalent adjustment)
  • Limits, carry-forward behaviour, and potential Art. 2.6.3 effects

Related Topics (recommended next reads)

• Pillar Two overview: /blog/pillar-two-guide
• IIR deep dive: /blog/income-inclusion-rule-guide
• QDMTT deep dive: /blog/qdmtt-guide
• Pillar Two + CbCR hub: /blog/pillar-two-cbcr-guide
• CbCR execution guide: /blog/cbcr-preparation-guide
• Glossary: /glossary/utpr, /glossary/pillar-two
• (Adjacent) TP benchmarking workflows: /blog/benchmarking-study-guide

FAQ: UTPR (Undertaxed Profits Rule)

1) What is the UTPR in Pillar Two?

UTPR is a secondary GloBE charging rule that collects residual top-up tax not collected under a Qualified IIR (and typically after QDMTT reduces the amount), by imposing tax adjustments in UTPR-adopting jurisdictions (OECD Model Rules Art. 2.4–2.6).

2) Why is UTPR called a “backstop” mechanism?

Because it is designed to ensure the 15% minimum tax is still collected when the primary parent-level mechanism (IIR) does not apply or does not fully collect the top-up tax (OECD Consolidated Commentary 2025; OECD Model Rules Art. 2.5–2.6).

3) When does UTPR apply compared with IIR?

UTPR applies only to the extent top-up tax is not brought into charge under a Qualified IIR; under the Model Rules the UTPR pool is reduced/zeroed for amounts brought into charge under a Qualified IIR (OECD Model Rules Art. 2.5.2–2.5.3).

4) How is UTPR collected in practice—deduction denial or something else?

A UTPR jurisdiction must raise the allocated amount of cash tax through denial of deductions or an equivalent adjustment (such as a deemed income inclusion or surcharge), as long as the cash tax outcome matches the allocated UTPR amount (OECD Model Rules Art. 2.4.1).

5) How is UTPR top-up tax allocated between countries?

Allocation is formulaic across UTPR jurisdictions based 50/50 on employees and tangible assets (net book value), per OECD Model Rules Art. 2.6.1.

6) What is the UTPR effective date in 2025?

In many regimes (including the EU and UK), UTPR generally applies for fiscal years beginning on/after 31 Dec 2024, which means calendar-year taxpayers first apply UTPR in 2025 (EU Directive 2022/2523; UK HMRC UTPR paper). However, in the EU, Directive Article 50(2) can cause earlier UTPR (2024 for calendar-year groups) for certain groups whose UPE is in a deferring Member State.

7) How is UTPR different from IIR?

IIR collects top-up tax at the parent level based on ownership (top-down). UTPR collects residual top-up tax by allocating it to operating countries based on employees and tangible assets (sideways), often shifting cash tax impacts to high-substance jurisdictions (OECD Model Rules Art. 2.4–2.6).

8) Can UTPR apply even if the undertaxed income is outside the UTPR country?

Yes. UTPR allocates residual top-up tax based on employees and tangible assets in UTPR jurisdictions, so a country can collect UTPR even if the undertaxed profits arose elsewhere in the group (OECD Model Rules Art. 2.6.1).

9) What is the Transitional UTPR Safe Harbour?

It’s an OECD transitional rule (July 2023 Administrative Guidance) that can deem the UTPR Top-up Tax Amount calculated for the UPE jurisdiction to be zero for Fiscal Years in the Transition Period (Fiscal Years no longer than 12 months that begin on/before 31 Dec 2025 and end before 31 Dec 2026), if the UPE jurisdiction has a corporate income tax with a rate of at least 20% (OECD Administrative Guidance, July 2023, §5.2).

10) Does UTPR affect US multinationals?

Potentially yes. Even without US adoption of Pillar Two, US-headed groups can be exposed to foreign UTPR in jurisdictions that have implemented it, subject to transitional safe harbours and evolving political agreements (OECD Administrative Guidance July 2023; US Treasury G7 statement 28 June 2025; US CRS IF11874 for background context).