Pillar Two Tax and IP: What Global Groups Need to Review

Pillar Two tax changes the way international groups should think about intellectual property, especially where valuable IP sits in a low-tax or zero-tax jurisdiction. The old question was often whether a specific UK anti-avoidance rule, such as ORIP, applied. The wider question now is whether the group’s IP profit, people functions, tax rate and transfer pricing evidence still make commercial sense in a 15% global minimum tax environment.

This article explains the practical IP angle. It is not a full technical guide to every Pillar Two rule. Instead, it focuses on what boards, CFOs and tax teams should review when brands, software, platforms, algorithms, patents or know-how create value across borders.

Why Pillar Two tax matters for IP structures

The core issue is profit location. IP can carry a large share of group value, even where the customer contract is signed by a local sales company. A group may earn revenue from subscriptions, consumer goods, licensing, apps or services, but the real commercial value may sit in the brand, platform, data, code base or product design behind those sales.

The tax issue is no longer only about legal ownership. A company can legally own IP in one jurisdiction, but that does not automatically mean it should keep all the profit linked to that IP. Tax authorities will usually look at the people who develop, enhance, maintain, protect and exploit the intangible asset, as well as the capital, risk control and decision-making behind it.

Pillar Two tax adds a rate overlay to that existing analysis. For large multinational groups within scope, low-taxed profits may attract top-up tax so that the effective tax rate reaches the minimum level under the rules. According to GOV.UK’s guidance on the UK undertaxed profits rule, the UK UTPR applies for accounting periods beginning on or after 31 December 2024.

For IP-rich groups, this means the board should not ask only whether the old structure still works technically. It should ask whether the structure still works after top-up tax, transfer pricing adjustments, permanent establishment risk and governance evidence are considered together.

How Pillar Two tax changes offshore IP planning

The commercial benefit of a low headline tax rate may be reduced. If an IP holding company is in a jurisdiction with a very low effective tax rate, the group may not keep the full benefit once Pillar Two tax applies. The top-up tax may arise locally, at parent level, or through a backstop rule such as the UTPR, depending on the group structure and the relevant domestic implementation.

The UK ORIP repeal does not remove IP scrutiny. GOV.UK’s note on the repeal of ORIP confirms that the rules are repealed for income arising on or after 31 December 2024, alongside the introduction of Pillar Two’s UTPR in the UK. That timing is significant. The policy concern has shifted from a narrow offshore receipts rule to a broader minimum tax and evidence framework.

The practical question is whether the IP hub still has a purpose. A low-tax IP company may still make sense where it has real substance, clear decision-making, qualified people, genuine risk control and a credible role in the business model. It becomes harder to defend where the IP hub mainly holds contracts while the strategic work is performed elsewhere.

For groups with UK and UAE operations, WellTax can help assess how this applies in practice, particularly where IP ownership, transfer pricing, UAE tax, UK tax and international tax analysis overlap.

Where IP transfer pricing still matters

Pillar Two tax does not replace transfer pricing. It adds another layer. Transfer pricing still decides how much profit should be allocated to each connected party before the effective tax rate is tested. If the profit split is not defensible, a group may face local tax adjustments before it even reaches the Pillar Two calculation.

IP transfer pricing starts with the actual transaction. One company may license trademarks, provide software rights, fund development, sell patents, charge a royalty, share R&D costs or provide strategic support to another group company. Each transaction needs its own pricing logic and supporting evidence.

The method should match the economics. A royalty can be suitable where one entity owns and controls valuable IP that another entity uses. A cost plus return may fit routine development services. A profit split may be more credible where several entities make unique and valuable contributions to the same intangible asset.

Many problems arise when the method is chosen before the facts are understood. A royalty model can look simple, but it may fail if the company paying the royalty is also making key product, brand or market decisions. A routine development return may also be too low where the development team controls the roadmap and takes real technical risk.

DEMPE, substance and evidence after Pillar Two tax

DEMPE remains the backbone of the IP story. DEMPE means development, enhancement, maintenance, protection and exploitation. It helps identify where the value of intellectual property is really created and managed. A group that cannot explain DEMPE clearly may struggle with both transfer pricing and Pillar Two tax governance.

Substance should match the profit. If a company earns material IP profit, the evidence should show who makes the relevant decisions, who controls risk, who funds development, who protects the IP legally and commercially, and who exploits the IP in customer markets. Board minutes, employment records, product roadmaps, budgets and intercompany agreements should tell the same story.

Documentation should be practical rather than excessive. A useful IP file does not need to be a long report in every case. It should be coherent. The reader should be able to follow the route from legal ownership to people functions, from people functions to profit allocation, and from profit allocation to the Pillar Two tax position.

Where the IP story depends heavily on people functions, WellTax’s article on DEMPE and IP explains why legal ownership and value creation need to be assessed together for UK tax purposes.

Common IP risk areas for international groups

Legacy offshore IP is the first risk area. Many groups still have IP in historic holding companies that were created before the current international tax environment. If the holding company has thin substance and a low effective tax rate, it may become a focus area for top-up tax analysis, transfer pricing review and, in some cases, restructuring.

Split IP ownership is the second risk area. A group may hold brand IP in one country, software IP in another country and customer data or platform strategy elsewhere. That can be commercially valid, but only if the facts support the split. If one leadership team is making all the main decisions, the pricing model should not pretend that each IP owner acts independently.

Fast-growing digital models are the third risk area. Apps, marketplaces, SaaS platforms, content businesses and data-led groups often change quickly. The IP map prepared three years ago may no longer reflect the current user base, product team, engineering function or marketing strategy.

The table below shows how IP arrangements can connect to the Pillar Two tax review.

IP arrangement	Why it matters	Evidence to check
Brand or trademark royalty	A royalty can move profit from operating markets to the IP owner, which affects the effective tax profile.	Licence agreement, brand strategy records, marketing control, royalty benchmark and sales data.
Software or platform licence	Platform IP can produce high residual profit and may be difficult to support if development sits elsewhere.	Product roadmap, developer locations, risk approvals, source code governance and pricing method.
Cost sharing or R&D recharge	Cost allocation affects where IP value is created and which entity should earn future returns.	Budget approvals, cost contribution terms, participant benefits and development decision records.
IP migration or buy-in	A transfer of IP may change future profit allocation and create valuation questions.	Valuation report, board approvals, forecasts, transfer terms and post-transfer functions.
Central IP holding company	Low-taxed residual profit may create top-up tax exposure where substance is weak.	People map, board minutes, local employees, risk control and effective tax rate model.

What boards should review now

Start with the IP map. Boards should know which entities own the main IP assets, which entities use them, and where the key people sit. This should include brands, software, algorithms, patents, content, data assets, know-how and franchise rights where relevant.

Then test the numbers. The group should identify which jurisdictions earn IP-linked profit, what effective tax rate applies there, and whether any top-up tax could arise. For groups with UAE entities, WellTax’s article on the UAE Domestic Minimum Top-Up Tax may be useful where the UAE forms part of the group’s wider minimum tax profile.

Finally, check the evidence trail. The best structure can still create risk if the documents do not match the facts. Intercompany agreements, transfer pricing files, board minutes and management accounts should support the same commercial story.

A practical review can usually be built around five questions. Which IP matters most to the group’s profit? Who actually controls and develops that IP? Which entity earns the income and why? What is the effective tax rate in that jurisdiction? What would a tax authority, auditor or buyer see if they reviewed the file?

How WellTax can support a practical review

A useful review should be focused. The aim is not to create paperwork for its own sake. The aim is to identify whether the IP structure still works after Pillar Two tax, transfer pricing, permanent establishment and accounting evidence are considered together.

The work should connect tax and business reality. For many groups, the right starting point is a short IP and Pillar Two pack. This can include an IP map, DEMPE summary, controlled transaction analysis, royalty or profit allocation review, effective tax rate overview and an evidence checklist.

The output should help decisions. A board needs clear options, not only technical commentary. Those options may include keeping the structure with better evidence, adjusting pricing, increasing substance, simplifying ownership or considering an IP migration where the commercial case supports it.

WellTax supports UK and UAE tax and accounting matters, together with international tax advice. For IP-rich groups, our work can help connect the legal structure, the people evidence and the tax position so the group has a clearer basis for action.

Pillar Two tax does not make IP planning irrelevant. It makes weak IP planning more visible. Groups that hold valuable intellectual property across borders should treat the new rules as a reason to revisit the connection between legal ownership, DEMPE functions, profit allocation and effective tax rates.

The best response is not panic. It is a clear, practical review of the IP assets that drive profit, the people who create and manage those assets, the countries that tax the profit, and the documents that support the position.

Written by Michele Ammirati, Managing Partner at WellTax and UK Chartered Accountant