1.1 Minimum Effective Tax Rate of 15% and calculation of the top-up tax
Pillar Two of the OECD framework on international tax reform introduces a minimum effective tax rate of 15% applicable to the profits of multinational enterprises (MNEs) with consolidated revenue exceeding 750 million euros. This mechanism, formalized in the GloBE (Global Anti-Base Erosion) rules, is based on a sophisticated calculation of the Effective Tax Rate (ETR) per jurisdiction, obtained by relating the Adjusted Covered Taxes to the GloBE Income or Loss. When the effective rate is below the 15% threshold, a top-up tax is triggered to cover the gap, applied to excess profits after deducting the Substance-Based Income Exclusion (SBIE).
The calculation integrates several layers of adjustment that complicate tax planning. Covered taxes must be adjusted for the time differences between accounting and tax standards, via a deferred tax adjustment mechanism capped at 15%. Recapture rules apply to ensure that active deferred taxes are paid within five years. For tax losses, a simplified method allows for the creation of an active deferred tax equal to the GloBE loss multiplied by 15%, usable without a time limit. These mechanisms, although technical, have direct implications for the valuation of investments in tokenized carbon credits, as the structure of the income generated by these assets—often qualified as passive income or capital gains on intangible assets—fully exposes them to the top-up tax in the absence of sufficient operational substance.
Revenue estimates for France illustrate the scale of the mechanism: 3.6 billion euros annually with transitional exclusions, up to 4 billion without them, according to simulations by Zucman and colleagues based on OECD model rules and the December 2021 European directive.
1.2 Income Inclusion Rule (IIR) and Under-Taxed Payments Rule (UTPR)
The GloBE framework revolves around two complementary operational pillars. The Income Inclusion Rule (IIR) constitutes the primary mechanism, allowing the ultimate parent entity’s (UPE) jurisdiction to tax the under-taxed profits of its foreign subsidiaries through a top-up tax proportionate to the Inclusion Ratio. This rule fundamentally redefines cross-border asset holding strategies, as it neutralizes the advantage traditionally sought by investment structures established in low-tax jurisdictions.
The Undertaxed Profits Rule (UTPR) functions as a backstop mechanism, allowing intermediate jurisdictions in the ownership chain to collect all or part of the top-up tax not collected via the Income Inclusion Rule (IIR). The allocation is done using a binary method: 50% based on the number of employees, and 50% based on the net book value of tangible assets. This architecture creates a structural incentive to maintain real operational substance in holding jurisdictions. For institutional investors holding CFCs through French entities, the UTPR represents a significant tax contagion risk: if other entities in the global group generate undertaxed income, a portion of the top-up tax may be reallocated to the French entity, mechanically increasing its effective tax rate and reducing the net return on the held CFC assets.
1.3 French Transposition via the QDMTT (Qualified Domestic Minimum Top-up Tax)
France was one of the first jurisdictions to fully transpose Pillar Two through the introduction of the QDMTT (Qualified Domestic Minimum Top-up Tax), a mechanism described as a domestic minimum tax that allows the top-up tax to be collected at the national level before it can be levied by other jurisdictions. This strategic approach aims to preserve French fiscal sovereignty and prevent revenues generated on French territory from being taxed by other states via the IIR or UTPR.
The French QDMTT applies to constituent entities of multinational groups with consolidated revenue exceeding 750 million euros, with specific reporting obligations including a detailed statement of the information necessary to calculate the effective tax rate and the top-up tax, as well as a tax liquidation statement. France has also established a transitional relief regime, planned for three fiscal years but potentially extendable, which allows the top-up tax to be considered zero when certain tests based on qualified Country-by-Country Reporting (CBCR) data are met. This measure, available for fiscal years beginning no later than December 31, 2028, and ending no later than June 30, 2030, offers a substantial reduction in the reporting burden for eligible groups.
For actors in the tokenized carbon market, a detailed understanding of the interactions between the QDMTT, IIR, and UTPR is essential, as determining the applicable effective tax rate depends on multiple variables: the tax qualification of TCC (Tokenized Carbon Credits) revenues, the treatment of any tax credits associated with emission reduction projects, and the allocation of holding and management costs among the group’s entities.
