Does the 'Initial Phase Relief' Make the EU’s Pillar Two Directive Invalid?

This paper by Kofler and Schnitzer considers the operation of the initial phase relief under the OECD Two Pillar Model Rules in its application in Europe, regarding whether it violates EU fundamental freedoms. The Pillar Two OECD Model Rules provide for initial phase relief for a five-year period, which prevents the application of the Undertaxed Payments Rule in order to ensure that the development of cross-border activities by purely domestic enterprises that benefit from low taxes in their home jurisdiction is not discouraged. The EU’s Pillar Two Directive mirrors the OECD Model Rules in that respect, but – due to its application of the Income Inclusion Rule to domestic Constituent Entities, including the Ultimate Parent Entity – it takes a more indirect approach to the initial phase relief through a mandatory exclusion from the IIR in certain domestic settings.
According to the authors, the non-application of the IIR to domestic Constituent Entities in the initial phase of an MNE’s international activity and to large scale domestic groups triggers the question whether the EU fundamental freedoms are breached.

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