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Location of a Constituent Entity

Applies
FY2024 onwards
Reviewed
Rule
P2-LOC-2024.1
By

Where is a Constituent Entity located for Pillar Two?

Where it is tax resident by management, creation or similar criteria, otherwise where it was created. Dual residents follow the treaty, then tie-breakers.

Per GloBE Model Rules (Pillar Two), December 2021, Article 10.3, Location of an Entity and a Permanent Establishment

An Entity that is not a Flow-through Entity is located where it is tax resident by place of management, creation or similar criteria, and otherwise where it was created. A Flow-through Entity is located where it was created if it is the Ultimate Parent Entity or must apply an IIR, and is otherwise stateless. A Permanent Establishment is located where it is treated as one and taxed under a Tax Treaty, where it is subject to net basis taxation on its business presence, or where it is situated, and is stateless if not taxed anywhere. An Entity resident in two jurisdictions is located where a Tax Treaty deems it resident; failing that, where it paid the greater Covered Taxes (leaving out CFC taxes); then where its Substance-based Income Exclusion is greater; and otherwise it is stateless, unless it is the Ultimate Parent Entity, which is located where it was created. An Entity that changed location during the Fiscal Year is located where it was at the start of it.

The location puts an entity's income and taxes into a jurisdiction's Effective Tax Rate; a stateless entity falls outside every jurisdiction's blending.

The order the tests run in

A move during the year overrides everything

An Entity that changed its location during the Fiscal Year is located where it was at the beginning of it.

An Entity that is not a Flow-through Entity

  • Tax resident by management, creation or similar criteria: located there
  • Otherwise: where it was created

What counts as tax residence

  • Residence under national or federal law — being treated as resident only by a state or local tax does not count
  • Place of management, place of creation (incorporation, organisation) or similar criteria such as domicile or registration
  • An election to be treated as resident, on its own, is not enough
  • The entity need not be a company: a partnership that is tax resident is located there
  • A company created where there is no corporate income tax is resident nowhere and is located where it was created
  • A jurisdiction is a State, or a non-State jurisdiction with fiscal autonomy, as for Country-by-Country Reporting

A Flow-through Entity

  • The UPE, or required to apply an IIR: where it was created
  • Any other: stateless

A Permanent Establishment

  • Treated as one and taxed under a Tax Treaty: that jurisdiction
  • Net basis taxation on its business presence: that jurisdiction
  • Not taxed, situated where it carries on activity: where situated
  • Not taxed anywhere: stateless

An Entity resident in two jurisdictions

  • A Tax Treaty that deems it resident in one decides — unless the competent authorities must agree and have not, or the Treaty gives no relief for dual residence
  • Then the jurisdiction where it paid the greater Covered Taxes, leaving out Controlled Foreign Company taxes
  • If those are the same or nil, the jurisdiction with the greater Substance-based Income Exclusion on an entity basis
  • If those are the same or nil, stateless — unless it is the UPE, which is located where it was created

How the tie-breakers are applied

  • A treaty decides whatever kind of tie-breaker it uses — place of effective management, or agreement between the competent authorities. Where no agreement has been reached, or the treaty denies the entity residence in both, the case goes on as if there were no treaty
  • The Covered Taxes compared are those paid or due in each of the two jurisdictions for the Fiscal Year, from the returns: foreign and withholding taxes are left out even if credited, and so are Controlled Foreign Company taxes
  • Where the tax year and the Fiscal Year differ, the taxes are time-apportioned: 120 for one tax year and 60 for the next, with the Fiscal Year straddling them equally, gives 90
  • The Substance-based Income Exclusion is computed for the entity alone for this purpose
  • The test is made afresh each Fiscal Year, so an entity's location can change; a competent authority agreement with retrospective effect can require earlier years to be recalculated
  • With more than two jurisdictions, the treaties are applied first and then the remaining tests

A dual-located Parent Entity

One not subject to a Qualified IIR where it is located may be required to apply the other jurisdiction's Qualified IIR, unless a Tax Treaty restricts it.

A move takes effect the following year

An entity that changes location during a Fiscal Year is located in the jurisdiction it left for that whole year, and in the jurisdiction it arrived in from the next.

Order of testing

  1. 1

    A change of location during the Fiscal Year

    Asked first; it overrides the rest.

  2. 2

    Where a Flow-through Entity is located

    Article 10.3.2.

  3. 3

    Where a Permanent Establishment is located

    Article 10.3.3, by limb of the definition.

  4. 4

    Where an Entity is located

    Article 10.3.1.

  5. 5

    A dual-located Entity: the Tax Treaty

    Article 10.3.4(a).

  6. 6

    A dual-located Entity: the greater Covered Taxes

    Article 10.3.4(b)(i).

  7. 7

    A dual-located Entity: the greater Substance-based Income Exclusion

    Article 10.3.4(b)(ii).

  8. 8

    A dual-located Entity: the last resort

    Article 10.3.4(b)(iii): stateless, or created-in for a UPE.

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.

Resident in one jurisdiction

A company tax resident in one jurisdiction by place of management.

Computed

It is located in the jurisdiction where it is tax resident as computed: Article 10.3.1(a) so provides where residence rests on place of management, place of creation or similar criteria. Based on what you supplied.

Decided by the where an entity is located

A company in a jurisdiction with no corporate income tax

A company incorporated in a jurisdiction that imposes no corporate income tax, and so has no rules that make anyone tax resident. It is tax resident nowhere, and is located where it was created.

Computed

It is located in the jurisdiction where it was created as computed: it is not tax resident anywhere on the basis of management, creation or similar criteria, so Article 10.3.1(b) applies. Based on what you supplied.

Decided by the where an entity is located

Resident in two, no treaty

A dual-resident company with no Tax Treaty between the jurisdictions. It paid EUR 900,000 of Covered Taxes in the first and EUR 100,000 in the second.

Computed

It is located in the first jurisdiction as computed: no Tax Treaty applies, so Article 10.3.4(b) applies, and it paid the greater Covered Taxes there — EUR 900,000 against EUR 100,000. A dual-located Parent Entity that is not subject to a Qualified IIR where it is located may be required to apply the other jurisdiction's Qualified IIR, unless a Tax Treaty restricts it (Article 10.3.5). Based on what you supplied.

Workings

Covered Taxes paid in the first jurisdictionArticle 10.3.4(b)(i) — as supplied, without CFC taxes
EUR 900,000
Covered Taxes paid in the second jurisdictionArticle 10.3.4(b)(i) — as supplied, without CFC taxes
EUR 100,000

Decided by the a dual-located entity: the greater covered taxes

A tie all the way down

A dual-resident company, no treaty, equal Covered Taxes of nil and equal SBIE of nil, that is not the UPE: stateless.

Computed

It is a Stateless Constituent Entity as computed: no Tax Treaty applies, so Article 10.3.4(b) applies, and both the Covered Taxes and the Substance-based Income Exclusion are the same or nil, and it is not the Ultimate Parent Entity (Article 10.3.4(b)(iii)). Based on what you supplied.

Workings

Covered Taxes paid in the first jurisdictionArticle 10.3.4(b)(i) — as supplied, without CFC taxes
EUR 0
Covered Taxes paid in the second jurisdictionArticle 10.3.4(b)(i) — as supplied, without CFC taxes
EUR 0
Substance-based Income Exclusion in the first jurisdictionArticle 10.3.4(b)(ii) — as supplied
EUR 0
Substance-based Income Exclusion in the second jurisdictionArticle 10.3.4(b)(ii) — as supplied
EUR 0

Decided by the a dual-located entity: the last resort

A partnership that is taxed as a company

A partnership that its home jurisdiction taxes as a resident entity. It is not a Flow-through Entity, and is located where it is tax resident like any company.

Computed

It is located in the jurisdiction where it is tax resident as computed: Article 10.3.1(a) so provides where residence rests on place of management, place of creation or similar criteria. Based on what you supplied.

Decided by the where an entity is located

A treaty tie-breaker decides

A company incorporated in one jurisdiction and managed from another, resident in both. The Tax Treaty between them deems it resident where it is effectively managed — the second.

Computed

It is located in the second jurisdiction as computed: Article 10.3.4(a)(i) locates a dual-located Entity where the Tax Treaty deems it resident. A dual-located Parent Entity that is not subject to a Qualified IIR where it is located may be required to apply the other jurisdiction's Qualified IIR, unless a Tax Treaty restricts it (Article 10.3.5). Based on what you supplied.

Decided by the a dual-located entity: the tax treaty

A Flow-through Entity

A partnership that is neither the UPE nor required to apply an IIR.

Computed

It is treated as a stateless Entity as computed: Article 10.3.2(b) treats a Flow-through Entity as stateless unless it is the Ultimate Parent Entity or required to apply an IIR. Based on what you supplied.

Decided by the where a flow-through entity is located

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:

  • Are you asking about an Entity that is not a Flow-through Entity, a Flow-through Entity, or a 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