EU Gateway newsletter 2.0

Pillar Two: The G7 Deal, Germany’s Doubts, and the UTPR Challenge

Pillar Two has dominated the global tax debate in recent months. The biggest headline came on 28 June 2025, when the G7 agreed on a “side-by-side” system between the U.S. tax system and Pillar Two. In practice, this shields U.S. firms from some of the toughest rules: U.S.-parented groups won’t face the IIR (Income Inclusion Rule) or the UTPR (Undertaxed Profits Rule), since they are already covered by U.S. minimum tax rules. The news set off political ripples. German Chancellor Friedrich Merz questioned whether the EU should continue with Pillar Two without U.S. participation—going as far as suggesting suspension. “The Americans have withdrawn, and this concept no longer has a future,” Merz argued. Just a day later, however, Finance Minister Lars Klingbeil reassured that Germany still supports Pillar Two, even if U.S. firms enjoy this special treatment. That special treatment still needs to be formalised at OECD, EU and EU Member States’ levels. The G7 agreement must first be formally approved and then adopted by the broader group of OECD's Inclusive Framework countries. At the same time, we read that at least 28 countries have already expressed concerns in their comments to the OECD, warning that the “side-by-side” approach risks undermining the overall integrity and coherence of the Pillar Two system, the tax sovereignty of states, and the competitiveness of their companies compared to U.S. multinationals.

Globally, implementation of Pillar Two is uneven. The U.S. remains engaged in OECD talks but leans on the G7 deal. China and India remain hesitant, and several other countries are moving slowly. EU-based multinationals therefore face a competitive disadvantage compared to peers elsewhere.

Adding to the uncertainty, on 17 July 2025 Belgium’s Constitutional Court referred questions to the CJEU following a challenge from the American Free Enterprise Chamber of Commerce. At stake is whether the UTPR complies with EU law—specifically, the EU fundamental freedoms (establishment and services), fundamental rights (property and business freedom), and principles like legal certainty and fiscal territoriality. The CJEU’s decision may take 12–24 months. But the referral itself ramps up political pressure, raising the live possibility that the UTPR could be struck down EU-wide.  For now, however, businesses must continue preparing for compliance, as this is what the law currently requires, with first filings due well before any judgment arrives. This remains the case regardless of how strong the arguments presented to the CJEU may be—and, most importantly, regardless of whether the “side-by-side” approach is eventually blessed by the OECD. It is still unclear whether, when, and to whom such an approach would apply, and whether it could retroactively block the application of the UTPR from the outset. See PwC's Tax Policy Alert for more information about the referral and the actions to consider. 

CJEU’s Nordcurrent Judgment: Expanding GAAR’s Reach

Finally, the CJEU made headlines with its Nordcurrent judgment (C-228/24) where the Court ruled, amongst others, that tax authorities must carry out an overall assessment to determine whether an arrangement is wholly artificial or abusive under the GAAR of the EU Parent Subsidiary Directive (PSD). This in itself is not new. What is crucial, however, is that the CJEU clarified that authorities may also consider circumstances that occur after an arrangement has been set up when testing the genuineness of dividend distributions. In other words: even if an arrangement was initially based on sound commercial reasons, it may later lose its legitimacy if it no longer reflects economic reality. Please see EUDTG newsalert for more information about the judgment. 

In Nordcurrent, the question was whether Lithuania had to exempt an inbound dividend from corporate income tax. But the Court’s reasoning goes further. Its emphasis on the temporal dimension could also shape how EU Member States apply the withholding tax exemption under the PSD. And since the EU Interest and Royalties Directive contains a similar GAAR, it is likely the Court will extend this interpretation there too—as well as to national anti-avoidance measures with the same purpose.

The judgment is already making an impact. The Dutch Supreme Court has invoked Nordcurrent in three cases, two of which concerned the dividend withholding tax exemption as it currently stands in the Netherlands. See PwC tax article “Supreme Court Denies WHT Exemption to Belgian Holding”.