Quick Definition
Top-Up Tax — Top Up Tax is the additional tax imposed under the OECD Pillar Two GloBE Rules to bring a jurisdiction's effective tax rate (ETR) to the 15% minimum rate .
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Top-Up Tax is the additional tax imposed under the OECD Pillar Two GloBE Rules to bring a jurisdiction's effective tax rate (ETR) to the 15% minimum rate. It applies when an MNE's constituent entities in a jurisdiction have an ETR below 15%.
Top-up tax is calculated on "Excess Profits"—the portion of Net GloBE Income that remains after subtracting the Substance-Based Income Exclusion (SBIE). This design ensures that profits attributable to genuine economic substance (payroll and tangible assets) are protected from top-up taxation.
Top-up tax calculation is defined in Article 5.2 of the GloBE Model Rules (20 December 2021).
The key provisions are:
Top-Up Tax Calculation (Simplified):
(Note: This example ignores Additional Current Top-up Tax (ACTT) and QDMTT adjustments for simplicity.)
Key Components:
| Component | Description |
|---|---|
| Net GloBE Income | Financial accounting net income with specified adjustments (Article 3) |
| Adjusted Covered Taxes | Taxes included in the ETR numerator (current tax expense + Article 4.4 deferred tax adjustments) |
| SBIE | Substance-Based Income Exclusion (payroll + tangible assets carve-out) |
| Excess Profit | Net GloBE Income minus SBIE—the base for top-up tax |
| ACTT | Additional Current Top-up Tax from Article 5.4 recalculations |
SBIE Protection: The Substance-Based Income Exclusion can reduce the excess profit base. Note that taxpayers may make an annual election not to apply SBIE for a jurisdiction. Only "excess" profits above the SBIE threshold are subject to top-up.
Facts (Jurisdiction L):
Calculation (assuming no ACTT and no QDMTT):
Result: €6.41 million of jurisdictional top-up tax is due for Jurisdiction L (before QDMTT offset).
Top-up tax can be collected through three mechanisms (in order of priority):
| Mechanism | Collecting Jurisdiction | Priority |
|---|---|---|
| QDMTT | Source jurisdiction (where low-taxed entity is located) | 1st |
| IIR | Parent jurisdiction | 2nd |
| UTPR | Jurisdictions with substance (50% employees / 50% tangible assets allocation) | 3rd (backstop) |
Example Flow:
The SBIE reduces the Excess Profit base, effectively protecting substance-backed profits. Rates transition over 10 years (Article 9.2):
| Fiscal Year Beginning | Payroll Rate | Tangible Assets Rate |
|---|---|---|
| 2023 | 10.0% | 8.0% |
| 2024 | 9.8% | 7.8% |
| 2025 | 9.6% | 7.6% |
| 2026 | 9.4% | 7.4% |
| 2027 | 9.2% | 7.2% |
| 2028 | 9.0% | 7.0% |
| 2029 | 8.2% | 6.6% |
| 2030 | 7.4% | 6.2% |
| 2031 | 6.6% | 5.8% |
| 2032 | 5.8% | 5.4% |
| 2033+ | 5.0% | 5.0% |
Declining Protection: As SBIE rates decline over time, more profit becomes subject to potential top-up tax. MNEs should model the long-term impact of declining carve-outs on their effective tax position.
Top-up tax can be deemed zero for a jurisdiction if an annual election is made and:
This is an election-based safe harbour for immaterial jurisdictions.
Top-up tax is due when a jurisdiction's effective tax rate falls below 15% and Net GloBE Income is positive. If ETR ≥ 15%, no top-up tax applies for that jurisdiction.
Per jurisdiction. All constituent entities in a jurisdiction are aggregated to calculate a single jurisdictional ETR and top-up tax amount. This prevents manipulation through intra-jurisdictional structures.
Yes—if SBIE equals or exceeds Net GloBE Income, Excess Profit is zero (or negative, treated as zero), resulting in zero top-up tax. This occurs when a jurisdiction has high substance (employees and assets) relative to profits. The de minimis exclusion can also result in zero top-up tax.
A Qualified Domestic Minimum Top-up Tax (QDMTT) allows the source jurisdiction to collect top-up tax first. QDMTT paid is subtracted from the jurisdictional top-up tax computation. If QDMTT covers the full amount, IIR and UTPR have nothing to collect.
Yes. The Model Rules define Top-Up Tax Percentage = 15% − ETR with no explicit cap. If Adjusted Covered Taxes are negative (resulting in negative ETR), the top-up tax percentage can exceed 15%. For example, if ETR = −5%, then Top-Up Tax % = 15% − (−5%) = 20%.
If Net GloBE Income is negative (loss), ETR is not calculated and no top-up tax applies in the loss year. Taxpayers may make a GloBE Loss Election that creates a GloBE Loss Deferred Tax Asset, which reduces GloBE Income in future years.
The Additional Current Top-up Tax (ACTT) mechanism under Article 5.4 addresses situations where prior-year calculations need adjustment. ACTT is added to the jurisdictional top-up tax computation in the current year.