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Investment Entities and the tax transparency election

Applies
FY2024 onwards
Reviewed
Rule
P2-IE-2024.1
By

How are Investment Entities taxed under Pillar Two?

On a stand-alone ETR, unless the entity is elected tax transparent or the owner elects the Taxable Distribution Method.

Per GloBE Model Rules (Pillar Two), December 2021, Articles 7.4 to 7.6

An Investment Entity is an Investment Fund or Real Estate Investment Vehicle; an Entity at least the published share owned by Investment Entities that operates exclusively or almost exclusively to hold assets or invest funds for them; or an Entity at least a lower published share owned by one whose income is substantially all Excluded Dividends or Excluded Equity Gain or Loss. One that is already a Tax Transparent Entity is dealt with under Article 3.5. Otherwise a Filing Constituent Entity may elect to treat it as a Tax Transparent Entity if its owner is taxed on a mark-to-market basis at the Minimum Rate or more; or the owner may elect the Taxable Distribution Method; and failing both its Effective Tax Rate and Top-up Tax are computed on a stand-alone basis on the MNE Group's Allocable Share of its GloBE Income, the Top-up Tax being the Top-up Tax Percentage times the excess over its Substance-based Income Exclusion.

A fund's low-taxed income is not blended with the rest of a jurisdiction, and outside investors are not charged on their share.

What applies, in order

The definition

  • An Investment Fund or Real Estate Investment Vehicle
  • A holding entity at least the published share owned by Investment Entities and holding assets or investing funds for them
  • A holding entity owned at least the lower share with substantially all income excluded
  • Both shares are 'at least'

1. Already transparent

A Tax Transparent Entity is outside Article 7.4; Article 3.5 allocates its income and taxes to its owners.

2. The Article 7.5 election

A Five-Year Election to treat it as a Tax Transparent Entity, available only if the owner is taxed on a mark-to-market or similar basis on the annual change in fair value of its interest at a rate that equals or exceeds the Minimum Rate.

3. The Article 7.6 method

An election of the owner, which must not itself be an Investment Entity and must reasonably be expected to be taxed on distributions at a rate that equals or exceeds the Minimum Rate. Distributions are taxed in the owner's hands and the entity's income is left out of ETR computations.

4. Article 7.4: a stand-alone ETR

  • ETR is Adjusted Covered Taxes over the MNE Group's Allocable Share of the entity's GloBE Income
  • Top-up Tax Percentage is the Minimum Rate less the ETR, if positive
  • Top-up Tax is that percentage times the excess of the Allocable Share over the Substance-based Income Exclusion, less any QDMTT paid
  • Several Investment Entities in one jurisdiction are combined

Order of testing

  1. 1

    The definition of an Investment Entity

    The kind, and for a holding entity the ownership and activities or income.

  2. 2

    Already a Tax Transparent Entity

    Article 7.4 does not apply.

  3. 3

    The tax transparency election

    Article 7.5.

  4. 4

    The Taxable Distribution Method

    Article 7.6.

  5. 5

    Article 7.4: a stand-alone ETR

    The computation.

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 stand-alone Top-up Tax

A fund with EUR 1,000 of the Group's share of GloBE Income, EUR 50 of Adjusted Covered Taxes and no Substance-based Income Exclusion: a 5% ETR, a 10% Top-up Tax Percentage and EUR 100 of Top-up Tax.

Computed

The Entity is an Investment Entity as computed: an Investment Fund or Real Estate Investment Vehicle. Article 7.4 applies: its Effective Tax Rate is 5% on the MNE Group's Allocable Share of EUR 1,000, calculated apart from the jurisdiction's other entities, against the Minimum Rate of 15%. The Top-up Tax is EUR 100: 10% of the EUR 1,000 by which the Allocable Share exceeds the Substance-based Income Exclusion. Several Investment Entities in one jurisdiction are combined — run the rule on their combined figures. Based on what you supplied.

Workings

MNE Group's Allocable Share of GloBE IncomeArticle 7.4.4 — as supplied
EUR 1,000
Adjusted Covered TaxesArticle 7.4.3 — as supplied
EUR 50
Effective Tax Rate of the Investment EntityArticle 7.4.2 — Adjusted Covered Taxes over the Allocable Share
5%
Minimum RateArticle 7.4.5 — published value
15%
Top-up Tax PercentageArticle 7.4.5 — the Minimum Rate less the ETR, if positive
10%
Substance-based Income ExclusionArticle 7.4.6 — as supplied
EUR 0
Allocable Share over the Substance-based Income ExclusionArticle 7.4.5 — not below nil
EUR 1,000
Top-up TaxArticle 7.4.5 — the percentage times the excess, less any QDMTT, not below nil
EUR 100

Decided by the article 7.4: a stand-alone etr

The tax transparency election

The election is made and the owner is taxed on a mark-to-market basis at the Minimum Rate or more.

Computed

The Entity is an Investment Entity as computed: an Investment Fund or Real Estate Investment Vehicle. The Article 7.5 election treats it as a Tax Transparent Entity: the owner is taxed on a mark-to-market basis at a rate that equals or exceeds the Minimum Rate. Its income and Covered Taxes flow through to the owner, and Article 7.4 is not needed. The election is a Five-Year Election. Based on what you supplied.

Decided by the tax transparency election

A holding entity just under the line

A holding entity 94% owned by Investment Entities with ordinary income.

Computed

The Entity is not an Investment Entity as computed: 94% of it is owned by Investment Entities, below 95%, and substantially all of its income is not excluded. Articles 7.4 to 7.6 do not apply to it. Based on what you supplied.

Decided by the definition of an investment 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

1 input still need your determination:

  • Is the Entity an Investment Fund or Real Estate Investment Vehicle, a holding entity owned by Investment Entities, an Insurance Investment Entity — or none of these?

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.

Thresholds

pillar_two.investment_entity_ownership_activities
95% · reviewed 2026-10-04 · source
pillar_two.investment_entity_ownership_income
85% · reviewed 2026-10-04 · source
pillar_two.minimum_rate
15% · reviewed 2026-10-04 · source

Threshold values are published separately from the rule and carried with a citation. Where none has been published for the period being computed, the rule reports that rather than applying a default.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader