Entity Setup
Entity Setup in Light of Pillar Two and ATAD Simplification Proposals
With forthcoming harmonisation of ATAD rules and clearer Pillar Two integration, setting up entities in the EU merits renewed strategic design to balance compliance, tax efficiency, and substance.
By NomadicTax Research Team • 5-8 min read • September 5, 2026
## What are ATAD and Pillar Two, and what’s changing?
- The **Anti-Tax Avoidance Directive** (ATAD) channels rules into Member States for controlled foreign companies (CFC), interest limitation, hybrid mismatches, exit taxation, etc. Pillar Two (GMT) imposes a global minimum tax of at least 15% to counter base erosion. ([taxation-customs.ec.europa.eu](https://taxation-customs.ec.europa.eu/news/european-commission-proposes-landmark-tax-simplification-package-streamline-compliance-and-boost-2026-06-24_en?utm_source=openai))
- The Tax Simplification Package’s **Omnibus Directive** proposes to harmonise certain ATAD elements (especially CFC interaction with GMT) and to simplify interest limitation thresholds. These changes aim to reduce fragmentation among member states. ([taxation-customs.ec.europa.eu](https://taxation-customs.ec.europa.eu/news/european-commission-proposes-landmark-tax-simplification-package-streamline-compliance-and-boost-2026-06-24_en?utm_source=openai))
## Designing entities under the proposed regime: Strategic considerations
- **Choose low-tax jurisdictions carefully**: Pillar Two’s Qualified Income Inclusion Rules (QIIR), Qualified Domestic Minimum Top-up Tax (QDMTT), and safe harbours reshape what qualifies as low or high tax. Entities in jurisdictions with incentives must align those incentives with substance to benefit. ([oecd.org](https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html?utm_source=openai))
- **Substance matters**: Having real operational substance, employees, premises, and business purpose will help defend CFC carve-outs and incentive regimes under Pillar Two’s substance-based safe harbours.
- **Interest financing strategies**: With proposed increases to ATAD de minimis thresholds and exclusion of third-party or market-based financing in some cases, structure debt financing accordingly; use equity or manage intra-group financing to optimize compliance. ([taxation-customs.ec.europa.eu](https://taxation-customs.ec.europa.eu/news/european-commission-proposes-landmark-tax-simplification-package-streamline-compliance-and-boost-2026-06-24_en?utm_source=openai))
- **Exit taxation and mergers**: Since the Omnibus proposes expanding tax-neutral regimes within the Tax Merger Directive, cross-border reorganisations may become more efficient, which impacts where you locate parent or holding entities. ([taxation-customs.ec.europa.eu](https://taxation-customs.ec.europa.eu/news/european-commission-proposes-landmark-tax-simplification-package-streamline-compliance-and-boost-2026-06-24_en?utm_source=openai))
## Example entity setups
- A tech group setting up a **subsidiary in a smaller EU state** with incentive regimes: Ensure the incentives satisfy Pillar Two’s substance-based safe harbour to avoid excess top-ups.
- A holding company doing **cross-border financing**: If withholding tax elimination occurs under the Omnibus, shift flows for interest, dividends, royalties through EU-wide holding structures to lower friction and tax drag.
## What founders and CFOs should do now
- Map existing entities to forecasted Pillar Two rules and proposed ATAD harmonisation
- Build or elevate substance: physical presence, staff, activity, decision-making powers
- Assess debt versus equity mix in financing
- Stay informed of transposition: once directives are adopted, member states will draft implementing laws—these will vary until harmonised
Entity setup in the EU is entering a period of regulatory realignment. Planning today with a solid understanding of the Omnibus and Pillar Two trajectory can yield long-term structural advantages.