US multinational companies are engaging in what essentially amounts to a political game of chicken, dissolving their overseas holding companies and reshoring ownership of their subsidiaries to delay paying the new 15% global minimum tax—perhaps indefinitely.
It’s unclear how many US companies are part of this trend, but practitioners tell Bloomberg Tax they have helped US companies move ownership of their foreign subsidiaries to the US, which has yet to sign up to the global minimum tax. The move triggers a one-year delay in compliance.
None of the practitioners would name the clients they are doing this work for, but at the end of the fiscal year, restructuring activities may start showing up in 10Ks.
Chad Hungerford, partner at Deloitte Tax LLP and global minimum tax leader, said these corporate shifts known as “out-from-under restructurings” have “definitely” happened with his clients.
Paul Crispino, a Treasury attorney, said during a panel at the 2024 Federal Bar Association Tax Law conference that the department has heard from practitioners that their corporate clients are restructuring as a result of the global minimum tax.
For many of these companies, the shift to the US is also a bet that the one-year delay will be permanent because other countries will be reluctant to collect tax from US businesses no matter who wins the election in November.
But the new global tax has the so-called undertaxed profits rule, which allows a country that has adopted the rule to tax a multinational company if that company’s parent jurisdiction and local jurisdiction aren’t applying a 15% rate. The rule goes into effect in 2025.
This leaves the compliant countries with a conundrum: Do they try to tax US foreign subsidiaries and risk retaliatory action? Or do they allow US-owned companies to avoid the global minimum tax, undermining one of the two pillars of a tax deal that took years for the Organization for Economic Cooperation and Development to negotiate?
“Do you believe in the UTPR? That is what it boils down to,” said Steffie Klein, senior associate and tax adviser at Loyens & Loeff in Amsterdam, referring to the undertaxed profits rule. “If you do not believe in the UTPR, then this is not a one-year save. This is a save until the US is going to introduce Pillar Two,” meaning the global minimum tax.
For years, large multinational companies set up holding companies around the world to reap benefits in countries with favorable tax treatments. But under the new global tax regime, these structures aren’t as helpful as they used to be—increasing corporate tax bills and compliance costs, especially in the heart of Europe.
Michael Lebovitz, an international tax partner at Eversheds Sutherland, said that he’s had clients with holding companies in Switzerland and the Netherlands reshoring ownership of subsidiaries back to the US.
Thirty-six jurisdictions have implemented or will implement the global minimum tax taking effect in 2024. The tax is part of the international tax deal struck in 2021.
There are three main ways to compel companies to pay at least a 15% tax rate in every jurisdiction they do business. The first is the global minimum tax’s qualified domestic minimum top-up tax, which is a 15% minimum tax that’s adopted and applied by a local jurisdiction. The second is the income inclusion rule, which went into effect this year. Under this rule, the country that is home to a corporation’s headquarters can collect tax on the company’s foreign affiliate if it’s taxed below 15%.
The third is the undertaxed profits rule. The system largely rests on the effectiveness of this backstop, experts say.
“If UTPR is not going to fly,” Klein said, “then the integrity of the rules is undermined.”
How ‘Out From Under’ Works
US-owned companies are using what’s referred to among tax professionals as “out-from-under” restructuring. In practice, they’re dissolving their European holding companies that act as a parent foothold in the region.
These intermediate parent companies own other subsidiaries in low-tax countries that would trigger the EU’s top-up tax. Getting rid of the middleman puts the subsidiaries back in the direct ownership of the US parent.
Here’s an example of how it works: A US-headquartered company may have a Dutch holding company lower in its structure. Under the Dutch holding company sit other subsidiaries in low-tax jurisdictions like the Cayman Islands, which has a zero percent corporate tax rate.
The Netherlands adopted the top-up tax effective this year, meaning that the US company’s Cayman affiliate is subject to an additional levy from the Dutch. To stave off the top-up tax for a year, the Dutch holding company is dissolved, and the low-taxed subsidiaries are moved out from under Europe and back to US ownership.
Corporate Pinch
Despite the considerable costs, reshuffling the corporate structure to delay the global minimum tax for just a one-year delay would appeal to global companies that have warned investors of higher tax payments under the new system and massive compliance costs, practitioners said.
For example, pharmaceutical giants like
This doesn’t include the compliance costs, which will be substantial. Companies will have to both track and manage the various parts of a business to ensure each is following the law and providing additional details to authorities and investors. Dave Denton,
“Many companies, as they work through their modeling, are discovering that many aren’t going to be looking at a significant increase in tax liability in any one jurisdiction, but the compliance burden is going to be very, very high,” said Jose Murillo, Ernst & Young partner and national tax department leader.
US multinationals in particular are finding that their subsidiaries are “causing havoc with their calculations,” said Frank Angeleri, senior director at Centri Business Consulting LLC and former partner at KPMG.
So companies are crunching the numbers to see if it would cost less to restructure than to pay the added compliance costs and any rate bumps that may come. These conversations about decreasing exposure to the global minimum tax are “ubiquitous,” a tax practitioner at a major accounting firm, who requested anonymity to speak freely on the subject, told Bloomberg Tax.
Risking Retaliation
This strategy is only effective until the undertaxed profits rule comes into play in 2025, with the EU countries, the UK, and Korea all having adopted it. But it’s still unclear if these countries—all of them US allies—will actually use the rule and risk retaliation from the US government.
Republicans in Congress loathe the global minimum tax rules, calling them “extraterritorial” and “discriminatory.” For his part, former President Donald Trump on the campaign trail has floated a 10% tariff on all imported goods, arguing that the measure would encourage companies to move manufacturing back to the US.
“There’s no doubt about the power the US has,” Klein said.
However, a Republican administration ruffling feathers in the international trade space could backfire on the companies counting on the US to protect them from the undertaxed profit rule, said Itai Grinberg, a former deputy assistant secretary for international affairs at Treasury and former top OECD negotiator.
Last month, Canada’s ambassador to the US Kirsten Hillman warned that if the US were to impose a 10% tariff on imports, foreign countries would respond.
“It’s not a one-way street,” Hillman said at the time.
If Donald Trump is elected and the US doesn’t adopt the global minimum tax, “I feel confident that foreign sovereigns will apply UTPR to the United States in 2026,” Grinberg said,
“Who honestly believes that foreign sovereigns would not impose UTPR in an environment where the administration is threatening or has imposed 10% or higher across-the-board tariffs on everything?”
