As the global tax landscape undergoes a monumental shift with the implementation of the OECD’s Pillar 2 framework, Türkiye has positioned itself as a proactive early adopter. This has direct and significant consequences for the Turkish subsidiaries of multinational enterprises (MNEs), particularly those whose parent companies are based in jurisdictions implementing the new rules from 2025.
This general analysis outlines the Pillar 2 liabilities and compliance obligations for a Turkish subsidiary whose parent company is located in a country that will enforce the global minimum tax rules starting in the 2025 fiscal year.
- The Decisive Factor: Türkiye’s Early and Comprehensive Adoption
Türkiye’s legislative timeline is the critical element in this analysis. The country has enacted a comprehensive set of Pillar 2 rules with the following effective dates:
- Qualifying Domestic Minimum Top-up Tax (QDMTT): Effective for fiscal years starting on or after January 1, 2024.
- Income Inclusion Rule (IIR): Effective for fiscal years starting on or after January 1, 2024.
- Undertaxed Profits Rule (UTPR): Effective for fiscal years starting on or after January 1, 2025.
This framework applies to MNE groups with consolidated annual revenues exceeding €750 million in at least two of the four preceding fiscal years.
- Analysis of Liabilities by Fiscal Year
The tax liabilities for a Turkish subsidiary are best understood by examining the situation across two key periods: the 2024 fiscal year, where Türkiye’s rules are active while the parent company’s are not, and the 2025 fiscal year, when both jurisdictions will have Pillar 2 regulations in force.
Fiscal Year 2024: Türkiye’s Unilateral Right to Tax
For the 2024 fiscal year, the situation is unambiguous. Since the parent company’s jurisdiction has not yet implemented Pillar 2 rules, there is no foreign IIR to apply to the profits of the Turkish subsidiary.
- Primary Liability: The Turkish subsidiary’s profits will be subject to Türkiye’s QDMTT. If the subsidiary’s Effective Tax Rate (ETR) in Türkiye is calculated to be below the global minimum of 15%, the entity will be directly liable to pay a top-up tax to the Turkish tax authorities to meet the 15% threshold.
- Conclusion for 2024: Türkiye has the sole and primary right to collect this top-up tax. The tax liability on the profits of the Turkish entity resides squarely in Türkiye.
Fiscal Year 2025 and Onwards: The Primacy of the QDMTT
Beginning in 2025, the parent company’s home country will activate its own Pillar 2 rules, most notably an IIR. The IIR is a “top-down” rule that generally allows a parent company’s jurisdiction to tax the low-taxed income of its foreign subsidiaries. However, the OECD’s model rules were specifically designed to prioritize a QDMTT.
- Interaction of Rules: The international tax framework gives precedence to a “Qualifying” Domestic Minimum Top-up Tax over a foreign IIR. Türkiye has designed its domestic top-up tax to meet the “qualifying” standard.
- Primary Liability: The Turkish subsidiary will first apply the Turkish QDMTT rules. If its local ETR is below 15%, it will pay the corresponding top-up tax directly to the Turkish tax authorities.
- Credit Mechanism at Parent Level: When the parent company in the foreign jurisdiction calculates its own Pillar 2 tax liability under its IIR, it must provide a credit for any QDMTT paid in Türkiye. Since the Turkish QDMTT will have already raised the tax on the Turkish subsidiary’s profits to 15%, the top-up tax liability under the parent’s IIR with respect to those profits will be reduced to zero.
- Conclusion for 2025+: Despite the parent company’s jurisdiction implementing its own set of rules, Türkiye effectively retains its right to tax the profits generated within its borders up to the 15% minimum. The primary tax liability for the Turkish subsidiary remains in Türkiye.
- GloBE Information Return (GIR) Filing Obligations
The GIR is a comprehensive, standardized tax return detailing an MNE’s Pillar 2 calculations. The rules offer a degree of flexibility, generally allowing a single designated entity to file the GIR for the entire group. However, Turkish subsidiaries must be aware of the following:
- Designated Filer Notification: Even if the MNE group designates the Ultimate Parent Entity (UPE) or another entity to file the global return, the Turkish subsidiary will certainly be required to file a local notification with the Turkish tax authorities. This notification will identify the entity that is filing the GIR and its location.
- Potential for Local Filing: The subsidiary must be prepared for a potential local filing requirement in Türkiye. This could occur if the MNE group fails to designate a filer or if the jurisdiction of the designated filer does not have a qualifying competent authority agreement for the exchange of GIRs with Türkiye. Given Türkiye’s early adoption, local filing might be a default requirement in the initial years until information-exchange mechanisms are fully operational.
- Other Key Liabilities and Compliance Burdens in Türkiye
Beyond the top-up tax itself, the Turkish subsidiary will face significant operational and compliance challenges:
- Data Collection and Systems: The subsidiary must develop robust systems to collect and process the vast amount of data required for GloBE calculations, which goes far beyond standard tax and accounting information.
- Technical Expertise: Calculating GloBE income, covered taxes, and the ETR involves numerous complex adjustments. Companies will need access to specialized knowledge, either in-house or through external advisors.
- Ongoing Monitoring: The MNE group must continuously track its consolidated revenue to confirm it remains subject to the rules. Any changes in group structure or business operations will also need to be assessed for their Pillar 2 implications.
In summary, by implementing a comprehensive and early Pillar 2 framework, Türkiye has ensured that it will be the primary jurisdiction to collect top-up taxes from the Turkish operations of MNEs. For Turkish subsidiaries, the immediate priorities are to prepare for the calculation and payment of the QDMTT and to clarify their specific GIR filing duties with the Turkish tax authorities.
- Key Takeaways on Türkiye’s Pillar 2 for Foreign Multinationals
Based on Türkiye’s early and comprehensive adoption of the OECD’s Pillar Two framework, here are the essential takeaways for foreign multinational enterprises (MNEs) with subsidiaries in Türkiye.
- Primary Taxing Right Belongs to Türkiye: The most critical point is that Türkiye’s Qualifying Domestic Minimum Top-up Tax (QDMTT), effective since January 1, 2024, gives it the primary right to tax the local profits of MNE subsidiaries. If a Turkish entity’s effective tax rate (ETR) is below 15%, the resulting top-up tax is paid directly to the Turkish Revenue Administration, not to the parent company’s jurisdiction.
- Parent Company’s Rules are Secondary: Even when the MNE’s home country implements its own Pillar 2 rules (like the Income Inclusion Rule – IIR) in 2025 or later, it will not override Türkiye’s taxing right. The parent’s jurisdiction must provide a tax credit for the QDMTT paid in Türkiye. This prevents double taxation but confirms that the actual cash tax liability for profits generated in Türkiye remains within Türkiye.
- Immediate Compliance and a Two-Phase Timeline: Pillar 2 is not a future concern; it is a current liability.
- Fiscal Year 2024: For the 2024 fiscal year, Türkiye had the sole right to apply a top-up tax via its QDMTT, as the parent company’s jurisdiction rules were not yet active.
- Fiscal Year 2025 and Onwards: With the addition of Türkiye’s Undertaxed Profits Rule (UTPR) from January 1, 2025, the framework is complete, ensuring Türkiye’s taxing rights are protected even as global rules become widespread.
- Specific and Mandatory Local Filing Obligations: Global compliance is not enough. MNEs must adhere to specific local requirements:
- GloBE Information Return (GIR) Notification: Turkish subsidiaries are required to file a local notification with the tax authorities, identifying which entity in the MNE group is filing the global GIR and its location.
- Potential for Local GIR Filing: Subsidiaries must be prepared to file the full GIR directly with the Turkish authorities. This is a likely requirement if the MNE has not designated a global filer or if information exchange agreements are not fully operational.
- Internal Readiness is Crucial: MNEs must ensure their Turkish operations are equipped to handle the new compliance burden. This includes developing robust systems for the extensive data collection required for GloBE calculations and securing the technical expertise to navigate the complex adjustments needed to determine the jurisdictional effective tax rate.
You can contact us for your questions on our bulletin and Pillar 2 liabilities of Turkish subsidiaries of foreign MNEs.
