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Tax neutrality regimes

Applies
FY2024 onwards
Reviewed
Rule
P2-NEUT-2024.1
By

Which Pillar Two rules cover tax-neutral entities?

Chapter 7: flow-through and deductible dividend parents, Eligible Distribution Tax Systems, and Investment and Insurance Investment Entities.

Per GloBE Model Rules (Pillar Two), December 2021, Chapter 7, Tax neutrality and distribution regimes (Articles 7.1 to 7.6)

Chapter 7 of the GloBE Rules deals with entities designed to be tax neutral or taxed on distribution. A UPE that is a Flow-through Entity has its GloBE Income reduced under Article 7.1; a UPE subject to a Deductible Dividend Regime under Article 7.2; an Entity subject to an Eligible Distribution Tax System may elect to add a Deemed Distribution Tax under Article 7.3; and an Investment Entity or Insurance Investment Entity has a stand-alone Effective Tax Rate under Article 7.4, with the tax transparency election in Article 7.5 and, for an Investment Entity, the Taxable Distribution Method in Article 7.6.

More than one can apply to one entity. This rule only names them; the amounts are in the rule each points to.

The regimes

Article 7.1

A UPE that is a Flow-through Entity: income attributable to holders taxed enough, or small resident holders, is taken out.

Article 7.2

A UPE subject to a Deductible Dividend Regime: dividends paid within 12 months to qualifying recipients are taken out.

Article 7.3

An Entity subject to an Eligible Distribution Tax System: an annual election adds a Deemed Distribution Tax, with a recapture account.

Articles 7.4 to 7.6

An Investment Entity: a stand-alone ETR and Top-up Tax, a tax transparency election, or the Taxable Distribution Method.

Insurance Investment Entities

The stand-alone ETR and the tax transparency election, not the Taxable Distribution Method.

Elsewhere

A Tax Transparent Entity that is not the UPE is dealt with under Article 3.5, and an Investment Fund or Real Estate Investment Vehicle that is the UPE is an Excluded Entity.

What the regimes have in common

Each is a system meant to tax business income once, in the owners' hands — by looking through the entity, by letting it deduct what it distributes, or by taxing it only on distribution. Applied to the top of a group, the ordinary rules would show a rate of nil and charge Top-up Tax although the owners are taxed. The owners' tax cannot be counted directly, because they are outside the group, so the Rules reduce the income instead, to the extent the owners are taxed at the Minimum Rate promptly. Losses flow through a transparent parent to its owners and are reduced likewise; under a Deductible Dividend Regime they do not, and stay in the jurisdiction's computation.

Order of testing

  1. 1

    The Chapter 7 regimes

    Which of the five apply to the Entity.

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 transparent UPE

The Ultimate Parent Entity is a Flow-through Entity and not subject to a Deductible Dividend Regime.

Computed

One Chapter 7 regime applies as computed. Article 7.1 — a UPE that is a Flow-through Entity: its GloBE Income is reduced for holders taxed enough or small resident holders (see upe-flow-through-entity). This rule only names them; the amounts are in the rule each points to. Based on what you supplied.

Decided by the chapter 7 regimes

A fund and a distribution tax

An Investment Entity in a jurisdiction with an Eligible Distribution Tax System.

Computed

2 Chapter 7 regimes apply as computed. Article 7.3 — an Eligible Distribution Tax System: an annual election adds a Deemed Distribution Tax to Adjusted Covered Taxes, with a recapture account (see eligible-distribution-tax-systems). Articles 7.4 to 7.6 — an Investment Entity: a stand-alone ETR and Top-up Tax, or the Article 7.5 tax transparency election, or the Article 7.6 Taxable Distribution Method (see investment-entity-elections). This rule only names them; the amounts are in the rule each points to. Based on what you supplied.

Decided by the chapter 7 regimes

None

An ordinary subsidiary.

Computed

No Chapter 7 regime applies as computed: on what you indicated the Entity is not a Flow-through or Deductible Dividend Regime UPE, is not subject to an Eligible Distribution Tax System, and is not an Investment Entity or Insurance Investment Entity. A Tax Transparent Entity that is not the UPE is dealt with under Article 3.5 (see tax-transparent-entities), and an Investment Fund or Real Estate Investment Vehicle that is the UPE is an Excluded Entity (see excluded-entities). Based on what you supplied.

Decided by the chapter 7 regimes

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

4 inputs still need your determination:

  • Is the Entity the Ultimate Parent Entity of the MNE Group?
  • Is the Entity subject to an Eligible Distribution Tax System — a corporate tax generally payable only on distribution, at the Minimum Rate or more, in force on or before 1 July 2021?
  • Is the Entity an Investment Entity — an Investment Fund, a Real Estate Investment Vehicle, or a holding entity owned by them that meets the definition?
  • Is the Entity an Insurance Investment Entity — it would be an Investment Fund or Real Estate Investment Vehicle but for being established for insurance or annuity liabilities and wholly owned by a regulated insurer?

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