Entity Setup
Entity Setup and International Exposure: Navigating Thin Capitalisation & Pillar Two for Private Groups
Australia’s private groups and SMEs with international operations face new rules under thin capitalisation and global minimum tax; learn how to structure borrowing, debt deductions, and transfer pricing strategically.
By NomadicTax Research Team • 5-8 min read • November 16, 2025
## What International Measures Are Changing?
Australia has introduced **new thin capitalisation rules**, aligning with OECD Base Erosion & Profit Shifting (BEPS) Action 4. These apply to most **multinational businesses**, and **privately owned wealth groups** operating across borders. Key elements include debt deduction limitations and removal of the arm’s length debt test for certain taxpayers. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/private-wealth-international-program/new-international-tax-measures-affecting-private-groups?utm_source=openai))
Also, the **Global and Domestic Minimum Tax** rules (OECD Pillar Two) are now law for large Multinational Enterprise (MNE) groups, ensuring a minimum 15% tax on profits in each jurisdiction. Two key rules apply:
- **Income Inclusion Rule (IIR)** from fiscal years starting **1 January 2024**.
- **Undertaxed Profits Rule (UTPR)** from fiscal years starting **1 January 2025**. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/international/implementation-of-a-global-minimum-tax-and-a-domestic-minimum-tax?utm_source=openai))
## Implications for Private Groups & SMEs
- If your business has **global turnover reaching EUR 750 million+**, you’re in scope for Pillar Two.
- Debt deductions are now limited: under fixed ratio tests (30% of EBITDA) for many, or group ratio/third-party options. Over-deductions will be denied and some can be carried forward. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/private-wealth-international-program/new-international-tax-measures-affecting-private-groups?utm_source=openai))
- The **arm’s length debt test** has been removed for general class investors – so **related party debt** must comply with stricter rules. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/private-wealth-international-program/new-international-tax-measures-affecting-private-groups?utm_source=openai))
## Practical Structuring & Setup Advice
1. **Assess current debt financing arrangements**, particularly with related parties. Ensure that interest rates and amounts would satisfy the new tests (fixed ratio, group ratio, etc.), especially if transferring or borrowing across jurisdictions.
2. **Forecast effective tax rate** across jurisdictions. Under Pillar Two, if tax rates in other jurisdictions are low, a top-up tax may be levied in Australia.
3. **Revisit transfer pricing documentation**. Transactions involving intangible assets, royalties, and related-party interest are under greater scrutiny—ensure proper valuation and documentation.
4. **Consider restructuring entity setup** – whether branches, subsidiaries, or special purpose entities are ideal for your cross-border expansion, given the new rules.
## Case Example
**GlobalCo Pty Ltd**, an Australian private group with overseas subsidiaries pays low taxes in one jurisdiction (say 5%). Under Pillar Two’s UTPR, top-up tax could be applied in Australia so that overall effective rate reaches 15%. Also, if GlobalCo has excessive related party debt, under new thin capitalisation, much of that interest could be denied. Restructuring intercompany loans to adhere to one of the new tests could preserve deductions.
## Timeline & Status
- Thin capitalisation and the associated **Debt Deduction Creation Rules** apply from income years starting 1 July 2023 and 1 July 2024 depending on the measure. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/private-wealth-international-program/new-international-tax-measures-affecting-private-groups?utm_source=openai))
- Pillar Two legislation is already law. IIR effective from 1 January 2024; UTPR from 1 January 2025. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai))
## Recommended Steps for Setup
- If planning foreign investment, plan structure with future compliance in mind—use group ratio or third-party tests rather than risk disallowed deductions.
- Use tax modelling tools or external advisers to estimate impacts under Pillar Two top-up taxes.
- Maintain detailed documentation for auditors—transfer pricing, debt terms, financial statements across group.
- Look into entities with tax treaty protections or withholding regimes – ensure withholding tax is correctly applied and not undervalued or mischaracterised (!).
With these changes, setting up your entity with care is more important than ever in Australia. Private groups and international operators need robust planning around debt, location, and operations to minimise exposure to new rules under thin capitalisation and global minimum tax.!