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Substance-based income exclusion

Applies
FY2024 onwards
Reviewed
Rule
P2-SBIE-2024.1
By

How is the Pillar Two SBIE calculated?

9.4% of eligible payroll costs plus 7.4% of eligible tangible assets, at this year's transitional rates, for each entity.

Per GloBE Model Rules (Pillar Two), December 2021, Article 5.3, Substance-based Income Exclusion

The Substance-based Income Exclusion for a jurisdiction is the sum of a payroll carve-out and a tangible asset carve-out for each Constituent Entity located in it, other than an Investment Entity. The payroll carve-out is the published payroll percentage of the Eligible Payroll Costs of Eligible Employees who perform activities for the MNE Group in the jurisdiction, leaving out costs capitalised into the carrying value of Eligible Tangible Assets and costs attributable to excluded international shipping income. The tangible asset carve-out is the published tangible asset percentage of the carrying value of Eligible Tangible Assets located in the jurisdiction, taken as the average of the beginning and the end of the Fiscal Year. For Fiscal Years beginning in the calendar years Article 9.2 lists, the percentages are the higher, declining ones that article sets, and they differ between the two carve-outs. A Filing Constituent Entity may make an Annual Election not to apply the exclusion.

It reduces the Net GloBE Income to give the Excess Profit that the Top-up Tax Percentage is applied to (Article 5.2.2). Its output is the figure jurisdictional-top-up-tax takes as an input.

Two carve-outs, a transition table, and an election

5.3.2 to 5.3.4 — the formula

  • Substance-based Income Exclusion = payroll carve-out + tangible asset carve-out
  • Payroll carve-out = payroll percentage × Eligible Payroll Costs
  • Tangible asset carve-out = tangible asset percentage × carrying value of Eligible Tangible Assets

The percentages are published values, not constants

Article 5.3 states a single base percentage, and Article 9.2 replaces it for each Fiscal Year beginning in a listed calendar year with a higher, declining one. The payroll and tangible asset percentages step down on different schedules. Both resolve from the rate table for the Fiscal Year; this page states none.

The Fiscal Year is the year in which it BEGINS

Article 9.2 keys its tables to "Fiscal Year beginning in". FY2026 here is a Fiscal Year that began in 2026, and a group with a non-calendar year must label it that way or it will pick up the wrong percentage.

5.3.5 — the carrying value is an average of two figures

The carrying value of Eligible Tangible Assets is the average of the figure at the beginning and at the end of the Fiscal Year, net of accumulated depreciation, amortisation or depletion and including capitalised payroll, as recorded in the Consolidated Financial Statements. An asset acquired or disposed of during the year has a nil figure at one end and contributes half its other-end value. The June 2024 guidance confirms it is the Consolidated Financial Statements value that counts, not the GloBE carrying value.

5.3.1 — the Annual Election

The exclusion can be left unclaimed for a jurisdiction and Fiscal Year by neither computing it nor claiming it in the GloBE Information Return. The Excess Profit is then the whole of the Net GloBE Income. An undecided election stops the computation.

Points the Commentary settles

  • An exclusion larger than the Net GloBE Income is lost: the excess is not carried forward or back
  • A group may claim less than the whole — it need not compute the maximum Eligible Payroll Costs and Eligible Tangible Assets to make a claim
  • The election not to apply it is made simply by filing a return that does not deduct it; it cannot be withdrawn for that year once filed, and binds no later year
  • The exclusion is the sum of each entity's and is not limited by that entity's own income
  • The carrying value is the one used for the Consolidated Financial Statements: after purchase accounting adjustments, and after eliminating gains on sales between group entities — so it reflects what the group paid outsiders for the asset
  • A revaluation increase, and the extra depreciation it causes, is disregarded: the value never exceeds what it would have been without the revaluation. Impairments reduce it, and a reversal cannot take it above the unimpaired figure

Employees and assets that move between jurisdictions

An employee who performs more than half of their activities for the group in the employer's jurisdiction counts in full there; one who performs half or less counts only in proportion to the working time spent there. The same test applies to a tangible asset by the time it is located in the owner's or lessee's jurisdiction. So a sales force that travels, or an aircraft, is not lost from the carve-out, but is not counted in full where it mostly is not.

Leased assets

A lessee counts its right-of-use asset. Under an operating lease the lessor may count the excess of its average carrying value of the asset over the lessee's average right-of-use asset, where the asset is in the lessor's jurisdiction — so the same value is not claimed twice. For a short-term rental asset, regularly let to different customers for thirty days or less, such as a hotel room or a hire car, the lessee's right of use is taken as nil and the lessor counts the whole.

What arrives net

  • Constituent Entities that are Investment Entities are left out
  • Payroll capitalised into tangible assets is left out here and counted in the asset's carrying value instead
  • Payroll attributable to excluded international shipping income, and shipping assets, are left out
  • Property held for sale, lease or investment is left out
  • Permanent Establishment and Flow-through Entity allocations (Articles 5.3.6 and 5.3.7) are not applied

Order of testing

  1. 1

    Inputs requiring your determination

    The election, the payroll and both carrying values must be supplied, in one currency. Enter nil where there is none; a blank is never read as nil.

  2. 2

    The Annual Election not to apply the exclusion

    Where the election is made, the exclusion is nil and no figures are needed.

  3. 3

    Payroll and tangible asset carve-outs

    Otherwise each carve-out is its published percentage for the Fiscal Year applied to its base, and the exclusion is their sum.

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.

An ordinary year

Eligible Payroll Costs of EUR 100 million and tangible assets that grew from EUR 200 million to EUR 300 million.

Computed

The Substance-based Income Exclusion is EUR 27,900,000 for FY2026 as computed: a payroll carve-out of EUR 9,400,000 — 9.4% of Eligible Payroll Costs of EUR 100,000,000 — plus a tangible asset carve-out of EUR 18,500,000 — 7.4% of an average carrying value of EUR 250,000,000, the average of EUR 200,000,000 at the beginning and EUR 300,000,000 at the end of the year. The percentages are the published values for a Fiscal Year beginning in this year: those Article 9.2 sets where it lists the year, and the base percentage in Article 5.3 otherwise. The figure reduces the Net GloBE Income to give the Excess Profit; the Annual Election not to apply it was not made. Based on the figures you supplied.

Workings

Eligible Payroll CostsArticle 5.3.3 — as supplied, net of the exclusions
EUR 100,000,000
Payroll percentageArticle 5.3.3, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2026
9.4%
Payroll carve-outArticle 5.3.3 — the percentage applied to the payroll
EUR 9,400,000
Carrying value at the beginning of the yearArticle 5.3.5 — as supplied
EUR 200,000,000
Carrying value at the end of the yearArticle 5.3.5 — as supplied
EUR 300,000,000
Average carrying value of Eligible Tangible AssetsArticle 5.3.5 — the average of the beginning and end of the Fiscal Year
EUR 250,000,000
Tangible asset percentageArticle 5.3.4, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2026
7.4%
Tangible asset carve-outArticle 5.3.4 — the percentage applied to the average carrying value
EUR 18,500,000
Substance-based Income ExclusionArticle 5.3.2 — the sum of the payroll carve-out and the tangible asset carve-out
EUR 27,900,000

Decided by the payroll and tangible asset carve-outs

The same group a year earlier

The same figures for a Fiscal Year beginning in 2025, where Article 9.2 sets different percentages.

Computed

The Substance-based Income Exclusion is EUR 28,600,000 for FY2025 as computed: a payroll carve-out of EUR 9,600,000 — 9.6% of Eligible Payroll Costs of EUR 100,000,000 — plus a tangible asset carve-out of EUR 19,000,000 — 7.6% of an average carrying value of EUR 250,000,000, the average of EUR 200,000,000 at the beginning and EUR 300,000,000 at the end of the year. The percentages are the published values for a Fiscal Year beginning in this year: those Article 9.2 sets where it lists the year, and the base percentage in Article 5.3 otherwise. The figure reduces the Net GloBE Income to give the Excess Profit; the Annual Election not to apply it was not made. Based on the figures you supplied.

Workings

Eligible Payroll CostsArticle 5.3.3 — as supplied, net of the exclusions
EUR 100,000,000
Payroll percentageArticle 5.3.3, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2025
9.6%
Payroll carve-outArticle 5.3.3 — the percentage applied to the payroll
EUR 9,600,000
Carrying value at the beginning of the yearArticle 5.3.5 — as supplied
EUR 200,000,000
Carrying value at the end of the yearArticle 5.3.5 — as supplied
EUR 300,000,000
Average carrying value of Eligible Tangible AssetsArticle 5.3.5 — the average of the beginning and end of the Fiscal Year
EUR 250,000,000
Tangible asset percentageArticle 5.3.4, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2025
7.6%
Tangible asset carve-outArticle 5.3.4 — the percentage applied to the average carrying value
EUR 19,000,000
Substance-based Income ExclusionArticle 5.3.2 — the sum of the payroll carve-out and the tangible asset carve-out
EUR 28,600,000

Decided by the payroll and tangible asset carve-outs

An asset acquired during the year

No payroll, and a plant bought during the year: nil at the beginning, EUR 100 million at the end, so half counts.

Computed

The Substance-based Income Exclusion is EUR 3,700,000 for FY2026 as computed: a payroll carve-out of EUR 0 — 9.4% of Eligible Payroll Costs of EUR 0 — plus a tangible asset carve-out of EUR 3,700,000 — 7.4% of an average carrying value of EUR 50,000,000, the average of EUR 0 at the beginning and EUR 100,000,000 at the end of the year. The percentages are the published values for a Fiscal Year beginning in this year: those Article 9.2 sets where it lists the year, and the base percentage in Article 5.3 otherwise. The figure reduces the Net GloBE Income to give the Excess Profit; the Annual Election not to apply it was not made. Based on the figures you supplied.

Workings

Eligible Payroll CostsArticle 5.3.3 — as supplied, net of the exclusions
EUR 0
Payroll percentageArticle 5.3.3, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2026
9.4%
Payroll carve-outArticle 5.3.3 — the percentage applied to the payroll
EUR 0
Carrying value at the beginning of the yearArticle 5.3.5 — as supplied
EUR 0
Carrying value at the end of the yearArticle 5.3.5 — as supplied
EUR 100,000,000
Average carrying value of Eligible Tangible AssetsArticle 5.3.5 — the average of the beginning and end of the Fiscal Year
EUR 50,000,000
Tangible asset percentageArticle 5.3.4, as replaced by the Article 9.2 percentage where the table lists the year — published value for FY2026
7.4%
Tangible asset carve-outArticle 5.3.4 — the percentage applied to the average carrying value
EUR 3,700,000
Substance-based Income ExclusionArticle 5.3.2 — the sum of the payroll carve-out and the tangible asset carve-out
EUR 3,700,000

Decided by the payroll and tangible asset carve-outs

The election not to apply it

The Filing Constituent Entity makes the Annual Election, so the exclusion is nil.

Computed

The Substance-based Income Exclusion is nil for FY2026 as computed, on the election you indicated: Article 5.3.1 lets the Filing Constituent Entity make an Annual Election not to apply it by neither computing nor claiming it, so the Excess Profit is the whole of the Net GloBE Income. The election is made year by year. Based on what you supplied.

Workings

Substance-based Income ExclusionArticle 5.3.1 — nil, the Annual Election not to apply it having been made
EUR 0

Decided by the annual election not to apply the exclusion

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:

  • Does the Filing Constituent Entity make the Annual Election under Article 5.3.1 not to apply the Substance-based Income Exclusion for this jurisdiction and Fiscal Year? Electing not to apply it means it is neither computed nor claimed in the GloBE Information Return.

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.sbie_payroll_rate
9.4% · reviewed 2026-10-04 · source
pillar_two.sbie_tangible_rate
7.4% · 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