The Finance Act 2025, which received Royal Assent on March 21, 2025, introduces several changes to the UK Pillar Two rules.
- Undertaxed profits rule (UTPR): The new law introduces a UTPR for accounting periods beginning on or after December 31, 2024. The UTPR would be collected in form of an additional top-up tax levied directly on UK constituent entities in an amount equal to the UTPR top-up tax amount allocated to the UK. An election is available that allows a group to identify a single constituent entity liable for the entire UK portion of the UTPR top-up tax.
- Safe harbors: The law introduces the transitional UTPR safe harbor. Furthermore, new amendments to the transitional country-by-country (CbC) reporting safe harbor incorporate the anti-hybrid arbitrage rules as per the OECD December 2023 Administrative Guidance (for transactions entered into on or after December 16, 2022) and applies for disqualified tax expenses attributable to profits accruing on or after March 14, 2024.
- Additional OECD guidance: Several new elements from the OECD December 2023 and from the June 2024 Administrative Guidance were incorporated.
Most provisions introduced by the Finance Act apply retroactively for financial years starting on or after December 31, 2023 (e.g., removal of election for substance-based income exclusion (SBIE) purposes, anti-hybrid arbitrage rules), while others apply for financial years beginning on or after December 31, 2024 (unless an election has been made by the filing entity to apply it retroactively).
Read an April 2025 report prepared by the KPMG’s EU Tax Centre