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Hybrid entities

Applies
FY2024 onwards
Reviewed
Rule
P2-HYB-2024.1
By

How are hybrid entities treated under Pillar Two?

Tax the owner pays on a hybrid entity's income is allocated to the hybrid entity, with tax on passive income capped by the top-up tax percentage.

Per GloBE Model Rules (Pillar Two), December 2021, Article 10.2, Hybrid Entity

A Hybrid Entity is an Entity treated as a separate taxable person for income tax purposes where it is located that is fiscally transparent where its owner is located. The Covered Taxes in the financial accounts of a Constituent Entity-owner on income of the Hybrid Entity are allocated to the Hybrid Entity. For Covered Taxes in respect of Passive Income, the amount included in its Adjusted Covered Taxes is the lesser of the Covered Taxes allocated and the Top-up Tax Percentage for its jurisdiction, determined without regard to the owner's Covered Taxes on that Passive Income, multiplied by the Passive Income. Any of the owner's Covered Taxes on the Passive Income that remain are not allocated.

A hybrid entity that looks low-taxed in its own jurisdiction is credited with the owner's tax on its income, but only so far as it takes the passive income to the Minimum Rate.

What the result turns on

The mismatch

The entity is a taxpayer where it is located, and invisible to its owner's jurisdiction, which taxes the owner on the entity's income as its own.

A company in a no-tax jurisdiction can be one

An entity located where there is no corporate income tax is also a Hybrid Entity if its owner's jurisdiction treats it as transparent and it does not qualify for the deemed tax-transparent treatment — typically because it has a place of business where it was created. "Owner" includes an indirect owner, and the classification applies only for the owners that look through it.

Taxes pass down

The owner's Covered Taxes on the entity's income are allocated to the entity and counted in its jurisdiction's Effective Tax Rate.

The passive income cap

  • Applies to the owner's taxes on Passive Income includible under a fiscal transparency rule
  • The amount counted is the lesser of those taxes and the jurisdiction's Top-up Tax Percentage — before those taxes — times the Passive Income
  • A jurisdiction already at the Minimum Rate takes none of the passive taxes
  • What is not counted stays with the owner

Other income is not capped

Covered Taxes on income that is not Passive Income pass down in full.

Order of testing

  1. 1

    The Article 10.2 classification

    A hybrid, or one of the others.

  2. 2

    Allocation of Covered Taxes under Article 4.3

    The owner's taxes, with the Passive Income cap.

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.

Other income taxes pass down

The owner paid EUR 300 of Covered Taxes on the hybrid's non-passive income and none on passive income.

Computed

EUR 300 of the owner's Covered Taxes are allocated to the Hybrid Entity as computed. The Entity is a Hybrid Entity: a separate taxable person where it is located that is fiscally transparent where its owner is located (Article 10.2). Article 4.3.2(d) allocates to it the Covered Taxes in the financial accounts of a Constituent Entity-owner on its income. No Covered Taxes on Passive Income were supplied, so no cap applies. Based on the figures you supplied.

Workings

Owner's Covered Taxes on other incomeArticle 4.3.2(d) — as supplied; allocated in full
EUR 300
Owner's Covered Taxes on Passive IncomeArticle 4.3.2(d) — as supplied
EUR 0
Covered Taxes allocated to the Hybrid EntityArticle 4.3.2(d) and 4.3.3
EUR 300

Decided by the allocation of covered taxes under article 4.3

Passive income taxes are capped

The owner paid EUR 200 on EUR 1,000 of Passive Income; the jurisdiction's Top-up Tax Percentage before those taxes is 10%, so only EUR 100 is allocated.

Computed

EUR 100 of the owner's Covered Taxes are allocated to the Hybrid Entity as computed. The Entity is a Hybrid Entity: a separate taxable person where it is located that is fiscally transparent where its owner is located (Article 10.2). Article 4.3.2(d) allocates to it the Covered Taxes in the financial accounts of a Constituent Entity-owner on its income. Of EUR 200 on Passive Income, Article 4.3.3 limits the amount allocated to EUR 100 — the lesser of the taxes and 10% of the Passive Income — and EUR 100 stays with the owner. Based on the figures you supplied.

Workings

Owner's Covered Taxes on other incomeArticle 4.3.2(d) — as supplied; allocated in full
EUR 0
Owner's Covered Taxes on Passive IncomeArticle 4.3.2(d) — as supplied
EUR 200
Passive Income includibleArticle 4.3.3(b) — as supplied
EUR 1,000
Top-up Tax Percentage times the Passive IncomeArticle 4.3.3(b) — 10% of the Passive Income
EUR 100
Passive Income taxes allocatedArticle 4.3.3 — the lesser of the taxes and that product
EUR 100
Passive Income taxes not allocatedArticle 4.3.4 — these remain with the owner
(EUR 100)
Covered Taxes allocated to the Hybrid EntityArticle 4.3.2(d) and 4.3.3
EUR 100

Decided by the allocation of covered taxes under article 4.3

An operating company in a no-tax jurisdiction that its parent looks through

A subsidiary with offices and staff in a jurisdiction that has no corporate income tax, treated as transparent by its parent's jurisdiction, which taxes the parent on its profits. It has a place of business where it was created, so it is not deemed tax transparent: it is a Hybrid Entity, and the parent's EUR 300 of tax on its trading income is pushed down to it.

Computed

EUR 300 of the owner's Covered Taxes are allocated to the Hybrid Entity as computed. The Entity is a Hybrid Entity: a separate taxable person where it is located that is fiscally transparent where its owner is located (Article 10.2). Article 4.3.2(d) allocates to it the Covered Taxes in the financial accounts of a Constituent Entity-owner on its income. No Covered Taxes on Passive Income were supplied, so no cap applies. Based on the figures you supplied.

Workings

Owner's Covered Taxes on other incomeArticle 4.3.2(d) — as supplied; allocated in full
EUR 300
Owner's Covered Taxes on Passive IncomeArticle 4.3.2(d) — as supplied
EUR 0
Covered Taxes allocated to the Hybrid EntityArticle 4.3.2(d) and 4.3.3
EUR 300

Decided by the allocation of covered taxes under article 4.3

Not transparent to its owner

If its owner's jurisdiction does not treat it as transparent it is not a hybrid.

Computed

The Entity is not a Hybrid Entity as computed: it is neither a Flow-through Entity nor a Hybrid Entity. See the constituent-entities rule for what follows. Classification is "to the extent", so an Entity that is partly one and partly another must be split. Based on what you supplied.

Decided by the article 10.2 classification

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

1 input still need your determination:

  • Is the Entity fiscally transparent in the jurisdiction where it was created — does that jurisdiction treat its income, expenditure, profit or loss as derived or incurred by its direct owner in proportion to its interest?

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