Navigating multinational and domestic top-up tax requirements

The multinational top-up tax (MTT) and domestic top-up tax (DTT) were introduced as part of the UK’s integration of the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar 2 framework.

Designed to ensure large multinational groups (MNGs) pay a minimum effective tax rate of 15% in every jurisdiction in which they operate, understanding these taxes is essential for UK-headquartered groups and domestic businesses within scope.

In this insight, we explore the key features of MTT and DTT, how they are applied in the UK, and provide some compliance considerations for affected groups.

What is the multinational top-up tax?

The MTT is one mechanism which the UK has introduced to implement the Pillar 2 Income Inclusion Rule. This rule requires the parent entity of large MNGs to pay additional tax where profits are taxed below the 15% minimum rate in other jurisdictions.

For groups with a UK-based parent entity:

• Additional tax may arise where overseas subsidiaries are subject to an effective tax rate below 15%
• The calculation to work out whether any top-up tax is due is performed on a jurisdiction-by-jurisdiction basis (not entity-by-entity), increasing complexity
• Adjustments to accounting profits are required to calculate Global Anti-Base Erosion Rules (GloBE) income and covered taxes, ensuring consistency across jurisdictions

For groups with a non-UK parent entity:

The UK may impose MTT on its subsidiaries if the jurisdiction of the non-UK parent has not implemented a qualifying Pillar 2 Income Inclusion Rule.

The UK may impose the UTPR (Undertaxed Profits Rule) on any member of the group if the non-UK parent has not implemented a qualifying Pillar 2 Income Inclusion Rule.

US groups may be able to take advantage of the recent Side-by Side agreement safe harbours which will apply from accounting periods beginning on or after 1 January 2026.It is important to note however that this agreement does not take away the requirement for making UK Pillar 2 filing requirements

Even having a no more than a dormant entity in the UK is sufficient to require UK Pillar 2 filings to be made.

What is the domestic top-up tax?

Alongside the MTT, the DTT ensures that any top-up tax arising on UK profits is collected in the UK, rather than being charged under overseas income inclusion rules.

For UK entities who are subject to an effective tax rate lower than 15%:

• Their UK profits will be brought up to the 15% minimum rate before any overseas top-up taxes are applied
• The effective tax rate (ETR) must be calculated for UK activities as they do for overseas jurisdictions

Challenges for businesses

MTT and DTT can bring some of the following challenges to businesses, even if they expect to be required to pay little or no additional tax:

• Calculating the ETR under Pillar 2 requires access to detailed financial and tax data across all jurisdictions, often requiring changes to existing systems and processes.
• Adjustments are needed to convert accounting profits into GloBE income and covered taxes, adding more complexity to calculations
• Groups within scope are required to file a GloBE Information Return, alongside domestic filings where applicable creating a heavier compliance burden.

Planning ahead

If you think your business may be within scope, early assessment and planning are critical. Areas to consider include:

• Assessing exposure to identify jurisdictions where top-up tax is likely to arise
• Evaluating safe harbour provisions which may simplify compliance in certain cases
• Reviewing group structures and financing arrangements
• Aligning tax and finance teams to ensure consistent data and reporting approaches

We are here to help

While the rules surrounding multinational and domestic top-up taxes are complex, proactive planning can help reduce compliance risk and administrative burden.

If you would like to find out whether your group is in scope, or need support preparing for your first MTT or DTT filings, please get in touch with a member of our specialist Corporate Tax team or speak to your usual Azets adviser.