Brussels is working to overcome resistance from three EU member states that oppose last week’s international agreement to rewrite corporate tax rules, with Hungary and Estonia arguing the proposal may even break EU law.

The EU is likely to need unanimous backing by member states before it can adopt the proposal to rewrite global corporate tax rules agreed by the OECD last week. But Ireland, Hungary and Estonia have so far refused to sign up to the global deal, setting up an internal EU clash with larger member countries.

The holdouts’ main but not sole point of contention revolves around the OECD’s proposed 15 per cent minimum tax rate.

Ireland has said it is “committed to the process” and wants to find an outcome that Dublin can support but it has expressed reservations about the proposal of a global minimum effective tax rate of at least 15 per cent. Hungary has also said the minimum rate would “hamper economic growth”.

In addition, Hungary and Estonia have argued that the current proposal violates EU law as it requires countries where large companies are based to apply that minimum tax rate on subsidiaries in lower tax jurisdictions.

They have argued the minimum rate rule would contravene a 2006 ruling by the European Court of Justice that involved the confectionery company Cadbury Schweppes.

The ruling said basing subsidiaries of multinationals in lower tax regimes does not constitute tax avoidance.

“The ECJ ruling on Cadbury Schweppes shows quite clearly that these kinds of rules should not exist according to the current legal regime,” said Helen Pahapill, Estonia’s deputy secretary-general for tax affairs.

The opposition within the EU sets up a showdown between smaller and larger member states — all of which need to agree for the OECD proposal to become EU law.

The OECD agreement is made up of two main elements: a minimum effective tax rate of 15 per cent for multinationals, known as pillar 2; and pillar 1, which would redistribute profits made by the largest 100 companies to domiciles where they make their sales.

“Smaller EU countries have raised questions about the legality of pillar 2 under EU law,” Pahapill added.

The EU is seeking to win over the holdouts in the coming months, ahead of an October target date for an OECD deal.

Daniel Gutmann, a partner at law firm CMS Lefebvre, said Brussels would need to propose its regulation in a way that was compatible with EU primary law on the freedom of establishment for businesses.

“If there are restrictions to this principle, the questions the commission will have to answer is whether it is justified,” he said.

Nevertheless, officials close to the negotiation said the design of the global minimum tax had been discussed with the European Commission’s legal department and they were confident it was compatible with EU law.

Poland had also expressed reservations over the minimum tax proposal, arguing it would undermine economic growth. But Warsaw last week came around to supporting the OECD agreement.

Tadeusz Koscinski, Poland’s finance minister, told the Financial Times that his country had decided to back the deal after the inclusion of a carve-out for substantial business activity, which had been absent earlier in negotiations.

“We’ve got to have instruments [to incentivise business to locate in Poland] and one of those is our domestic tax regime,” he said.

“I’m not interested in companies from France or Germany coming into Poland to sell back into France and Germany and transferring the profits to Poland,” Koscinski added. “But I am for them coming to Poland to help us build our innovation capabilities and to sell into the local and third markets. That has to be accounted for in a minimum global tax.”

While that obstacle has now been overcome, at least in Poland’s case, another complication is a planned European levy on digital services.

Opposed by Washington, as it is largely aimed at big US technology companies, Brussels is anyway expected to publish its proposal later this month.

EU leaders mandated the commission last July to draw up the levy, part of which would be used to repay borrowings amassed under its €800bn Next Generation EU recovery plan.

The European Parliament is particularly keen to see the introduction of new sources of revenue allocated to the commission, such as the digital levy.

The EU’s previous attempt at a tech tax foundered in 2019, but the idea was revived as the Trump administration threw up obstructions to an international process.

The commission says the new levy would apply to hundreds of companies, most of them European, and that it would complement the global tax deal, rather than clashing with it.

But the EU faces pressure from the US to delay the idea, given the global corporate tax agreement is meant to supersede national digital taxes. Washington said in a recent paper sent to EU diplomats that proposing the levy now risks “entirely derailing” the tax negotiations, given the talk’s sensitive juncture.

Pascal Saint-Amans, head of tax administration at the OECD, said: “There is a dynamic to the talks and we are hopeful that all countries will join the agreement eventually.”

Additional reporting by Laura Noonan and Marton Dunai