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Stateless Constituent Entities

Applies
FY2024 onwards
Reviewed
Rule
P2-STATELESS-2024.1
By

What is a Stateless Constituent Entity?

An entity located in no jurisdiction, treated as its own jurisdiction. It cannot use the de minimis exclusion or the transitional CbCR safe harbour.

Per GloBE Model Rules (Pillar Two), December 2021, Articles 10.3.2(b), 10.3.3(d), 10.3.4(b)(iii) and the definition of Stateless Constituent Entity

A Stateless Constituent Entity is a Constituent Entity located in no jurisdiction: a Flow-through Entity that is neither the Ultimate Parent Entity nor required to apply an IIR; a Permanent Establishment taxed in no jurisdiction; or a dual-located Entity that the tie-breakers do not place and that is not the Ultimate Parent Entity. Each is treated as a single Constituent Entity located in a separate jurisdiction. It is not eligible for the de minimis exclusion, the Transitional CbCR Safe Harbour or, save for one case, the Simplified ETR Safe Harbour; it has no local filing obligation; a QDMTT need not reach it; and it can be a Low-Taxed Constituent Entity.

A stateless entity has its own stand-alone Effective Tax Rate and Top-up Tax, with none of the jurisdiction-level reliefs.

What the result turns on

How it becomes stateless

  • A Flow-through Entity that is neither the UPE nor required to apply an IIR
  • A Permanent Establishment taxed in no jurisdiction
  • A dual-located Entity that the Tax Treaty, Covered Taxes and Substance-based Income Exclusion tie-breakers do not place — unless it is the UPE, which is located where it was created

Its own jurisdiction

Each Stateless Constituent Entity is a single Constituent Entity in a separate jurisdiction for Chapter 5.

Why it is taxed on its own

Income left in a Stateless Constituent Entity is generally income no jurisdiction treats as that of a resident or of a taxable branch. In practice that is a Reverse Hybrid Entity — transparent where created, opaque to its owner — and a Permanent Establishment of the fourth kind, whose income the head office's jurisdiction exempts and nobody else recognises. A Flow-through Entity whose income has all been allocated to its owners is stateless too, but has no income left to test. Blending such income with a real jurisdiction's would let it shelter behind taxes paid on something else.

Left out of the reliefs

  • The de minimis exclusion — and its revenue and income are left out of the averages for other entities
  • The Transitional CbCR Safe Harbour
  • The Simplified ETR Safe Harbour, except a Tax Transparent Entity all of whose income and taxes go to its owners

Other treatment

  • A QDMTT need not apply to it, though a jurisdiction may charge one on a Flow-through Entity created under its law or a Permanent Establishment it can tax
  • Not counted as a jurisdiction for the initial-phase exclusion, but its Tangible Assets count as outside the Reference Jurisdiction unless shown to be inside it
  • No local filing obligation; its owners file
  • It can be a Low-Taxed Constituent Entity, reached by the IIR and UTPR

Order of testing

  1. 1

    Whether the Entity is stateless

    How it became stateless; the UPE never is.

  2. 2

    The treatment of a Stateless Constituent Entity

    The answer for the feature asked about.

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.

The de minimis exclusion

A Flow-through Entity that is not the UPE: can it use the de minimis exclusion?

Computed

The Entity is a Stateless Constituent Entity as computed: it is a Flow-through Entity that is neither the UPE nor required to apply an IIR (Article 10.3.2(b)). It is not eligible for the de minimis exclusion, and its revenue and GloBE Income are left out of the Article 5.5.3 computations for other jurisdictions so that they cannot cause a jurisdiction to fail the tests (Article 5.5.4; Commentary paragraph 96). Based on what you supplied.

Decided by the treatment of a stateless constituent entity

The simplified ETR safe harbour

A stateless Tax Transparent Entity all of whose income and taxes are allocated to its owners.

Computed

The Entity is a Stateless Constituent Entity as computed: it is a Flow-through Entity that is neither the UPE nor required to apply an IIR (Article 10.3.2(b)). Stateless Constituent Entities are not eligible for the Simplified ETR Safe Harbour, but this one is the exception in paragraph 175: a Tax Transparent Entity all of whose income and taxes are allocated to its owners under Articles 3.5 and 4.3.2(b) can still be eligible, its Top-up Tax being deemed zero. Based on what you supplied.

Decided by the treatment of a stateless constituent entity

A dual-located UPE

A dual-located Entity the tie-breakers cannot place, which is the Ultimate Parent Entity: located where it was created, not stateless.

Computed

The Entity is not a Stateless Constituent Entity as computed: where the treaty, Covered Taxes and Substance-based Income Exclusion tie-breakers do not place a dual-located Entity that is the Ultimate Parent Entity, Article 10.3.4(b)(iii) locates it where it was created. Based on what you supplied.

Decided by the whether the entity is stateless

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:

  • How is the Entity stateless — a Flow-through Entity that is neither the UPE nor required to apply an IIR; a Permanent Establishment taxed in no jurisdiction; a dual-located Entity that the tie-breakers do not place — or is it not stateless?

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