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Income allocation for flow-through entities

Applies
FY2024 onwards
Reviewed
Rule
P2-FTAL-2024.1
By

How is a flow-through entity's income allocated under Pillar Two?

Outside owners' share comes off first, then income goes to any PE and to group owners, or stays with a UPE or reverse hybrid entity.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.5, Allocation of Income or Loss from a Flow-through Entity

The Financial Accounting Net Income or Loss of a Constituent Entity that is a Flow-through Entity is first reduced by the amount allocable to its owners that are not Group Entities and that hold their Ownership Interest directly or through a Tax Transparent Structure. It is then allocated: to a Permanent Establishment through which the business of the Entity is wholly or partly carried out, in accordance with Article 3.4; in the case of a Tax Transparent Entity that is not the Ultimate Parent Entity, the remainder to its Constituent Entity-owners in accordance with their Ownership Interests; and in the case of a Tax Transparent Entity that is the Ultimate Parent Entity, or a Reverse Hybrid Entity, the remainder to the Entity itself. These rules are applied separately with respect to each Ownership Interest, and the Flow-through Entity's own figure is reduced by the amount allocated to another Constituent Entity.

Income ends up in the same place as the tax on it. A stateless Tax Transparent Entity is left with no income of its own.

An order of allocation that is not the order of the paragraphs

The order

  • First — remove what is allocable to non-Group owners (3.5.3)
  • Then — to a Permanent Establishment, the Group's share of what is attributable to it (3.5.1(a))
  • Then — the remainder to Constituent Entity-owners, for a Tax Transparent Entity that is not the Ultimate Parent Entity (3.5.1(b))
  • Or — the remainder to the Entity itself, for an Ultimate Parent Entity or a Reverse Hybrid Entity (3.5.1(c))
  • Last — the Entity's own figure is reduced by what went to other Constituent Entities (3.5.5)

Tax Transparent or Reverse Hybrid

A Flow-through Entity is fiscally transparent where it was created. It is a Tax Transparent Entity for an owner whose jurisdiction also treats it as transparent, and a Reverse Hybrid Entity for an owner whose jurisdiction treats it as opaque. The same Entity can be both, for different owners: the rule is run once for each treatment.

No reduction through a Flow-through Ultimate Parent Entity

The non-Group reduction does not apply to an Ultimate Parent Entity that is a Flow-through Entity, nor to interests held through one; Article 7.1 deals with those owners instead.

Profit shares follow the interests

Ownership Interests are read with the rights to profit attached to them, including agreements that vary the split, even where an owner's own tax law does not recognise the agreement.

Taxes follow

Covered Taxes on income removed for non-Group owners are reduced in the same proportion.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    A Tax Transparent Entity that is not the Ultimate Parent Entity

    The remainder goes to its Constituent Entity-owners.

  3. 3

    A Tax Transparent Entity that is the Ultimate Parent Entity

    The remainder stays with it, and Article 7.1 applies.

  4. 4

    A Reverse Hybrid Entity

    The remainder stays with it.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A partnership with minority partners and a branch

The Commentary's B LP example, in millions: income of 200, 40% held outside the group, 100 attributable to a Permanent Establishment.

Computed

Of the Flow-through Entity's Financial Accounting Net Income or Loss of EUR 200,000,000, EUR 80,000,000 is removed as allocable to non-Group owners (Article 3.5.3), EUR 60,000,000 is allocated to the Permanent Establishment (Article 3.5.1(a)), and the residual of EUR 60,000,000 is allocated to its Constituent Entity-owners in accordance with their Ownership Interests as computed (Article 3.5.1(b)), because the Entity is a Tax Transparent Entity that is not the Ultimate Parent Entity. Nothing remains with the Flow-through Entity (Article 3.5.5). Covered Taxes on the income removed for non-Group owners are reduced in the same proportion. Based on the figures you supplied.

Workings

Financial Accounting Net Income or (Loss) of the Flow-through EntityArticle 3.5.1 — as supplied
EUR 200,000,000
Allocable to non-Group ownersArticle 3.5.3 — 40% of the figure, removed before anything is allocated
(EUR 80,000,000)
Allocated to the Permanent EstablishmentArticle 3.5.1(a) — the Group's share of the amount attributable under Article 3.4
(EUR 60,000,000)
Allocated to Constituent Entity-ownersArticle 3.5.1(b) — the residual, in accordance with their Ownership Interests
EUR 60,000,000
Remaining with the Flow-through EntityArticle 3.5.5 — after what is allocated to other Constituent Entities
EUR 0

Decided by the a tax transparent entity that is not the ultimate parent entity

The same entity as a reverse hybrid

Its owners' jurisdiction treats it as opaque: the remainder stays with the entity.

Computed

Of the Flow-through Entity's Financial Accounting Net Income or Loss of EUR 200,000,000, EUR 80,000,000 is removed as allocable to non-Group owners (Article 3.5.3), EUR 60,000,000 is allocated to the Permanent Establishment (Article 3.5.1(a)), and the residual of EUR 60,000,000 is allocated to the Entity itself as computed (Article 3.5.1(c)), because it is a Reverse Hybrid Entity, which its owners' tax law treats as opaque, so its income is not taxed in their hands. Based on the figures you supplied.

Workings

Financial Accounting Net Income or (Loss) of the Flow-through EntityArticle 3.5.1 — as supplied
EUR 200,000,000
Allocable to non-Group ownersArticle 3.5.3 — 40% of the figure, removed before anything is allocated
(EUR 80,000,000)
Allocated to the Permanent EstablishmentArticle 3.5.1(a) — the Group's share of the amount attributable under Article 3.4
(EUR 60,000,000)
Allocated to the Entity itselfArticle 3.5.1(c) — the residual stays with the Entity
EUR 60,000,000
Remaining with the Flow-through EntityArticle 3.5.5 — after what is allocated to other Constituent Entities
EUR 60,000,000

Decided by the a reverse hybrid entity

A wholly owned transparent holding entity

No outside owners and no Permanent Establishment: everything goes to the owners.

Computed

Of the Flow-through Entity's Financial Accounting Net Income or Loss of EUR 45,000,000, EUR 0 is removed as allocable to non-Group owners (Article 3.5.3), EUR 0 is allocated to the Permanent Establishment (Article 3.5.1(a)), and the residual of EUR 45,000,000 is allocated to its Constituent Entity-owners in accordance with their Ownership Interests as computed (Article 3.5.1(b)), because the Entity is a Tax Transparent Entity that is not the Ultimate Parent Entity. Nothing remains with the Flow-through Entity (Article 3.5.5). Covered Taxes on the income removed for non-Group owners are reduced in the same proportion. Based on the figures you supplied.

Workings

Financial Accounting Net Income or (Loss) of the Flow-through EntityArticle 3.5.1 — as supplied
EUR 45,000,000
Allocable to non-Group ownersArticle 3.5.3 — 0% of the figure, removed before anything is allocated
EUR 0
Allocated to the Permanent EstablishmentArticle 3.5.1(a) — the Group's share of the amount attributable under Article 3.4
EUR 0
Allocated to Constituent Entity-ownersArticle 3.5.1(b) — the residual, in accordance with their Ownership Interests
EUR 45,000,000
Remaining with the Flow-through EntityArticle 3.5.5 — after what is allocated to other Constituent Entities
EUR 0

Decided by the a tax transparent entity that is not the ultimate parent entity

A transparent Ultimate Parent Entity

A partnership at the top of the group: no non-Group reduction, and Article 7.1 applies to what it keeps.

Computed

Of the Flow-through Entity's Financial Accounting Net Income or Loss of EUR 120,000,000, nothing is removed for non-Group owners (Article 3.5.4(a)), EUR 0 is allocated to the Permanent Establishment (Article 3.5.1(a)), and the residual of EUR 120,000,000 is allocated to the Entity itself as computed (Article 3.5.1(c)), because it is a Tax Transparent Entity that is the Ultimate Parent Entity, whose owners are not Constituent Entities; Article 7.1 then applies to its GloBE Income or Loss. Based on the figures you supplied.

Workings

Financial Accounting Net Income or (Loss) of the Flow-through EntityArticle 3.5.1 — as supplied
EUR 120,000,000
Allocable to non-Group ownersArticle 3.5.4(a) — no reduction for a Flow-through Entity that is the Ultimate Parent Entity
EUR 0
Allocated to the Permanent EstablishmentArticle 3.5.1(a) — the Group's share of the amount attributable under Article 3.4
EUR 0
Allocated to the Entity itselfArticle 3.5.1(c) — the residual stays with the Entity
EUR 120,000,000
Remaining with the Flow-through EntityArticle 3.5.5 — after what is allocated to other Constituent Entities
EUR 120,000,000

Decided by the a tax transparent entity that is the ultimate parent entity

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

3 inputs still need your determination:

  • With respect to these Ownership Interests, is the Flow-through Entity a Tax Transparent Entity that is not the Ultimate Parent Entity, a Tax Transparent Entity that is the Ultimate Parent Entity, or a Reverse Hybrid Entity?
  • What is the Financial Accounting Net Income or Loss of the Flow-through Entity for the Fiscal Year? Enter a loss as a negative.
  • How much of that is attributable under Article 3.4 to a Permanent Establishment through which the Entity's business is wholly or partly carried out? Give the whole amount, before any share of non-Group owners, and nil if there is no Permanent Establishment.

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader