Pillar 2 and the top-up tax: how to calculate the group revenue for merged and divided groups?

This article answers the following questions:

• How to determine whether a merged or divided group is subject to the global minimum tax regulations?
• How to calculate the group revenue of a merged group?
• How to calculate the group revenue of a divided group?

With the introduction of the EU Pillar 2 Directive and the global top-up tax, calculating the revenue of international and domestic groups has become significantly more complex. The regulations cover not only “traditional” groups, but also organisations undergoing mergers or divisions – although the rules for fulfilling tax obligations differ slightly in such cases. How substantial are these differences, and what should Polish constituent entities of international groups bear in mind?

What is the minimum group revenue and does the top-up tax apply to merged or divided groups?

Analysing the revenue of an international or domestic group is the primary method for determining whether an organisation is subject to the top-up tax. 

The Polish Act on the Top-up Taxation of International and Domestic Groups stipulates that its provisions apply to constituent entities of an international or domestic group if, for at least two out of the four tax years directly preceding the given tax year, the group’s annual revenue – as reported in its consolidated financial statements – amounted to at least EUR 750,000,000.

This regulation does not exclude merged or divided groups, which means they are also required to calculate the minimum group revenue to verify whether the provisions of the Act apply to them.

How to determine the group revenue for merged groups?

First, it is important to establish which domestic and international groups are considered merged groups under the Polish legislation. According to the Pillar 2 regulations, merged groups are those formed under an agreement whereby:

• all or nearly all constituent entities of at least two separate groups become constituent entities of a single group, or
• at least two entities not belonging to any group become constituent entities of a new group, or
• an entity not belonging to any group becomes a constituent entity of an existing group.

When analysing the obligations of a merged group under the global minimum tax regulations, one must also examine its consolidated revenue in relation to the statutory threshold of EUR 750,000,000. However, it is important to note that the minimum group revenue of a merged group is determined differently depending on whether the period in question is before or after the merger. The type of merged group also plays a significant role:

• to assess whether the minimum group revenue condition was met prior to the merger, the annual revenue is determined based on the sum of the annual revenues of the groups involved in the merger, as reported in each group’s consolidated financial statements,
• in the case of two individual entities forming a group through a merger, the revenues of each entity are analysed based on their financial statements for previous tax years,
• if an entity joins an existing group, the revenue reported in the entity’s financial statements for the given year is added to the consolidated revenue of the group for the same year,
• in the case of group mergers, the annual revenue reported in the consolidated financial statements of the merged group is taken into account.

How to calculate the group revenue for divided groups? 

Similar to merged groups, divided groups are clearly defined in the Pillar 2 regulations. 

According to the regulations, divided groups are those formed under an agreement whereby the constituent entities of one group become constituent entities of at least two groups that are not consolidated by the same ultimate parent entity.

The Polish regulations implementing the global minimum tax apply to any divided group that has achieved a minimum group revenue of EUR 750,000,000:

• for the first tax year following the division (if the division results in the commencement of a new tax year), or for the tax year in which the division occurred (if the division does not result in the commencement of a new financial year), or
• in at least two out of the four tax years of the divided group’s operation (this period is counted from the year in which the division occurred).

As can be seen, the Pillar 2 regulations concerning divided groups differ from the general rules, as meeting the minimum group revenue condition for the first year following the division (or the year of the division) is sufficient for the group to be subject to the top-up tax.

This additional condition ensures that any group formed as a result of the division of a group covered by the GloBE system – and which, as a divided group, has reached the EUR 750,000,000 threshold for the tax year ending after the division (regardless of whether the division resulted in a new tax year or not) – is subject to the Pillar 2 provisions.

If the regulations were not formulated in this way, each divided group would fall outside the scope of taxation due to the division, as in the first year of its existence – even if the organisation exceeded the minimum revenue threshold – it would never meet the second key condition for top-up taxation, namely the requirement to exceed the revenue threshold in two out of four years (which would be impossible due to the shorter existence of the group post-division). This could lead to abuse in this area, so it is no surprise that the legislator took steps to prevent artificial group divisions aimed at avoiding the top-up tax.

When settling the global minimum tax for domestic and international groups, it is advisable to seek expert assistance

As shown, the Act on the Top-up Taxation of International and Domestic Groups is quite precise in defining the entities subject to its provisions and also covers merged and divided groups, applying the same qualification criterion as for groups not undergoing mergers or divisions – namely, the minimum group revenue.

However, it is worth noting that the method for determining the minimum group revenue differs from the method used for ordinary groups and, in some respects, requires more effort from entities when assessing whether the EU Pillar 2 Directive applies to them. In cases involving mergers and divisions, it is therefore advisable to seek support from professionals providing tax advisory services for companies, with experience working with large international groups.