When the European Union’s new global minimum tax took effect last year, it was billed as a milestone in the global fight against corporate tax avoidance. But a deal struck at the Group of 7 summit in June has given American multinationals a way around the rules, unsettling European companies that must now navigate a more complex and arguably less even playing field.
The OECD’s 15 percent minimum tax, known as Pillar Two, became law in the EU on January 1, 2024. In Luxembourg, like in other EU member states, the first official information returns for in-scope calendar-year groups will be due by June 30, 2026, following an 18-month filing window for the first year.
A central feature of the G7 accord is a “side-by-side mechanism” that spares United States companies from the EU rules by recognizing their domestic GILTI regime as equivalent. That has drawn concern from tax specialists such as Jan Neugebauer, partner at Arendt, who said the arrangement risks tilting the competitive balance in favor of American firms.
“With those new rules around the side-by-side mechanism, it is still really a question whether Pillar Two is the right way going forward,” Neugebauer told Investment Officer.
What Pillar Two is
The OECD’s Two-Pillar Solution is intended to overhaul global corporate taxation. Pillar One reallocates taxing rights to countries where large multinationals have customers. Pillar Two sets a 15 percent minimum corporate tax for groups with revenue above 750 million euros, applied on a country-by-country basis to ensure that profits cannot be shifted to low-tax jurisdictions without triggering a top-up tax.
At the June 2025 G7 meeting in Canada, the United States secured a political agreement that its multinationals will avoid EU top-up taxes under Pillar Two. In exchange, Washington dropped a planned retaliatory tax that could have targeted European companies investing in the United States, by removing the controversial Section 899 from Trump’s ambitious tax bill.
“The most important thing was to get the section 899, the retaliatory measures off the table,” said Neugebauer. ”If that would have happened, it would have had probably quite a substantial impact, not only on multinationals which are invested in the US, but also on investment funds like ETFs, mutual funds which have investments in the US, or alternative funds planning to invest or having invested in the US, as they would have been potentially caught by those retaliatory measures.”
“This one-sided agreement reflects, probably as well, the political power between the EU and the U.S., not only on tax but on defense, energy and other areas where Europe needs American support,” he added.
GILTI in plain terms
GILTI, or Global Intangible Low-Taxed Income, is America’s own minimum tax on the overseas profits of United States companies. Introduced in 2017, it taxes these profits at about 13 percent, blending results across all countries. Pillar Two’s 15 percent rate is calculated separately for each country. Without the G7 deal, the difference would have exposed American companies to additional EU taxes. The agreement effectively says that GILTI is good enough.
Pillar Two generally exempts investment funds. Most UCITS and alternative funds, including private equity and debt funds, meet the definition and will likely be outside the scope. Some vehicles such as managed accounts or co-investment structures can still be caught if they are consolidated into the accounts of a large multinational investor. Early checks on accounting treatment are essential, Neugebauer said. “If you set up dedicated vehicles, you need to be closely tuned to your investors and understand the accounting treatment. Subscription documents today are being modified to get that information upfront,” he said.
EU Court to role on UTPR
For the fund industry, the G7 outcome removed the immediate threat of the retaliatory tax,. Yet, the Undertaxed Profits Rule is still applied to American multinationals in the EU. UTPR is Pillar Two’s backstop, allowing countries to collect top-up tax when a multinational’s profits are taxed below the 15 percent minimum.
Pillar Two compliance is highly complex. Asset managers must monitor portfolio company audits, investor accounting and potential deal impacts. Temporary safe harbor rules simplify filing if certain criteria are met, but they expire in 2026.
On July 17, Belgium’s Constitutional Court referred a challenge to the Court of Justice of the EU. Filed by the American Free Chamber of Commerce, it questions whether the UTPR violates EU law. The case argues that the rule conflicts with the right to property, the freedom to conduct a business, the principle of equal treatment and the principle of fiscal territoriality. A European court ruling is expected by late 2026. For now, the rules remain in force, so companies should prepare while protecting their rights.
Policy debate still open
From a policy perspective, Neugebauer questions whether the EU should persist with Pillar Two if major economies, starting with the United States, are not applying it in the same way. “The policy goal behind it is probably a good one, to have a minimum level of taxation on a global basis,” he said. “But the rules are so complex that one has to ask whether this is really the right way forward.”
For now, he sees little chance of the EU backing down and no sign that complexity will ease. His advice to fund managers is to map exposures early, involve investors in the conversation and be ready for the rules to stay in place for the long haul.