Under the Pillar Two framework, top-up tax is primarily collected through the Income Inclusion Rule (IIR) or a Qualified Domestic Minimum Top-up Tax (QDMTT). However, if the top-up tax is not collected at this level from a low-tax jurisdiction within the group, other jurisdictions may step in through the Undertaxed Profits Rule (UTPR).
In this context, if a constituent entity operates in a low-tax jurisdiction and neither IIR nor QDMTT applies, Turkey may be entitled to collect a portion of the global top-up tax under its UTPR regime, together with other UTPR jurisdictions.
Importantly, under Turkish legislation, the UTPR applies with a one-year deferral. Accordingly, UTPR obligations start with the 2025 fiscal year, rather than 2024. This timing difference is critical for transitional planning.
Interaction with the Transitional Safe Harbour
The transitional safe harbour rules also apply to the global top-up tax. As long as the relevant safe harbour tests are met, no top-up tax arises, including under UTPR.
However, if the conditions for the transitional safe harbour are not satisfied, the Pillar Two framework provides an additional layer of relief. In Turkey, this takes the form of a transitional UTPR relief mechanism, designed to support multinational groups that are still in the early stages of international expansion.
Transitional UTPR Relief Mechanism in Turkey
Under the Turkish implementation of the Pillar Two rules, a special transitional UTPR relief applies for a limited group of multinational enterprises.
Specifically, the global top-up tax under UTPR is deemed to be zero for five fiscal years if both of the following conditions are met:
- The group has constituent entities in no more than six jurisdictions, including the reference country.
- The total net book value of tangible assets located outside the reference country does not exceed EUR 50 million.
If these thresholds are satisfied, Turkey will not collect any top-up tax through UTPR during the five-year relief period, even if some foreign jurisdictions remain low-taxed and have not yet implemented a QDMTT.
Key Definitions for the Transitional UTPR Relief
For the purposes of applying this relief, several definitions are particularly important.
First, the total value of tangible assets in a jurisdiction refers to the aggregate net book value of tangible assets held by all constituent entities located in that jurisdiction.
Second, the reference country is defined as the jurisdiction in which the multinational group has the highest total net book value of tangible assets in the first fiscal year in which it becomes subject to Pillar Two.
Finally, when testing the EUR 50 million threshold, all tangible assets located outside the reference country are taken into account, without any further exclusions.
Spreading Election for Tangible Asset Disposal Gains
In addition to transitional UTPR relief, certain elections under the GloBE Rules may also have a mitigating effect on top-up tax exposure.
One such election is the spreading election for gains arising from the disposal of tangible (immovable) assets. Under this election, disposal gains may be allocated over five fiscal years, rather than being fully recognized in the year of disposal.
As a result, the GloBE income base is smoothed over multiple periods instead of being concentrated in a single year.
Potential Impact on GloBE Income and ETR
In practice, the spreading election may produce two important effects.
First, if part of the disposal gain is allocated to fiscal years prior to the effective application of Pillar Two, those portions may fall outside the GloBE calculation scope altogether.
Second, by reducing income in the year of disposal, the election may increase the effective tax rate (ETR) for that year. This, in turn, could reduce or even eliminate top-up tax exposure.
However, it should be noted that local legislation does not yet provide explicit guidance confirming whether allocations to pre-Pillar Two periods would be accepted for GloBE purposes. As such, this area remains subject to interpretation and future clarification.
Final Remarks
In summary, while UTPR introduces an additional layer of top-up tax risk, Turkey’s transitional rules offer meaningful relief for eligible groups. When combined with careful election planning, including the spreading election for tangible asset disposals, these mechanisms can significantly mitigate early Pillar Two exposure.
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