Pillar Two: don’t overlook your smaller entities

In the race to secure safe harbour easements under Pillar Two, many groups focus on high-value jurisdictions and core entities. But even non-material subsidiaries can carry tax risks that undermine group-wide compliance. Here’s why they matter and what you need to do now.

Why small doesn’t mean safe

Under the GloBE rules, groups may assume that entities in low-revenue, low-profit jurisdictions are too small to affect the top-up tax calculation. But that assumption can break safe harbour eligibility or trigger unanticipated compliance obligations.

Jordan Gill (Alvarez & Marsal) explained in a recent Tolley webinar:

“In many of the less tax-sophisticated jurisdictions, basic data is hard to extract, and local teams don’t understand the global compliance ask. That’s where the risk lies.”

Whether due to missing data, ineligible reports, or lack of substance evidence, a single overlooked subsidiary can force full GloBE calculations across that jurisdiction.

The key risks posed by smaller entities

• Ineligible or incomplete CbCR data
  If a subsidiary’s jurisdiction does not meet the qualified report standards, the entire jurisdiction could lose safe harbour eligibility.
• Substance test failures
  The transitional safe harbour includes a substance-based test. Small entities with low payroll or fixed assets may fall short, even if tax is paid locally.
• Misclassified or stale entity records
  Incorrect treatment of holding companies, dormant entities, or legacy JVs can skew group-level exposure.
• Data integrity gaps
  In many cases, local teams have never been involved in group tax compliance and lack structured reporting tools.

Ross Robertson (BDO LLP) added:

“I’ve seen cases where one overlooked or under-prepared subsidiary ends up disqualifying an entire jurisdiction from safe harbour reliance. The cost isn’t just tax it’s time, audit exposure, and process failure.”

Three smart steps to get ahead

1. Reassess your entity materiality thresholds
   Review all jurisdictions where entities fall below traditional financial materiality levels but may still matter under GloBE tests.
2. Implement tax reporting packs for all subsidiaries
   Distribute standardised data request templates with instructions tailored for smaller, less-resourced teams.
3. Audit substance positions across jurisdictions
   Map payroll, tangible assets and local decision-making authority to confirm safe harbour eligibility under the substance-based test.

Small subsidiaries, big compliance implications

Many groups still exclude their smallest subsidiaries from core tax tech rollouts and reporting infrastructure. But under Pillar Two, these entities carry operational and reputational risk well beyond their size.

To protect safe harbours and avoid last-minute scramble, tax teams must bring even the smallest jurisdictions into the Pillar Two governance framework.

Explore how Tolley+ helps cover the full group footprint.

Watch the full webinar here