Entity Setup
Structuring Your Business for Minimum Tax Compliance under Pillar Two in Australia
Australia’s implementation of the OECD’s Pillar Two rules introduces new obligations for multinationals. This article explains how to plan your entity structure now to avoid compliance pitfalls.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## What are the Pillar Two Rules in Australia?
Australia has adopted the OECD Global Anti-Base Erosion (GloBE) Model Rules alongside a **Domestic Minimum Tax (DMT)** framework. Primary legislation passed in December 2024 implements the legal basis for these rules. ([softwaredevelopers.ato.gov.au](https://softwaredevelopers.ato.gov.au/Pillar2_20250305?utm_source=openai)) Multinational enterprise (MNE) groups with annual covered revenue of at least EUR 750 million will be in scope. Australia’s Income Inclusion Rule (IIR) and DMT took effect 1 January 2024; the Undertaxed Profits Rule (UPR) starts 1 January 2025. ([softwaredevelopers.ato.gov.au](https://softwaredevelopers.ato.gov.au/Pillar2_20250305?utm_source=openai))
## Entity Setup and Planning Opportunities
To meet these obligations and operate efficiently:
- **Review your corporate group structure**: Identify which entities in Australia are part of the MNE group. Any Ultimate Parent Entity or Designated Filing Entity must file the GloBE Information Return (GIR) and related domestic forms. ([softwaredevelopers.ato.gov.au](https://softwaredevelopers.ato.gov.au/Pillar2_20250305?utm_source=openai))
- **Upgrade accounting and tax reporting systems**: Ensure your systems can capture financial information required for IIR, DMT, UPR. Many businesses are working with Digital Service Providers (DSPs) to build API or SFTP lodgment paths. ([softwaredevelopers.ato.gov.au](https://softwaredevelopers.ato.gov.au/Pillar2_20250305?utm_source=openai))
- **Plan for top-up tax exposures**: If effective tax rates in low-tax jurisdictions fall below the minimum, Australia’s rules impose top-up tax. Predict where shortfalls might occur. Transfer pricing policies and financing arrangements are often tested. ([ato.gov.au](https://www.ato.gov.au/about-ato/consultation/in-detail/stewardship-groups-key-messages/large-business-stewardship-group/large-business-stewardship-group-key-messages-5-march-2025?utm_source=openai))
- **Utilize transitional relief and soft-landing periods**: The ATO is putting in place softer penalty enforcement during transition periods (fiscal years beginning on or before 31 December 2026 but not including years ending after 30 June 2028) for those taking reasonable measures to comply. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/consultation-open-for-guidance-about-pillar-two?utm_source=openai))
## Compliance Risks and Examples
Here are some practical scenarios to be mindful of:
| Scenario | Risk | Mitigation |
|---|---|---|
| A foreign-headquartered company licenses software or IP offshore but requests minimal reporting | Exposure to UPR, mischaracterisation of royalties, or diverted profits tax concerns ([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai)) | Document value, substance of licensing, location of IP use and ownership; audit transfer pricing aspects. |
| Corporations not properly consolidating domestic forms | Non-lodgment infractions, potential penalties | Ensure consistent group boundaries; identify the Designated Filing Entity; align domestic forms with GIR filings. |
| Low value functions or data centers in Australia seeking relief | Understated Australian effective tax base; mistaken eligibility for low tax SAFE jurisdictions | Define functions, assets and risks accurately; avoid under-valuing local activities; get external advice. |
## Action Plan
1. Map existing entities and review financial statements for all in-scope group members.
2. Engage DSPs early to test lodgment paths for GIR and domestic forms via API portals.
3. Conduct internal tax rate modelling to forecast top-up exposure.
4. Review transfer pricing, IP licensing, royalty withholding processes.
5. Maintain robust documentation substantiating decisions in structuring, especially in relation to low-tax jurisdictions.
By implementing these steps now, entities can reduce compliance risk, lessen exposure to penalties later, and meet the demands of Australia’s increasingly stringent transparency and minimum tax rules.