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Income allocation between a main entity and its permanent establishment

Applies
FY2024 onwards
Reviewed
Rule
P2-PEAL-2024.1
By

How is income split between a head office and its PE?

A PE keeps the income attributable to it. A PE loss the head office deducts moves to the head office and comes back when the PE later earns income.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.4, Allocation of Income or Loss between a Main Entity and a Permanent Establishment

The Financial Accounting Net Income or Loss of a Constituent Entity that is a Permanent Establishment is the net income or loss reflected in its separate financial accounts, or the amount that would have been reflected in them on a standalone basis, adjusted to reflect only the income and expense attributable to it under the applicable Tax Treaty or domestic law. It is not taken into account in determining the GloBE Income or Loss of the Main Entity, except that a GloBE Loss of a Permanent Establishment is treated as an expense of the Main Entity to the extent that the loss is treated as an expense in the computation of the domestic taxable income of the Main Entity and is not set off against an item of income that is subject to tax under the laws of both jurisdictions. GloBE Income subsequently arising in the Permanent Establishment is treated as GloBE Income of the Main Entity up to the amount of the GloBE Loss previously so treated.

A Permanent Establishment is a separate Constituent Entity in its own jurisdiction. The loss rule keeps a worldwide-system head office from showing a tax reduction with no GloBE loss to explain it.

A separate entity, with one loss rule that crosses the border

The Permanent Establishment's own figure

  • 3.4.1 — its separate accounts, or what they would show on a standalone basis under the Ultimate Parent Entity's standard
  • 3.4.2 — limited to income and expense attributable to it under the Tax Treaty or local law, regardless of how much is taxed or deductible there
  • 3.4.3 — for a stateless Permanent Establishment, the income the Main Entity's jurisdiction exempts and the expenses it does not deduct
  • 3.4.4 — left out of the Main Entity's GloBE Income or Loss

Attribution, not taxation

If 100 of royalties is attributable to the Permanent Establishment and local law exempts half, its income is still 100. Timing follows the accounts, not the tax computation.

The loss that moves

To the extent the Main Entity's jurisdiction treats the loss as an expense in computing domestic taxable income. If it takes only 80% of the loss, 80% moves and 20% stays. A loss set off against income that both jurisdictions tax does not move.

And comes back

Later GloBE Income of the Permanent Establishment is the Main Entity's up to the loss previously moved — the full amount, even where the Main Entity's domestic loss carry-forward expired unused.

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

    The result of the Permanent Establishment

    A nil year moves nothing.

  3. 3

    The loss as an expense in the Main Entity's domestic taxable income

    The share deducted, less what is set off against dual-taxed income.

  4. 4

    Income after a loss treated as Main Entity expense

    Treated as the Main Entity's up to the balance of earlier losses.

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 branch loss in a worldwide system

A EUR 10 million loss, fully deducted by the head office.

Computed

EUR 10,000,000 of the Permanent Establishment's GloBE Loss of EUR 10,000,000 is treated as an expense of the Main Entity as computed (Article 3.4.5): 100% of the loss is treated as an expense in computing the Main Entity's domestic taxable income, less EUR 0 set off against income taxed in both jurisdictions. EUR 0 remains a GloBE Loss of the Permanent Establishment. Later GloBE Income of the Permanent Establishment is treated as the Main Entity's up to EUR 10,000,000. Based on the figures you supplied.

Workings

GloBE Loss of the Permanent EstablishmentArticles 3.4.1 to 3.4.3 — as supplied, shown as a positive amount
EUR 10,000,000
Share deducted by the Main EntityArticle 3.4.5 — treated as an expense in the Main Entity's domestic taxable income
100%
Loss deducted by the Main EntityThe loss multiplied by that share
EUR 10,000,000
Set off against income taxed in both jurisdictionsArticle 3.4.5 — not reallocated
EUR 0
Treated as an expense of the Main EntityArticle 3.4.5 — not below nil
EUR 10,000,000
GloBE Loss remaining with the Permanent EstablishmentThe rest of the loss
EUR 0
Balance carried forwardArticle 3.4.5 — later income of the Permanent Establishment is the Main Entity's up to this amount
EUR 10,000,000

Decided by the loss as an expense in the main entity's domestic taxable income

Only 80% taken by the head office

The Commentary's example: the Main Entity takes 80% of the loss.

Computed

EUR 8,000,000 of the Permanent Establishment's GloBE Loss of EUR 10,000,000 is treated as an expense of the Main Entity as computed (Article 3.4.5): 80% of the loss is treated as an expense in computing the Main Entity's domestic taxable income, less EUR 0 set off against income taxed in both jurisdictions. EUR 2,000,000 remains a GloBE Loss of the Permanent Establishment. Later GloBE Income of the Permanent Establishment is treated as the Main Entity's up to EUR 8,000,000. Based on the figures you supplied.

Workings

GloBE Loss of the Permanent EstablishmentArticles 3.4.1 to 3.4.3 — as supplied, shown as a positive amount
EUR 10,000,000
Share deducted by the Main EntityArticle 3.4.5 — treated as an expense in the Main Entity's domestic taxable income
80%
Loss deducted by the Main EntityThe loss multiplied by that share
EUR 8,000,000
Set off against income taxed in both jurisdictionsArticle 3.4.5 — not reallocated
EUR 0
Treated as an expense of the Main EntityArticle 3.4.5 — not below nil
EUR 8,000,000
GloBE Loss remaining with the Permanent EstablishmentThe rest of the loss
EUR 2,000,000
Balance carried forwardArticle 3.4.5 — later income of the Permanent Establishment is the Main Entity's up to this amount
EUR 8,000,000

Decided by the loss as an expense in the main entity's domestic taxable income

The branch returns to profit

Income of EUR 15 million after EUR 10 million of losses were moved to the Main Entity.

Computed

EUR 10,000,000 of the Permanent Establishment's GloBE Income of EUR 15,000,000 is treated as GloBE Income of the Main Entity as computed (Article 3.4.5): GloBE Losses of EUR 10,000,000 were earlier treated as an expense of the Main Entity, and later income is treated as the Main Entity's up to that amount. EUR 5,000,000 remains with the Permanent Establishment and EUR 0 is still to be matched. This applies even where the Main Entity's domestic loss carry-forward expired unused. Based on the figures you supplied.

Workings

GloBE Income of the Permanent EstablishmentArticles 3.4.1 to 3.4.3 — as supplied
EUR 15,000,000
Earlier losses treated as Main Entity expenseArticle 3.4.5 — the balance not yet matched, as supplied
EUR 10,000,000
Treated as GloBE Income of the Main EntityArticle 3.4.5 — the lesser of the income and that balance
EUR 10,000,000
GloBE Income remaining with the Permanent EstablishmentArticle 3.4.4 — not taken into account in the Main Entity
EUR 5,000,000
Balance carried forwardArticle 3.4.5 — still to be matched by later income of the Permanent Establishment
EUR 0

Decided by the income after a loss treated as main entity expense

An exempt branch

A loss where the Main Entity's jurisdiction exempts foreign branches.

Computed

The Permanent Establishment's GloBE Loss of EUR 10,000,000 stays with it as computed: none of it is treated as an expense in computing the Main Entity's domestic taxable income, so Article 3.4.5 does not move it and Article 3.4.4 keeps it out of the Main Entity's GloBE Income or Loss. Based on the figures you supplied.

Workings

GloBE Loss of the Permanent EstablishmentArticles 3.4.1 to 3.4.3 — as supplied, shown as a positive amount
EUR 10,000,000
Share deducted by the Main EntityArticle 3.4.5 — treated as an expense in the Main Entity's domestic taxable income
0%
Loss deducted by the Main EntityThe loss multiplied by that share
EUR 0
Set off against income taxed in both jurisdictionsArticle 3.4.5 — not reallocated
EUR 0
Treated as an expense of the Main EntityArticle 3.4.5 — not below nil
EUR 0
GloBE Loss remaining with the Permanent EstablishmentThe rest of the loss
EUR 10,000,000
Balance carried forwardArticle 3.4.5 — later income of the Permanent Establishment is the Main Entity's up to this amount
EUR 0

Decided by the loss as an expense in the main entity's domestic taxable income

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

2 inputs still need your determination:

  • What is the GloBE Income or Loss of the Permanent Establishment for the Fiscal Year, on the income and expense attributable to it under Articles 3.4.1 to 3.4.3? Enter a loss as a negative.
  • What GloBE Losses of this Permanent Establishment were treated as an expense of the Main Entity in earlier Fiscal Years and have not yet been matched by later income of the Permanent Establishment? Enter nil if none.

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