Cross-Border M&A: Structuring for Substance in a Post-Pillar Two World

For two decades, cross-border M&A structuring operated within a recognisable set of conventions. Holding companies in the Netherlands or Luxembourg. IP in Ireland or Singapore. Financing through low-tax intermediaries. The structures were lawful, well-documented, and widely replicated. They were also, in large part, form over substance. That distinction now matters.

The OECD's Pillar Two framework — the Global Anti-Base Erosion (GloBE) rules — imposes a 15% minimum effective tax rate on multinational groups with consolidated revenues exceeding €750 million. It has been live in most implementing jurisdictions since 1 January 2024, with the Undertaxed Profits Rule following shortly thereafter. The UK's Multinational Top-up Tax, enacted through the Finance (No. 2) Act 2023 and refined by subsequent regulations in April 2025, sits squarely within this framework.

The practical consequence for anyone structuring or advising on a cross-border acquisition is that tax has moved from a back-office optimisation exercise to a core deal variable. The question is no longer merely "what is the effective tax rate?" but "will that rate survive a jurisdiction-by-jurisdiction GloBE calculation — and if not, who bears the top-up?"

The Mechanics That Matter for Deals

Pillar Two operates on a deceptively simple premise: if an in-scope group's effective tax rate in any jurisdiction falls below 15%, a top-up tax is levied to bring it to that floor. The calculation, however, is anything but simple. It runs through three priority mechanisms: the Qualified Domestic Minimum Top-up Tax (QDMTT), which allows jurisdictions to collect the top-up tax locally; the Income Inclusion Rule (IIR), which allows the parent jurisdiction to collect it; and the Undertaxed Profits Rule (UTPR), which operates as a backstop where neither the QDMTT nor IIR has captured the shortfall.

For M&A purposes, the critical insight is that Pillar Two does not look at the group's blended global rate. It operates on a jurisdiction-by-jurisdiction basis. A group can have a 25% effective rate globally and still face top-up tax exposure in a specific country where a subsidiary benefits from incentives, carries forward losses, or generates volatile income that produces a sub-15% outcome in a given year.

How Acquisitions Bring Groups Into Scope

The threshold question in any deal is whether the transaction itself brings one or both parties within scope. Pillar Two applies to groups with consolidated revenue of at least €750 million in two of the four preceding fiscal years. An acquisition can push a previously out-of-scope buyer over that threshold immediately, bringing its entire worldwide structure into the GloBE framework for the first time.

Private equity buyers sometimes enjoy an advantage here. Portfolio investments held through fund structures are typically not consolidated for GloBE purposes, meaning the €750 million threshold is assessed at the portfolio company level rather than across the fund's combined holdings. Strategic acquirers — industrial conglomerates, listed groups — do not have that luxury. Their entire consolidated perimeter is in scope.

On the sell side, a disposal can take a group back below the threshold, but the timing matters. Revenue is assessed on a trailing four-year basis, and the allocation of the target's income and assets in the year of the transaction is a matter of detailed calculation, not assumption.

The Death of the Letterbox Holding Company

The Substance-Based Income Exclusion (SBIE) is Pillar Two's clearest statement that the era of form over substance is over. The SBIE reduces the amount of income subject to top-up tax by an amount calculated by reference to real, tangible economic activity in each jurisdiction — specifically, payroll costs for eligible employees and the carrying value of tangible assets.

The design is intentional: entities with genuine operational presence generate a larger SBIE carve-out and therefore face lower or zero top-up tax exposure. Entities with no employees, no physical assets, and no operational function — the classic holding company, IP box vehicle, or financing conduit — generate no SBIE benefit at all. Their income sits fully exposed to top-up tax if the local effective rate falls below 15%.

For deal structuring, this inverts a longstanding calculus. The question is no longer "where do we minimise the tax?" but "where do we have the substance to support the structure?" Legacy holding companies in jurisdictions chosen primarily for their tax attributes — participation exemptions, favourable treaty networks, low headline rates — must now be evaluated against whether they create GloBE exposure that a more substance-rich alternative would avoid.

Due Diligence Is Fundamentally Different

Tax due diligence on cross-border acquisitions has traditionally focused on historical compliance, transfer pricing documentation, and the quantification of contingent liabilities. Pillar Two adds a forward-looking dimension that is structurally new.

Buyers must now model the target's jurisdiction-by-jurisdiction ETR under GloBE rules — not merely the local statutory rate, but the rate as computed after GloBE adjustments to accounting income, covered taxes, and deferred tax positions. This requires access to data that sellers have not historically been expected to provide: granular financial reporting packages by jurisdiction, deferred tax asset and liability schedules, details of tax incentives and their GloBE treatment, and information about intra-group flows that affect the allocation of income across entities.

The treatment of deferred tax is particularly significant. Pillar Two includes a recapture mechanism for deferred tax liabilities — if a DTL recognised in the GloBE computation does not reverse into an actual cash tax payment within five years, it is recaptured, potentially creating a retrospective top-up tax liability. A target with large timing differences — accelerated depreciation, long-term provisions, uncertain tax positions — carries a latent Pillar Two exposure that will not appear in a traditional tax due diligence scope.

Transaction Agreements Need New Architecture

The contractual framework around cross-border deals is also adapting. Standard tax indemnities and warranties were drafted for a world in which the seller's historical tax position was the primary risk. Pillar Two introduces risks that do not fit neatly into that framework.

The January 2026 Side-by-Side Package

The OECD's "side-by-side" administrative guidance, released on 5 January 2026, has materially changed the landscape for transactions involving US-parented groups. The new safe harbour allows US multinational groups to elect a deemed top-up tax of zero under both the IIR and UTPR — effectively exempting them from the core Pillar Two charging mechanisms — on the basis that the US tax system is sufficiently robust in its taxation of domestic and foreign profits.

This does not eliminate Pillar Two compliance for US groups. QDMTTs in implementing jurisdictions still apply. GloBE Information Return filing obligations continue. And the OECD has committed to a "stocktake" by 2029 to assess whether the safe harbours are being gamed — including monitoring for inversions and surges in profits in low-tax jurisdictions without QDMTTs.

For European or UK buyers acquiring US targets, the side-by-side package reduces one category of Pillar Two risk — but introduces new structuring questions. A UK-parented group acquiring a US business must still compute its GloBE position for US subsidiaries, and the interaction between GILTI, the Corporate Alternative Minimum Tax (CAMT), and QDMTTs in third-country jurisdictions creates coordination issues that require careful modelling.

What This Means in Practice

Pillar Two does not prohibit any particular structure. It reprices them. The holding company in a zero-tax jurisdiction is still legally permissible — it simply now carries a 15% floor cost that did not previously exist. The IP vehicle with no employees still works mechanically — it just generates no substance exclusion and therefore faces full top-up tax exposure on its income.

The groups that will manage this regime effectively are those that treat Pillar Two as an operating model question, not a compliance filing. That means stress-testing existing structures against GloBE calculations before entering a transaction; embedding Pillar Two modelling into buy-side due diligence from the outset; and ensuring that post-acquisition integration plans account for the GloBE consequences of entity rationalisations, IP migrations, and financing restructurings.

Substance over form was always good legal principle. It is now good tax arithmetic.