Entity Setup
Entity Setup & Planning: How Global Minimum Tax under OECD Pillar Two is Reshaping Australian Tax Strategies
Australia’s implementation of the global minimum tax through Pillar Two is forcing entities to reevaluate where they locate, how they report, and how they structure financing, especially for multinationals with significant overseas activity.
By NomadicTax Research Team • 5-8 min read • March 16, 2026
## Overview of Pillar Two in Australia
Australia has introduced new global and domestic minimum tax rules under the OECD/G20 Pillar Two regime. These apply to multinational enterprise (MNE) groups affecting both foreign-controlled private groups and Australian-headquartered entities with overseas operations. The *Income Inclusion Rule (IIR)* applies from fiscal years starting **1 January 2024**, and the *Undertaxed Profits Rule (UTPR)* from **1 January 2025**. ([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))
New “thin capitalisation” rules and Debt Deduction Creation Rules (DDCR) also apply: they limit net debt deductions to **30% of EBITDA** unless alternative methods are elected. The DDCR deny deductions for certain related party loans funding asset acquisition or capital distributions. The rules all now *law*, applying from **1 July 2023** for thin cap and **1 July 2024** for DDCR. ([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))
## Impacts on Entity Setup and Structuring
### Tax residency & group structure
Entities must assess whether the parent or group companies are in scope of IIR/UTPR. Tax residency, ownership percentages, and country diversification matter.
### Financing and debt arrangements
Debt-financed acquisitions or operations via related parties will be limited. Entities must consider:
- Limiting interest deductibility under the 30% EBITDA cap
- Avoiding or restructuring intra-group loans that trigger DDCR penalties
- Using group ratio or fixed ratio tests if favorable
### Transfer pricing & intangible asset planning
Royalties, intellectual property licensing, and related payments must be carefully structured to ensure they are arm’s length and appropriately characterized. Australia’s guidance on intangible migration and royalty mischaracterization is front and center. ([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai))
## Example of restructuring
**GlobalSoft Pty Ltd.** is an Australian-headquartered tech firm with IP licensing revenues from the US & EU. Previously, revenue was channelled via low-tax foreign subsidiaries with royalty payments back to Australia, deducting royalty expense. Under the new DDCR, those royalty payments may be disallowed if viewed as mischaracterised or made through related-party financing. GlobalSoft must now:
- Ensure royalty licensing agreements are at fair market value
- Possibly centralize IP IP holding in Australia under stricter reporting and feed-in requirements
- Limit interest debt deductions under the 30% EBITDA cap unless using group ratio method
## Actionable insights
- Audit current debt levels & intercompany loans; model them under thin cap & DDCR constraints
- Consult on licensing agreements and where intangible assets are held
- Prepare for Global Intangible Low-taxed Income (GILTI)-like reporting obligations, exchange OFEI group returns (GIR) etc.
- Employ strong documentation, functional analysis, substance in foreign entities
## Compliance & implementation timeline
- **1 Jan 2024**: IIR begins for income years starting on or after this date.
- **1 Jan 2025**: UTPR rules apply.
- **1 July 2023–2025**: thin cap & DDCR rules apply depending on the test and entity’s classification.
- First lodgments and exchange of GIR due **30 June 2026** in many cases. ([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai))
By understanding where an entity stands now and restructuring appropriately, entities can avoid costly penalties, ensure compliance, and align international operations with Australia’s new global minimum tax systems.