What is the Pillar Two minimum tax, and how does it affect PE structures?
Pillar Two is an OECD initiative for a global minimum tax of 15% effective rate on multinational groups with consolidated revenue above the Pillar Two threshold (roughly $750m). It is effective in the EU since 2024.
aggressive tax structures through low-tax holdings have become less attractive. If a holding has an effective rate of 1.5% (the classic PEC setup), the top-up tax applies — the group must pay the difference up to 15%. For sponsors with group revenue above the threshold, it hits every deal.
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| Criterion | Threshold |
|---|---|
| Revenue threshold | above the Pillar Two threshold (~$750m consolidated) |
| Application to PE funds | yes, if the group threshold is met |
| Application to portfolio companies | only if the portfolio company itself is above the threshold |
an effective-tax-rate test (actual tax / GloBE income); a 15% top-up threshold; top-up = (15% − actual ETR) × excess profit; a substance-based carve-out (5% of payroll + 5% of tangible assets stays exempt).
| Item | Pre-Pillar Two | Post-Pillar Two |
|---|---|---|
| Holding ETR | ~1.5% | unchanged |
| Top-up tax | 0 | (15% − 1.5%) × holding profit = 13.5% |
| Effective total tax | 1.5% | 15% |
sponsor fund structures are often above the threshold and fall under Pillar Two. In mid-market deals it's often misunderstood: the portfolio company is below the threshold, but the sponsor is above it — it still applies.
Question: "How has Pillar Two changed LBO structures?"
Answer: "For large sponsors above the revenue threshold, Pillar Two broke the aggressive tax structures. The ETR on a low-tax holding plus participation exemption goes from ~1.5% to 15% via the top-up. In mid-market buyouts with portfolio revenue below the threshold it doesn't apply directly — but most sponsor houses are themselves large enough that it still bites."