Finance (No.2) Act 2023

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Implementation of Council Directive (EU) 2022/2523 of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union

94. The Principal Act is amended by the insertion of the following Part after section 111:

“PART 4A

IMPLEMENTATION OF COUNCIL DIRECTIVE (EU) 2022/2523 OF 15 DECEMBER 2022 ON ENSURING A GLOBAL MINIMUM LEVEL OF TAXATION FOR MULTINATIONAL ENTERPRISE GROUPS AND LARGE-SCALE DOMESTIC GROUPS IN THE UNION

CHAPTER 1

Interpretation and general (Part 4A)

Interpretation (Part 4A)

111A. (1) In this Part—

‘acceptable financial accounting standard’ means International Financial Reporting Standards and the generally accepted accounting principles of Australia, Brazil, Canada, a Member State, an EEA state, Hong-Kong (China), Japan, Mexico, New-Zealand, the People’s Republic of China, the Republic of India, the Republic of Korea, Russia, Singapore, Switzerland, the United Kingdom and the United States of America;

‘the Acts’ means the Tax Acts and the Capital Gains Tax Acts;

‘adjusted covered taxes’ has the meaning assigned to it in section 111U;

‘authorised financial accounting standard’ means, in respect of an entity, a set of generally acceptable accounting principles permitted by an authorised accounting body in the jurisdiction where that entity is located, where that authorised accounting body has legal authority in that jurisdiction to prescribe, establish or accept accounting standards for financial reporting purposes;

‘consolidated financial statements’ means—

(a) the financial statements prepared by an entity in accordance with an acceptable financial accounting standard, in which the assets, liabilities, income, expenses and cash flows of that entity, and of any entities in which it has a controlling interest are presented as those of a single economic unit,

(b) the financial statements of a group to which paragraph (b) of the definition in this subsection of ‘group’ applies prepared by an entity in accordance with an acceptable financial accounting standard,

(c) where an ultimate parent entity has prepared financial statements described in paragraphs (a) or (b), that are not prepared in accordance with an acceptable financial accounting standard, the financial statements of the ultimate parent entity that have been subsequently adjusted to prevent any material competitive distortions, and

(d) where an ultimate parent entity does not prepare financial statements as described in paragraph (a), (b) or (c), the financial statements that would have been prepared if the ultimate parent entity were required to prepare such financial statements in accordance with—

(i) an acceptable financial accounting standard, or

(ii) another financial accounting standard, provided such financial statements have been adjusted to prevent any material competitive distortions;

‘consolidated revenue test’ has the meaning assigned to it in section 111C;

‘consolidated revenue threshold’—

(a) in respect of a fiscal year of 12 months, means €750,000,000,

(b) in respect of a fiscal year which is less than 12 months, the amount referred to in paragraph (a) shall be decreased pro rata, and

(c) in respect of a fiscal year which is greater than 12 months, the amount referred to in paragraph (a) shall be increased pro rata;

‘constituent entity’ means—

(a) an entity that is a member of an MNE group or of a large-scale domestic group, or

(b) any permanent establishment of a main entity that is a member of an MNE group referred to in paragraph (a),

but does not include an entity that is an excluded entity within the meaning of section 111C;

‘constituent entity-owner’ means a constituent entity that owns, directly or indirectly, an ownership interest in another constituent entity of the same MNE group or the same large-scale domestic group;

‘controlled foreign company tax regime’ means a set of tax rules, other than a qualified IIR, under which an entity with a direct or indirect ownership interest in another entity which is not tax resident in the same jurisdiction as the first mentioned entity, or the main entity of a permanent establishment, is subject to taxation on its share of part or all of the income earned by that other entity or permanent establishment, irrespective of whether that income is distributed to the first mentioned entity;

‘controlling interest’ means an ownership interest in an entity whereby the interest holder—

(a) is required to consolidate the assets, liabilities, income, expenses and cash flows of the entity on a line-by-line basis, in accordance with an acceptable financial accounting standard, or

(b) would have been required to consolidate the assets, liabilities, income, expenses and cash flows of the entity on a line-by-line basis if the interest holder had prepared consolidated financial statements;

‘covered taxes’ has the meaning assigned to it in section 111T;

‘deferred tax expense’ means the amount of the net movement in the deferred tax assets and deferred tax liabilities of a constituent entity between the beginning and end of the fiscal year;

‘designated filing entity’ means the constituent entity, other than the ultimate parent entity, that has been appointed by the MNE group or large-scale domestic group to fulfil the filing obligations set out in section 111AAI on behalf of the MNE group or the large-scale domestic group;

‘Directive’ means Council Directive 2022/2523 of 15 December 2022²⁹ on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union;

‘disqualified refundable imputation tax’ means any tax, other than a qualified imputation tax, accrued, or paid by a constituent entity that is—

(a) refundable to the beneficial owner of a dividend distributed by such constituent entity in respect of that dividend or creditable by the beneficial owner against a tax liability other than a tax liability in respect of such dividend, or

(b) refundable to the distributing company upon distribution of a dividend to a shareholder;

‘domestic top-up tax’ means a tax arising pursuant to section 111AAC;

‘EEA Agreement’ means the Agreement on the European Economic Area signed at Oporto on 2 May 1992 as adjusted by all subsequent amendments to that Agreement;

‘EEA state’ means a state which is a contracting party to the EEA Agreement;

‘eligible distribution tax system’ means a corporate income tax system that—

(a) imposes income tax on profits only when those profits are distributed or deemed to be distributed to shareholders, or when the company incurs certain non-business expenses,

(b) imposes tax at a rate equal to, or in excess of, the minimum tax rate, and

(c) was in force on or before 1 July 2021; ‘entity’ means—

(a) any legal arrangement of whatever nature or form that prepares separate financial accounts, or

(b) any legal person other than an individual,

but does not include central, state or local government, or their administration or agencies that carry out government functions;

‘excluded entities’ has the meaning assigned to it in section 111C;

‘financial accounting net income or loss’ means the net income or loss determined for a constituent entity in preparing consolidated financial statements of the ultimate parent entity for a fiscal year before any consolidation adjustments eliminating intra-group transactions;

‘filing constituent entity’ means an entity filing a top-up tax information return in accordance with section 111AAI;

‘fiscal year’ means—

(a) the accounting period in respect of which the ultimate parent entity of an MNE group or of a large-scale domestic group prepares its consolidated financial statements, or

(b) if the ultimate parent entity does not prepare consolidated financial statements, the calendar year;

‘flow-through entity’ means an entity to the extent that it is fiscally transparent with respect to its income, expenditure, profit or loss in the jurisdiction where it was created unless it is tax resident and subject to a covered tax on its income or profit in another jurisdiction;

‘governmental entity’ means an entity that meets all of the following criteria—

(a) it is part of, or wholly-owned by, a government (including any political subdivision or local authority thereof),

(b) it does not carry on a trade or business (other than that of carrying out the activities referred to in subparagraph (ii)) and has the principal purpose of—

(i) fulfilling a government function, or

(ii) managing or investing that government’s or jurisdiction’s assets through the making and holding of investments, asset management, and related investment activities for that government’s or jurisdiction’s assets,

(c) it is accountable to a government on its overall performance, and provides annual information reporting to that government, and

(d) its assets vest in a government upon dissolution and, to the extent that it distributes net earnings, such net earnings are distributed solely to that government with no portion of its net earnings inuring to the benefit of any private person;

‘group’ means—

(a) all entities which are related through ownership or control for the purpose of the preparation of consolidated financial statements by the ultimate parent entity, including any entity that is excluded from the consolidated financial statements of the ultimate parent entity solely based on its small size, on materiality grounds, or on the grounds that it is held for sale, or

(b) an entity that has one or more permanent establishments, provided that the entity is not part of another group referred to in paragraph (a);

‘hybrid entity’ means an entity not treated as fiscally transparent in the jurisdiction where it is located but as fiscally transparent in the jurisdiction in which its owner is located;

‘income inclusion rule’ means the rules laid down in the Directive or, as regarding third country jurisdictions, the OECD Model Rules in accordance with which the parent entity of an MNE group or of a large-scale domestic group calculates and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of that group;

‘IIR’ means the income inclusion rule;

‘IIR top-up tax’ means a tax arising pursuant to subsection (1) or (2) of section 111E, subsection (1) or (2) of section 111F, subsection (1) or (2) of section 111G or subsection (1) or (2) of section 111H, as the case may be;

‘insurance investment entity’ means an entity that would meet the definition in this subsection of an ‘investment fund’ or a ‘real estate investment vehicle’, if it had not been established in relation to liabilities under an insurance or annuity contract and if it were not wholly owned by an entity that is subject to regulation in the jurisdiction where it is located as an insurance company;

‘intermediate parent entity’ means a constituent entity that—

(a) owns, directly or indirectly, an ownership interest in another constituent entity in the same MNE group or large-scale domestic group, and

(b) is not an ultimate parent entity, a partially-owned parent entity, a permanent establishment or an investment entity;

‘International Financial Reporting Standards’ means International Financial Reporting Standards as adopted by the Union pursuant to Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002³⁰ on the application of international accounting standards;

‘international organisation’ means an intergovernmental organisation, including a supranational organisation, or wholly-owned agency or instrumentality thereof, that—

(a) is comprised primarily of governments,

(b) has in effect a headquarters or substantially similar agreement with the jurisdiction in which it is established, such as arrangements that entitle the organisation’s offices or establishments in that jurisdiction to privileges and immunities, and

(c) law or its governing documents prevent its income inuring to the benefit of any private person;

‘investment entity’ means—

(a) an investment fund or a real estate investment vehicle,

(b) an entity that is at least 95 per cent owned directly by an entity referred to in paragraph (a) or through a chain of such entities and that operates exclusively or almost exclusively to hold assets or invest funds for their benefit,

(c) an entity where a minimum of 85 per cent of its value is owned by an entity referred to in paragraph (a), provided that substantially all of its income is derived from dividends or equity gains or losses that are excluded from the calculation of the qualifying income or loss for the purposes of this Part, or

(d) an insurance investment entity;

‘investment fund’ means an entity or arrangement that—

(a) is designed to pool financial or non-financial assets from a number of investors, some of which are not connected,

(b) invests in accordance with a defined investment policy,

(c) allows investors to reduce transaction, research and analytical costs or to spread risk collectively,

(d) has as its main purpose the generation of investment income or gains, or protection against a particular or general event or outcome,

(e) its investors have a right to return from the assets of the fund or income earned on those assets, based on the contribution they made,

(f) is, or its management is, subject to the regulatory regime, including appropriate anti-money laundering and investor protection regulation for investment funds in the jurisdiction in which it is established or managed, and

(g) is managed by investment fund management professionals on behalf of the investors;

‘joint venture’, ‘joint venture affiliate’ and ‘joint venture group’ have the meaning assigned to them, respectively, in section 111AO;

‘large-scale domestic group’ means a group of which all constituent entities are located in the same Member State and ‘member of a large-scale domestic group’ shall be construed accordingly;

‘local tangible assets’ means immovable property located in the same jurisdiction as the constituent entity and that jurisdiction shall be referred to in this Part as the ‘local tangible asset jurisdiction’;

‘low-tax jurisdiction’ means, in respect of an MNE group or of a large-scale domestic group in any fiscal year, a Member State or a third country jurisdiction in which the MNE group or the large-scale domestic group has qualifying income and is subject to an effective tax rate which is lower than the minimum tax rate;

‘low-taxed constituent entity’ means—

(a) a constituent entity of an MNE group or large-scale domestic group that is located in a low-tax jurisdiction, or

(b) a stateless constituent entity that, in respect of a fiscal year, has qualifying income and an effective tax rate which is lower than the minimum tax rate;

‘main entity’ means an entity that includes the financial accounting net income or loss of a permanent establishment in its financial statements;

‘marketable transferable tax credit’ has the meaning assigned to it in section 111V;

‘material competitive distortion’ means, in respect of the application of a specific principle or procedure under a set of generally acceptable accounting principles, an application that results in an aggregate variation of income or expense of more than €75,000,000 in a fiscal year as compared to the amount that would have been determined by applying the corresponding principle or procedure under International Financial Reporting Standards;

‘Member State’ means a member state of the European Union; ‘minimum tax rate’ means 15 per cent;

‘MNE’ means multinational enterprise;

‘MNE group’ means a group that includes at least one entity or permanent establishment which is not located in the jurisdiction of the ultimate parent entity and ‘member of an MNE group’ shall be construed accordingly;

‘net book value of tangible assets’ means the average of the beginning and end values of tangible assets after taking into account accumulated depreciation, depletion and impairment, as recorded in the financial statements;

‘non-marketable transferable tax credit’ has the meaning assigned to it in section 111V;

‘non-profit organisation’ means an entity that meets all of the following criteria—

(a) it is established and operated in its jurisdiction of residence—

(i) exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational or other similar purposes, or

(ii) as a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civil league or an organisation operated exclusively for the promotion of social welfare,

(b) substantially all the income from the activities mentioned in paragraph (a) is exempt from income tax in its jurisdiction of residence,

(c) it has no shareholders or members who have a proprietary or beneficial interest in its income or assets,

(d) the income or assets of the entity may not be distributed to, or applied for the benefit of, a private person or non-charitable entity other than—

(i) pursuant to the conduct of the entity’s charitable activities,

(ii) as payment of reasonable compensation for services rendered or for the use of property or capital, or

(iii) as payment representing the fair market value of property which the entity has purchased,

(e) upon termination, liquidation or dissolution of the entity, all of its assets are to be distributed or revert to a non-profit organisation or to the government (including any government entity) of the entity’s jurisdiction of residence or any political subdivision thereof, and

(f) it does not carry on a trade or business that is not directly related to the purposes for which it was established;

‘non-qualified refundable tax credit’ means a tax credit that is not a qualified refundable tax credit but that is refundable in whole or in part;

‘OECD Model Rules’ means the document entitled OECD (2021), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting, OECD Publishing, Paris, approved on 14 December 2021 by the OECD/G20 Inclusive Framework on BEPS;

‘OECD Model Tax Convention on Income and Capital’ means the Model Tax Convention on Income and on Capital as published by the OECD on 21 November 2017;

‘ownership interest’ means any equity interest that carries rights to the profits, capital or reserves of an entity or of a permanent establishment;

‘parent entity’ means—

(a) an ultimate parent entity which is not an excluded entity,

(b) an intermediate parent entity, or

(c) a partially-owned parent entity;

‘partially-owned parent entity’ means a constituent entity—

(a) that owns, directly or indirectly, an ownership interest in another constituent entity of the same MNE group or large-scale domestic group,

(b) for which more than 20 per cent of the ownership interest in its profits is held, directly or indirectly, by one or several persons that are not constituent entities of that MNE group or large-scale domestic group, and

(c) that is not an ultimate parent entity, a permanent establishment or an investment entity;

‘pension fund’ means—

(a) an entity that is established and operated in a jurisdiction exclusively or almost exclusively to administer or provide retirement benefits and ancillary or incidental benefits to individuals where—

(i) that entity is regulated by that jurisdiction or one of its political subdivisions or local authorities, or

(ii) those benefits are secured or otherwise protected by national regulations and funded by a pool of assets held through a fiduciary arrangement or trustor to secure the fulfilment of the corresponding pension obligations against a case of insolvency of the MNE group or large-scale domestic group,

or

(b) a pension services entity;

‘pension services entity’ means an entity that is established and operated exclusively or almost exclusively to invest funds for the benefit of an entity referred to in paragraph (a) of the definition in this subsection of ‘pension fund’, or to carry out activities that are ancillary to the regulated activities referred to in the said paragraph (a), where the pension services entity forms part of the same group as the entities carrying out those regulated activities;

‘permanent establishment’ means—

(a) a place of business or a deemed place of business located in a jurisdiction where it is treated as a permanent establishment in accordance with a tax treaty provided that such jurisdiction taxes the income attributable to it, that income being attributable to it in accordance with a provision drafted in a like manner to Article 7 of the OECD Model Tax Convention on Income and Capital,

(b) if there is no applicable tax treaty, a place of business or a deemed place of business located in a jurisdiction which taxes the income attributable to such place of business on a net basis in a manner similar to which it taxes its own tax residents,

(c) if a jurisdiction has no corporate income tax system, a place of business or a deemed place of business located therein that would be treated as a permanent establishment in accordance with the OECD Model Tax Convention on Income and Capital, provided that such jurisdiction would have had the right to tax the income that would have been attributable to the place of business in accordance with Article 7 of that Convention, or

(d) a place of business or a deemed place of business, that is not referred to in paragraph (a), (b) or (c), through which operations are conducted outside the jurisdiction where the entity is located if such jurisdiction exempts the income attributable to such operations;

‘qualified domestic top-up tax’ means a top-up tax that is implemented in the domestic law of a jurisdiction, provided that such jurisdiction does not provide any benefits that are related to those rules, and that—

(a) provides for the determination of the excess profits of the constituent entities located in that jurisdiction in accordance with the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules, and the application of the minimum tax rate to those excess profits for the jurisdiction and the constituent entities in accordance with the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules, and

(b) is administered in a way that is consistent with the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules;

‘qualified domestic top-up tax payable’ means the amount accrued by the constituent entities in a jurisdiction in respect of qualified domestic top-up tax for a fiscal year, except that such amount shall not include any amount of qualified domestic top-up tax that—

(a) the MNE group or large-scale domestic group directly or indirectly challenges in a judicial or administrative proceeding, or

(b) the tax authority of the jurisdiction has determined is not assessable or collectible,

based on—

(i) constitutional grounds,

(ii) other superior law, or

(iii) a specific agreement with the government of the qualified domestic top-up tax jurisdiction limiting the MNE group’s or large-scale domestic group’s tax liability, such as a tax stabilisation agreement, investment agreement or similar agreement;

‘qualified IIR’ means a set of rules implemented in the domestic law of a jurisdiction, provided that such jurisdiction does not provide any benefits that are related to those rules, and that is—

(a) equivalent to the rules laid down in the Directive or, as regarding third country jurisdictions, the OECD Model Rules in accordance with which the parent entity of an MNE group or of a large-scale domestic group calculates and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of that group, and

(b) administered in a way that is consistent with the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules;

‘qualified imputation tax’ shall be construed in accordance with subsection (6);

‘qualified refundable tax credit’ means—

(a) a refundable tax credit that is designed such that it is to be paid as a cash payment or a cash equivalent to a constituent entity within 4 years from the date when the constituent entity is entitled to receive the refundable tax credit under the laws of the jurisdiction granting the credit, or

(b) if the tax credit is refundable in part, the portion of the refundable tax credit that is payable as a cash payment or a cash equivalent to a constituent entity within 4 years from the date when the constituent entity is entitled to receive the partial refundable tax credit,

and shall not include any amount of tax creditable or refundable pursuant to a qualified imputation tax or a disqualified refundable imputation tax;

‘qualified UTPR’ means a set of rules implemented in the domestic law of a jurisdiction, provided that such jurisdiction does not provide any benefits that are related to those rules, and that is—

(a) equivalent to the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules, in accordance with which a jurisdiction collects its allocable share of top-up tax of an MNE group that was not charged under the qualified IIR in respect of the low-taxed constituent entities of that MNE group, and

(b) administered in a way that is consistent with the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules;

‘qualifying competent authority agreement’ means a bilateral or multilateral agreement or arrangement between two or more competent authorities that provides for the automatic exchange of top-up tax information returns;

‘qualifying entity’ shall be construed in accordance with section 111AAB;

‘qualifying income or loss’ has the meaning assigned to it in section 111O(1);

‘real estate investment vehicle’ means a widely held entity that—

(a) holds predominantly immovable property, and

(b) is subject to a tax system which is designed to achieve a single level of taxation on the income, gains or profits of the entity, either at the level of the entity or at the level of its interest holders, with the deferral of taxation on such income, gains or profits either at the level of the entity or at the level of its interest holders being no more than one year from the end of the accounting period in which the income, profits or gains arise;

‘stateless constituent entity’ means a constituent entity to which subsection (3)(b), (4)(d) or (6)(d)(i) of section 111D applies;

‘substance-based income exclusion amount’ shall be construed in accordance with section 111AE(2)(a);

‘tax treaty’ means an agreement for the avoidance of double taxation with respect to taxes on income and on capital;

‘third country jurisdiction’ means a jurisdiction that is not a Member State;

‘top-up tax’ means the top-up tax calculated for a jurisdiction or a constituent entity pursuant to section 111AD;

‘ultimate parent entity’ means—

(a) an entity that owns, directly or indirectly, a controlling interest in any other entity and that is not owned, directly or indirectly, by another entity with a controlling interest in it, or

(b) the main entity of a group referred to in paragraph (b) of the definition in this subsection of ‘group’;

‘undertaxed profit rule’ means the rules laid down in the Directive or, as regards third country jurisdictions, the OECD Model Rules, in accordance with which a jurisdiction collects its allocable share of top-up tax of an MNE group that was not charged under the qualified IIR in respect of the low-taxed constituent entities of that MNE group;

‘UTPR’ means the undertaxed profit rule;

‘UTPR top-up tax’ means a tax arising pursuant to section 111L(1), 111M(1) or 111AZ(1), as the case may be.

(2) For the purposes of this Part, a person or entity is connected with another person or entity if they are closely related within the meaning of Article 5(8) of the OECD Model Tax Convention on Income and Capital.

(3) For the purposes of this Part, an entity is fiscally transparent where its income, expenditure, profit or loss is treated by the laws of a jurisdiction as if it were derived or incurred by the direct owner of that entity in proportion to its interest in that entity.

(4) For the purpose of the definition of ‘controlling interest’ in subsection (1), a main entity is deemed to hold the controlling interests of its permanent establishment.

(5) For the purposes of this Part—

(a) a flow-through entity shall be—

(i) a tax transparent entity with respect to its income, expenditure, profit or loss to the extent that it is fiscally transparent in the jurisdiction in which its owner is located, and

(ii) a reverse hybrid entity with respect to its income, expenditure, profit or loss to the extent that it is not fiscally transparent in the jurisdiction in which its owner is located,

(b) an ownership interest in an entity or a permanent establishment that is a constituent entity shall be treated as held through a tax transparent structure if that ownership interest is held indirectly through a chain of tax transparent entities, and

(c) a constituent entity that—

(i) is not tax resident in any jurisdiction, and

(ii) is not subject to a covered tax or a qualified domestic top-up tax based on its place of management, place of creation or similar criteria,

shall be treated as a flow-through entity and a tax transparent entity in respect of its income, expenditure, profit or loss, to the extent that—

(I) its owners are located in a jurisdiction that treats the entity as fiscally transparent,

(II) it does not have a place of business in the jurisdiction where it was created, and

(III) its income, expenditure, profit or loss is not attributable to a permanent establishment.

(6) (a) In this Part, ‘qualified imputation tax’ means a covered tax accrued or paid by a constituent entity, including a permanent establishment, that is refundable or creditable to the beneficial owner of the dividend distributed by the constituent entity or, in the case of a covered tax accrued or paid by a permanent establishment, a dividend distributed by the main entity, to the extent that the refund is payable, or the credit is provided—

(i) by a jurisdiction other than the jurisdiction which imposed the covered taxes,

(ii) to a beneficial owner of the dividend that is subject to tax at a nominal rate that equals or exceeds the minimum tax rate on the dividend received under the domestic law of the jurisdiction which imposed the covered taxes on the constituent entity,

(iii) to an individual who is the beneficial owner of the dividend and tax resident in the jurisdiction which imposed the covered taxes on the constituent entity and who is subject to tax at a nominal rate that equals or exceeds the standard tax rate applicable to ordinary income, or

(iv) to a governmental entity, an international organisation, a resident non-profit organisation, a resident pension fund, a resident investment entity that is not part of an MNE group or of a large-scale domestic group, or a resident life insurance company to the extent that the dividend is received in connection with resident pension fund activities and is subject to tax in a similar manner as a dividend received by a pension fund.

(b) For the purposes of paragraph (a)—

(i) a non-profit organisation or pension fund is resident in a jurisdiction if it is created and managed in that jurisdiction,

(ii) an investment entity is resident in a jurisdiction if it is created and regulated in that jurisdiction, and

(iii) a life insurance company is resident in the jurisdiction in which it is located.

(7) A word or expression which is used in this Part and is also used in the Directive has, unless the context otherwise requires, the same meaning in this Part as it has in the Directive.

Principles for construing rules in accordance with OECD Pillar Two guidance

111B. (1) In this section—

‘Minister’ means the Minister for Finance; ‘OECD Pillar Two guidance’ means—

(a) the document entitled OECD (2022), Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two), First Edition: Inclusive Framework on BEPS, OECD Publishing, Paris published by the OECD on 14 March 2022,

(b) the document entitled OECD (2022), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) Examples, OECD, Paris published by the OECD on 14 March 2022,

(c) the document entitled OECD (2022), Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris published by the OECD on 20 December 2022,

(d) the document entitled OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris published by the OECD on 2 February 2023,

(e) the document entitled OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris published by the OECD on 17 July 2023,

(f) the document entitled OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – GloBE Information Return (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris published by the OECD on 17 July 2023, and

(g) such additional subsequent guidance published by the OECD, as may be designated by order made under subsection (3) by the Minister for the purposes of this Part.

(2) For the purpose of calculating and administering, in respect of any fiscal year or accounting period, IIR top-up tax, UTPR top-up tax or domestic top-up tax for a constituent entity or qualifying entity, as the case may be, this Part shall be construed so as to ensure, as far as practicable, consistency between the following:

(a) the effect which is to be given to this Part;

(b) the effect which would be given if the OECD Model Rules were to be applied, in accordance with the OECD Pillar Two guidance, to the calculation and administration of those taxes, for a constituent entity or qualifying entity, as the case may be, for a fiscal year or an accounting period,

other than where such an application of this section would be inconsistent with the Directive.

(3) The Minister may, for the purposes of this Part, by order designate any additional subsequent guidance referred to in paragraph (g) of the definition in subsection (1) of ‘OECD Pillar Two guidance’ as being comprised in the OECD Pillar Two guidance.

(4) Every order made by the Minister under subsection (3) shall be laid before Dáil Éireann as soon as may be after it is made and, if a resolution annulling the order is passed by Dáil Éireann within the next 21 days on which Dáil Éireann has sat after the order is laid before it, the order shall be annulled accordingly, but without prejudice to the validity of anything previously done thereunder.

Scope of Part 4A

111C. (1) Subject to subsection (2) and section 111AL, this Part shall apply for a fiscal year to constituent entities, located in the State, that are members of an MNE group or of a large-scale domestic group, where the following condition (in this Part referred to as ‘the consolidated revenue test’) is satisfied, namely, the revenue of the group (including that of any excluded entities within the meaning of subsection (2)) recorded in the group’s consolidated financial statements is no less than the consolidated revenue threshold for at least 2 of the 4 fiscal years immediately preceding that fiscal year.

(2) Subject to subsection (3), this Part shall not apply to the following entities (in this Part referred to as ‘excluded entities’):

(a) an entity which is—

(i) a governmental entity,

(ii) an international organisation,

(iii) a non-profit organisation,

(iv) a pension fund,

(v) an investment fund that is an ultimate parent entity, or

(vi) a real estate investment vehicle that is an ultimate parent entity;

(b) an entity where at least 95 per cent of the value of that entity is owned by one or more entities referred to in paragraph (a), directly or through one or more excluded entities, other than a pension services entity, that—

(i) operates exclusively, or almost exclusively, to hold assets or invest funds for the benefit of the entities referred to in paragraph (a), or

(ii) exclusively carries out activities ancillary to those performed by the entities referred to in paragraph (a);

(c) an entity where at least 85 per cent of the value of that entity is owned, directly or through one or more excluded entities, by one or more entities referred to in paragraph (a) other than a pension services entity, provided that substantially all of the income of the entity is derived from dividends or equity gains or losses that are excluded from the calculation of qualifying income or loss to which paragraph (b) or (c) of section 111P(2) applies.

(3) A member of a group that would otherwise be an excluded entity, by virtue of paragraph (b) or (c) of subsection (2), shall not be an excluded entity where a filing constituent entity makes an election, in accordance with section 111AAAD, that the entity is not to be an excluded entity.

(4) Nothing in the Acts shall prevent an entity or permanent establishment from being chargeable to IIR top-up tax, UTPR top-up tax or domestic top-up tax, as the case may be, under this Part.

Location of constituent entity

111D. (1) Subject to subsections (2) to (9), an entity, other than a flow-through entity, shall for the purposes of this Part, be located in the jurisdiction where it is considered to be resident for tax purposes based on its place of management, its place of creation or similar criteria.

(2) Where it is not possible to determine the location of an entity, other than a flow-through entity, based on where it is considered to be a tax resident in accordance with subsection (1), the entity shall be deemed to be located in the jurisdiction where it was created.

(3) (a) Where a constituent entity is a flow-through entity and that constituent entity is—

(i) an ultimate parent entity of an MNE group or of a large-scale domestic group, or

(ii) required to apply a qualified IIR,

then, that constituent entity shall be located in the jurisdiction where it was created.

(b) Where a constituent entity is a flow-through entity and paragraph

(a) does not apply, the constituent entity shall be considered to be stateless.

(4) Where a constituent entity is a permanent establishment referred to in—

(a) paragraph (a) of the definition in section 111A of ‘permanent establishment’, it shall be deemed to be located in the jurisdiction where it is treated as a permanent establishment and liable to tax under a tax treaty,

(b) paragraph (b) of the definition in section 111A of ‘permanent establishment’, it shall be deemed to be located in the jurisdiction where it is subject to income taxation based on its business presence,

(c) paragraph (c) of the definition in section 111A of ‘permanent establishment’, it shall be deemed to be located in the jurisdiction where it is situated, or

(d) paragraph (d) of the definition in section 111A of ‘permanent establishment’, it shall be considered to be stateless.

(5) (a) Subject to paragraphs (b) and (c), where a constituent entity is regarded as located in 2 jurisdictions, and those jurisdictions have a tax treaty, the constituent entity shall be deemed to be located in the jurisdiction where it is considered to be resident for tax purposes under that tax treaty.

(b) Where the tax treaty referred to in paragraph (a) requires the competent authorities to reach a mutual agreement on the deemed residence for tax purposes of the constituent entity, and no agreement is reached, subsection (6) shall apply.

(c) Where no relief from double taxation is available under a tax treaty as a consequence of the constituent entity being resident for tax purposes in both of the jurisdictions concerned, subsection (6) shall apply.

(6) (a) Subject to paragraphs (b) and (c), where a constituent entity is located in 2 jurisdictions and those jurisdictions do not have a tax treaty or where paragraph (b) or (c) of subsection (5) applies, as the case may be, the constituent entity shall be deemed to be located in the jurisdiction which charged the higher amount of covered taxes for the fiscal year.

(b) For the purpose of calculating the covered taxes referred to in paragraph (a), no account shall be taken of any tax paid in accordance with a controlled foreign company tax regime.

(c) Subject to paragraph (d), where the amount of covered taxes referred to in paragraph (a) is the same, or is zero, in both jurisdictions, then, the constituent entity shall be deemed to be located in the jurisdiction in which the greater substance-based income exclusion amount under section 111AE is calculated on an entity basis.

(d) Where the substance-based income exclusion amount referred to in paragraph (c) is the same, or is zero, in both jurisdictions, then—

(i) the constituent entity shall be considered to be stateless, or

(ii) where the constituent entity is an ultimate parent entity, the constituent entity shall be deemed to be located in the jurisdiction in which it is created.

(7) Where, on the application of paragraphs (5) and (6), a parent entity is deemed to be located in a jurisdiction where it is not subject to a qualified IIR, it shall be deemed to be subject to the qualified IIR of the other jurisdiction, unless a tax treaty prohibits the application of such rule.

(8) For the purpose of this Part, the location of a constituent entity, determined at the beginning of a fiscal year, shall remain the same throughout the fiscal year.

(9) For the purposes of Chapter 5, a stateless constituent entity shall be deemed to be located in a jurisdiction but not a jurisdiction where any other entity is located.

CHAPTER 2

IIR and UTPR

Ultimate parent entity in the State 111E. (1) An ultimate parent entity that—

(a) is a constituent entity located in the State, and

(b) owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity.

(2) Where an ultimate parent entity located in the State is a low-taxed constituent entity in a fiscal year, that ultimate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

Intermediate parent entity in the State

111F. (1) Subject to subsection (3), an intermediate parent entity located in the State—

(a) whose ownership interests are owned directly or indirectly by an ultimate parent entity that is located in a third country jurisdiction or in a Member State that has not applied a qualified IIR to the ultimate parent entity, and

(b) that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where an intermediate parent entity located in the State, whose ownership interests are owned, directly or indirectly, by an ultimate parent entity that is located in a third country jurisdiction or in a Member State that has not applied a qualified IIR to the ultimate parent entity, is a low-taxed constituent entity in a fiscal year, the intermediate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where—

(a) the ultimate parent entity of the intermediate parent entity is subject to a qualified IIR for that fiscal year, or

(b) another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity referred to in subsection (1) or (2), as the case may be.

Intermediate parent entity located in the State and held by excluded ultimate parent entity

111G. (1) Subject to subsection (3), an intermediate parent entity located in the State—

(a) whose ownership interests are owned directly or indirectly by an ultimate parent entity that is an excluded entity, and

(b) that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where an intermediate parent entity located in the State, whose ownership interests are owned, directly or indirectly, by an ultimate parent entity that is an excluded entity, is a low-taxed constituent entity in a fiscal year, the intermediate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity referred to in subsection (1) or (2), as the case may be.

Partially-owned parent entity in the State

111H. (1) Subject to subsection (3), a partially-owned parent entity located in the State that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where a partially-owned parent entity located in the State is a low-taxed constituent entity in a fiscal year, that partially-owned parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where the ownership interests of the partially-owned parent entity referred to in subsection (1) or (2), as the case may be, are wholly owned, directly or indirectly, by another partially-owned parent entity that is subject to a qualified IIR for that fiscal year.

Allocation of top-up tax under IIR

111I. (1) IIR top-up tax due by a parent entity in respect of a low-taxed constituent entity for a fiscal year pursuant to section 111E(1), 111F(1), 111G(1) or 111H(1), as the case may be, shall be equal to an amount calculated as—

A x B

where—

A is the top-up tax of the low-taxed constituent entity, as calculated in accordance with section 111AD, and

B is the parent entity’s allocable share in that top-up tax for the fiscal year.

(2) (a) A parent entity’s allocable share in the top-up tax with respect to a low-taxed constituent entity is the proportion of the parent entity’s ownership interest in the qualifying income of the low-taxed constituent entity, calculated as—

(A – B) / C

where—

A is the qualifying income of the low-taxed constituent entity for the fiscal year,

B is the amount of qualifying income attributable to ownership interests held by owners other than the parent entity as determined by paragraph (b), and

C is the qualifying income of the low-taxed constituent entity for the fiscal year.

(b) The amount of qualifying income attributable to ownership interests in a low-taxed constituent entity held by owners other than the parent entity shall be the amount that would have been treated as attributable to such owners under the principles of the acceptable financial accounting standard used in the ultimate parent entity’s consolidated financial statements if the low-taxed constituent entity’s net income was equal to its qualifying income, and—

(i) the parent entity had prepared consolidated financial statements in accordance with that accounting standard (in this subsection referred to as the ‘hypothetical consolidated financial statements’),

(ii) the parent entity owned a controlling interest in the low-taxed constituent entity such that all of the income and expenses of the low-taxed constituent entity were consolidated on a line-by-line basis with those of the parent entity in the hypothetical consolidated financial statements,

(iii) all of the low-taxed constituent entity’s qualifying income was attributable to transactions with persons that are not members of an MNE group or large-scale domestic group, and

(iv) all ownership interests not directly or indirectly held by the parent entity were held by persons other than members of an MNE group or large-scale domestic group.

(3) In addition to the amount allocated to a parent entity in accordance with subsection (1), IIR top-up tax due by a parent entity pursuant to section 111E(2), 111F(2), 111G(2) or 111H(2), as the case may be, shall include, for the fiscal year, in accordance with section 111AD, the full amount of top-up tax calculated for that parent entity.

IIR offset mechanism

111J. Where a parent entity located in the State holds an ownership interest in a low-taxed constituent entity indirectly through an intermediate parent entity or a partially-owned parent entity that is subject to a qualified IIR for the fiscal year, the top-up tax due pursuant to section 111E(1), 111F(1), 111G(1) or 111H(1), as the case may be, shall be reduced by an amount equal to the portion of the first-mentioned parent entity’s allocable share of the top-up tax which is due by the intermediate parent entity or the partially-owned parent entity.

Effect of qualified domestic top-up tax

111K. (1) Notwithstanding section 111AI, where a Member State does not apply a qualified domestic top-up tax to collect any additional top-up tax arising in accordance with Article 29 of the Directive, additional top-up tax shall be computed pursuant to section 111AF and such additional top-up tax shall be considered to be jurisdictional top-up tax for the purposes of section 111AD(3).

(2) Where the amount of qualified domestic top-up tax in respect of a constituent entity for a fiscal year has not been paid within 4 fiscal years following the fiscal year in which it was due, the amount of qualified domestic top-up tax that was not paid shall be added to the jurisdictional top-up tax in respect of the jurisdiction where the constituent entity is located calculated in accordance with section 111AD(3).

(3) Where a qualified domestic top-up tax is applied by a Member State or a third country jurisdiction, for the purposes of determining the qualified domestic top-up tax in that jurisdiction, the financial accounting net income or loss of the constituent entities located in that Member State or third country jurisdiction may be determined in accordance with—

(a) an acceptable financial accounting standard, or

(b) an authorised financial accounting standard that is different from the financial accounting standard used in the consolidated financial statements of the ultimate parent entity, provided that such financial accounting net income or loss is adjusted to prevent any material competitive distortion.

(4) Where an amount of domestic top-up tax in respect of a qualifying entity (within the meaning of paragraph (a) or (b), as the case may be, of section 111AAB(1)) for a fiscal year has not been paid to and collected by the Collector-General within 4 fiscal years following the fiscal year in which it was due, that amount of domestic top-up tax shall no longer be due and payable to the Revenue Commissioners.

Application of UTPR across MNE group

111L. (1) Subject to subsection (2) and section 111AAL, where during a fiscal year—

(a) the ultimate parent entity of an MNE group is located in a jurisdiction that does not apply a qualified IIR, or

(b) the ultimate parent entity of an MNE group is an excluded entity,

a constituent entity of that MNE group that is located in the State shall be subject to a top-up tax (referred to in this section as ‘UTPR top-up tax’) calculated in accordance with section 111N.

(2) Subsection (1) shall not apply to a constituent entity that is an investment entity.

Application of UTPR in jurisdiction of ultimate parent entity

111M.(1) Subject to subsections (2) and (3) and sections 111AZ and 111AAL, where during a fiscal year, the ultimate parent entity of an MNE group is a low-taxed constituent entity that is not located in a Member State, a constituent entity of that MNE group that is located in the State shall be subject to a top-up tax (referred to in this section as ‘UTPR top-up tax’) calculated in accordance with section 111N.

(2) Subsection (1) shall not apply where the ultimate parent entity is subject to a qualified IIR in respect of itself and its low-taxed constituent entities.

(3) Subsection (1) shall not apply to a constituent entity that is an investment entity.

Calculation and allocation of UTPR top-up tax amount

111N. (1) (a) The UTPR top-up tax amount arising pursuant to section 111L(1), 111M(1) or 111AZ(1), as the case may be, of an MNE group allocated to a constituent entity for a fiscal year shall be calculated as follows:

A x B

where—

A is the UTPR top-up tax amount of an MNE group allocated to the State for a fiscal year as determined in accordance with subsection (2), and

B is the UTPR percentage in respect of the constituent entity for a fiscal year as determined in accordance with paragraph (b).

(b) The UTPR percentage in respect of a constituent entity for a fiscal year shall be calculated as follows:

((A / B) x 50 per cent) + ((C / D) x 50 per cent) where—

A is the total number of employees of the constituent entity,

B is the total number of employees of all the constituent entities of the MNE group located in the State,

C is the sum of the net book values of tangible assets of the constituent entity, and

D is the sum of the net book values of tangible assets of all constituent entities of the MNE group located in the State.

(2) The UTPR top-up tax amount of an MNE group allocated to the State for a fiscal year shall be calculated as follows:

A x B

where—

A is the total UTPR top-up tax of the MNE group for a fiscal year as determined in accordance with subsection (3), and

B is the UTPR percentage in respect of the MNE group located in the State for a fiscal year as determined in accordance with subsection (6).

(3) The total UTPR top-up tax of an MNE group for a fiscal year shall be equal to the sum of the top-up tax calculated for each low-taxed constituent entity of the MNE group for that fiscal year, in accordance with section 111AD, as adjusted by subsections (4) and (5).

(4) UTPR top-up tax of a low-taxed constituent entity for a fiscal year shall be equal to zero for the purposes of subsection (3) where all of the ultimate parent entity’s ownership interests in such low-taxed constituent entity are held directly or indirectly by one or more parent entities which are required to apply a qualified IIR in respect of that low-taxed constituent entity for that fiscal year.

(5) Where subsection (4) does not apply, UTPR top-up tax of a low-taxed constituent entity for a fiscal year shall be reduced, for the purposes of subsection (3), by a parent entity’s allocable share of the top-up tax of that low-taxed constituent entity that is brought into charge under a qualified IIR.

(6) Subject to subsection (8), the UTPR percentage in respect of an MNE group located in the State for a fiscal year shall be calculated as follows:

((A / B) x 50 per cent) + ((C / D) x 50 per cent) where—

A is the total number of employees of all the constituent entities of the MNE group located in the State,

B is the total number of employees of all constituent entities of the MNE group located in jurisdictions that have a qualified UTPR in force for the fiscal year,

C is the sum of the net book value of tangible assets of all constituent entities of the MNE group located in the State, and

D is the sum of the net book value of tangible assets of all constituent entities of the MNE group located in jurisdictions that have a qualified UTPR in force for the fiscal year.

(7) The following shall apply for the purposes of subsections (1)(b) and (6):

(a) the number of employees of a constituent entity in a jurisdiction shall be the number of employees employed on a full-time equivalent basis located in that jurisdiction, including independent contractors provided that they participate in the ordinary operating activities of the constituent entity;

(b) the tangible assets of a constituent entity in a jurisdiction shall include the tangible assets of that constituent entity located in that jurisdiction but shall not include—

(i) cash or cash equivalent,

(ii) intangible assets, or

(iii) financial assets;

(c) a constituent entity that is a permanent establishment shall be allocated the employees whose payroll costs are included in the separate financial accounts of that permanent establishment as determined by subsection (1) of section 111R adjusted in accordance with subsection (2) of that section;

(d) a constituent entity that is a permanent establishment shall be allocated the tangible assets included in the separate financial accounts of the permanent establishment as determined by subsection (1) of section 111R adjusted in accordance with subsection (2) of that section;

(e) the number of employees and the tangible assets allocated to the jurisdiction of a permanent establishment shall not be taken into account for the number of employees and the tangible assets, as the case may be, of the jurisdiction of the main entity;

(f) the number of employees and the net book value of tangible assets held by an investment entity shall be excluded from the calculations in accordance with subsections (1)(b) and (6) of the UTPR percentage in respect of a constituent entity and an MNE group, as the case may be, located in the State;

(g) the number of employees and the net book value of tangible assets of a flow-through entity shall be excluded from the calculation in accordance with subsections (1)(b) and (6) of the UTPR percentage in respect of a constituent entity and an MNE group, as the case may be, located in the State, unless they are allocated to a permanent establishment, or, in the absence of a permanent establishment, to a constituent entity that is located in the jurisdiction where the flow-through entity was created.

(8) Where an amount of tax allocated to a jurisdiction under a qualified UTPR in a prior fiscal year has not resulted in the constituent entities of an MNE group located in that jurisdiction having an additional cash tax expense equal, in total, to that amount of tax for that prior fiscal year allocated to that jurisdiction, then—

(a) the UTPR percentage for that MNE group in respect of that jurisdiction shall be deemed to be zero for the fiscal year, and

(b) the number of employees and the net book value of tangible assets of the constituent entities of that MNE group which are located in that jurisdiction shall be excluded from the calculation in accordance with subsection (6) of the UTPR percentage in respect of an MNE group located in the State.

(9) Subsection (8) shall not apply for a fiscal year if all jurisdictions with a qualified UTPR in force for the fiscal year have a UTPR percentage of zero for the MNE group for that fiscal year.

CHAPTER 3

Calculation of the qualifying income or loss

Determination of qualifying income or loss

111O. (1) Subject to subsection (2), ‘qualifying income or loss’, in respect of a fiscal year, means the financial accounting net income or loss of a constituent entity for a fiscal year, as adjusted in accordance with sections 111P, 111Q, 111R, 111S, 111W, 111AB, 111AM, 111AN, 111AQ, 111AR, 111AV and 111AW.

(2) Where it is not reasonably practicable to determine the financial accounting net income or loss, referred to in subsection (1), based on the acceptable financial accounting standard or authorised financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, the financial accounting net income or loss of the constituent entity for the fiscal year may be determined using another acceptable financial accounting standard or an authorised financial accounting standard where—

(a) the financial accounts of the constituent entity are maintained based on that accounting standard,

(b) the information contained in the financial accounts is reliable, and

(c) permanent differences greater than €1,000,000 that arise from the application of a particular principle or financial accounting standard to items of income or expense or transactions, which differs from the principle or financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, are adjusted to conform to the treatment required for that item or transaction under the financial accounting standard used in the preparation of the consolidated financial statements.

(3) Where the consolidated financial statements of an ultimate parent entity are prepared using financial accounting standards other than an acceptable financial accounting standard, the consolidated financial statements of the ultimate parent entity shall be adjusted to prevent any material competitive distortion for the purpose of determining qualifying income or loss.

(4) Where the application of a specific principle or procedure under a set of generally accepted accounting principles results in a material competitive distortion referred to in subsection (3), the accounting treatment of any item or transaction subject to that principle or procedure shall be adjusted to conform to the treatment required for that item or transaction under International Financial Reporting Standards.

Adjustments to determine qualifying income or loss

111P. (1) In this section—

‘accounting functional currency’ means the functional currency used to determine the constituent entity’s financial accounting net income or loss;

‘accrued pension expense’ means the difference between the amount of pension liability expense or pension liability income included in the financial accounting net income or loss in relation to a pension fund and the amount contributed by the constituent entity to a pension fund for the fiscal year and the amount of the adjustment referred to in subsection (2)(i) shall be based on the following formula—

((Accrued Income or Accrued Expense) + (Contribution)) x (-1) where—

‘additional tier one capital’ means an instrument issued by a constituent entity pursuant to prudential regulatory requirements;

‘arm’s length principle’ means the principle under which transactions between constituent entities must be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances;

‘asymmetric foreign currency gain or loss’ means a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is—

(a) included in the calculation of the taxable income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(b) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(c) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity, and

(d) attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether that third foreign currency gain or loss is included in the taxable income;

‘excluded dividend’ means, subject to subsection (14), a dividend or other distribution received or accrued in respect of an ownership interest, other than a dividend or other distribution received or accrued in respect of—

(a) an ownership interest—

(i) held by a group in an entity that carries rights to less than 10 per cent of the profits, capital or reserves, or voting rights of that entity at the date of the distribution or disposition (in this section referred to as a ‘portfolio shareholding’), and

(ii) that is economically owned by the constituent entity for less than one year at the date of the distribution,

or

(b) an ownership interest in an investment entity that is subject to an election pursuant to section 111AV,

but where a dividend or other distribution is received or accrued in respect of an ownership interest which is a financial instrument that has both equity and debt components under the acceptable financial accounting standard, only the amounts received or accrued in respect of the equity component of the ownership interest shall be treated as an excluded dividend;

‘excluded equity gain or loss’ means a gain or loss, included in the financial accounting net income or loss of a constituent entity, arising from—

(a) changes in the fair value of an ownership interest, other than a portfolio shareholding,

(b) an ownership interest that is included under the equity method of accounting, or

(c) the disposal of an ownership interest, other than the disposal of a portfolio shareholding;

‘included revaluation method gain or loss’ means a net gain or loss, increased or decreased by any associated covered taxes for the fiscal year, arising from the application of an accounting method or practice that, in respect of all property, plant and equipment—

(a) periodically adjusts the carrying value of such property, plant and equipment to its fair value,

(b) records the changes in value arising from the adjustment referred to in paragraph (a) in other comprehensive income as gain or loss, and

(c) does not subsequently report the gain or loss accrued in other comprehensive income referred to in paragraph (b) through profit and loss;

‘intra-group financing arrangement’ means a financing arrangement whereby one or more constituent entities directly or indirectly provide credit to, or otherwise makes an investment in, one or more other constituent entities of the same group;

‘net taxes expense’ means, in respect of a constituent entity and a fiscal year, the net amount of—

(a) covered taxes accrued as an expense and any current and deferred covered taxes included in the income tax expense, including covered taxes on income that is excluded from the qualifying income or loss calculation,

(b) deferred tax assets attributable to a loss accrued for the fiscal year,

(c) qualified domestic top-up taxes accrued as an expense,

(d) taxes arising pursuant to the rules of the Directive or, as regards third country jurisdictions, the OECD Model Rules, accrued as an expense,

(e) disqualified refundable imputation taxes accrued as an expense, and

(f) taxes accrued by an insurance company in respect of returns to policyholders to the extent that subsection (10)(a) applies in relation to those taxes,

in the financial accounting net income or loss;

‘policy disallowed expense’ means, in respect of a fiscal year, an expense accrued by the constituent entity for—

(a) illegal payments, or

(b) fines and penalties that are equal to or greater than €50,000, or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is calculated,

in the financial accounting net income or loss;

‘prior period errors and changes in accounting principles’ means a change in the opening equity of a constituent entity at the beginning of a fiscal year that is attributable to—

(a) a correction of an error in the determination of the financial accounting net income or loss of the constituent entity in a previous fiscal year that affected the income or expenses that may be included in the calculation of the qualifying income or loss of the constituent entity in that previous fiscal year, except to the extent such correction of an error resulted in a material decrease of a liability for covered taxes subject to section 111AB, or

(b) a change in accounting principles or policy that affected the income or expenses included in the calculation of the qualifying income or loss of the constituent entity;

‘tax functional currency’ means the functional currency used to determine the constituent entity’s taxable income or loss for a covered tax in the jurisdiction in which it is located;

‘third foreign currency’ means a currency that is not the constituent entity’s tax functional currency or accounting functional currency.

(2) To determine the qualifying income or loss of a constituent entity in respect of a fiscal year, the financial accounting net income or loss of that constituent entity shall be adjusted by the following:

(a) net taxes expense;

(b) excluded dividends;

(c) excluded equity gains or losses;

(d) included revaluation method gains or losses;

(e) gains or losses from the disposal of assets and liabilities excluded pursuant to section 111AN;

(f) asymmetric foreign currency gains or losses;

(g) policy disallowed expenses;

(h) prior period errors and changes in accounting principles;

(i) accrued pension expenses; and

(j) the net amount of the additions and reductions to qualifying income for the fiscal year as set out in section 111W.

(3) (a) On the making of an election by a filing constituent entity, a constituent entity shall, in the calculation of qualifying income or loss of the constituent entity in respect of a fiscal year, substitute the amount allowed as a deduction in the calculation of its taxable income in the jurisdiction where it is located for the amount expensed in its financial accounts for a cost or expense of such constituent entity that was paid with stock-based compensation.

(b) Where a stock-option granted by a constituent entity expires without being exercised, the amount of stock-based compensation cost or expense that has been deducted from the financial accounting net income or loss of the constituent entity in the calculation of its qualifying income or loss for all previous fiscal years in respect of that stock-option shall be included in the calculation of qualifying income or loss of the constituent entity in respect of the fiscal year in which that option has expired.

(c) Where part of the amount of stock-based compensation cost or expense has been recorded in the financial accounts of the constituent entity in fiscal years prior to the fiscal year in which the election referred to in paragraph (a) is made, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted in the calculation of its qualifying income or loss in those previous fiscal years and the total amount of stock-based compensation cost or expense that would have been deducted in the calculation of its qualifying income or loss in those previous fiscal years if the election had been made in such fiscal years, shall be included in the calculation of the qualifying income or loss of the constituent entity for that fiscal year.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in the same jurisdiction for the fiscal year in which the election is made and all subsequent fiscal years.

(e) Where the election referred to in paragraph (a) is withdrawn, the amount of unpaid stock-based compensation cost or expense deducted pursuant to the election that exceeds the financial accounting expense accrued shall be included in the calculation of the qualifying income or loss of the constituent entity in the fiscal year in which the election is withdrawn.

(4) (a) Any transaction between constituent entities of an MNE group located in different jurisdictions that is not—

(i) recorded in the same amount in the financial accounts of both constituent entities in the calculation of financial accounting net income or loss, or

(ii) consistent with the arm’s length principle,

shall be adjusted in the calculation of qualifying income or loss of the constituent entities so as to be in the same amount and consistent with the arm’s length principle.

(b) A loss from a sale or transfer of an asset between 2 constituent entities located in the same jurisdiction that is not recorded consistently with the arm’s length principle shall be adjusted in the calculation of qualifying income or loss of the constituent entities based on the arm’s length principle if that loss is included in the calculation of the qualifying income or loss of a constituent entity for a fiscal year.

(5) (a) A qualified refundable tax credit or marketable transferable tax credit shall be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(b) A tax credit which is not a qualified refundable tax credit or a marketable transferable tax credit shall not be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(c) Where a qualified refundable tax credit or marketable transferable tax credit is related to the acquisition, or construction, of an asset and the constituent entity which has the benefit of the tax credit—

(i) has an accounting policy of reducing the carrying value of the asset in respect of such a tax credit, or

(ii) recognises the tax credit as deferred income over the productive life of that asset,

then, the constituent entity concerned may follow the same accounting policy for the purposes of determining the qualifying income or loss of the constituent entity for a fiscal year.

(6) (a) On the making of an election by a filing constituent entity, gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting in the consolidated financial statements for a fiscal year shall be determined on the basis of the realisation principle in the calculation of qualifying income or loss of a constituent entity.

(b) Gains or losses which result from applying fair value or impairment accounting in respect of an asset or a liability shall be excluded from the calculation of the qualifying income or loss of a constituent entity for a fiscal year under paragraph (a).

(c) The carrying value of an asset or a liability for the purpose of determining a gain or a loss under paragraph (a) shall be the carrying value adjusted for accumulated depreciation on the later of—

(i) the time the asset was acquired, or the liability was incurred, or

(ii) the first day of the fiscal year in respect of which the election is made.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in a jurisdiction to which the election is made unless the filing constituent entity chooses to limit the election to the tangible assets of the constituent entities or to investment entities.

(e) Where the election referred to in paragraph (a) is withdrawn in respect of a fiscal year, an amount equal to the difference between—

(i) the fair value of the asset or liability, and

(ii) the carrying value adjusted for accumulated depreciation of the asset or liability on the first day of the fiscal year in respect of which the withdrawal is made,

shall be—

(I) included, if the fair value exceeds the carrying value adjusted for accumulated depreciation, or

(II) deducted, if the carrying value adjusted for accumulated depreciation exceeds the fair value,

in the calculation of qualifying income or loss of the constituent entities in respect of that fiscal year.

(7) (a) On the making of an election by a filing constituent entity, the qualifying income or loss of a constituent entity arising from the disposal of local tangible assets by that constituent entity to entities other than entities who are members of the same group in respect of a fiscal year shall be adjusted in accordance with this subsection.

(b) The net gain arising from the disposal of local tangible assets referred to in paragraph (a) in the fiscal year in which the election referred to in that paragraph is made shall be offset against any net loss of a constituent entity located in the local tangible asset jurisdiction arising from the disposal of local tangible assets in the fiscal year in which the election is made and in the 4 fiscal years prior to that fiscal year (in this subsection referred to as ‘the 5 year period’).

(c) The net gain referred to in paragraph (b) shall be offset against the net loss, if any, referred to in that paragraph that has arisen in the earliest fiscal year of the 5 year period in priority to later fiscal years, with any remaining net gain being carried forward and offset against the net loss, if any, in subsequent fiscal years of the 5 year period.

(d) Where, after the application of paragraph (b), there is an amount of net gain which remains unrelieved, such amount shall be spread evenly over the 5 year period for the purpose of the calculation of the qualifying income or loss of each constituent entity located in the local tangible asset jurisdiction that has made a net gain from the disposal of local tangible assets in the fiscal year in which the election referred to in paragraph (a) is made.

(e) The amount of net gain referred to in paragraph (d) which is to be allocated to each constituent entity, shall be calculated as follows:

NG x (NGCE / NGCES)

where—

(f) Where no constituent entity that has made a net gain from the disposal of local tangible assets in the fiscal year for which the election referred to in paragraph (a) is made is located in the local tangible asset jurisdiction in a fiscal year that occurs during the 5 year period, the residual amount of net gain referred to in paragraph (d) shall be allocated equally to each constituent entity in that jurisdiction in that fiscal year.

(g) Any adjustments made pursuant to this subsection for a fiscal year preceding the fiscal year in respect of which the election referred to in paragraph (a) is made shall be subject to adjustments in accordance with section 111AF.

(h) The election referred to in paragraph (a) shall be made annually in accordance with section 111AAAD.

(8) Any expense related to an intra-group financing arrangement shall not be taken into consideration in the calculation of qualifying income or loss of a constituent entity for a fiscal year where—

(a) the constituent entity is a low-taxed constituent entity or would have been low-taxed if the expenses had not accrued to the constituent entity,

(b) it is reasonable to assume that, over the expected duration of the intra-group financing arrangement, the intra-group financing arrangement will increase the amount of expenses taken into account in the calculation of the qualifying income or loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit or making the investment (in this subsection referred to as the ‘counterparty’), and

(c) the counterparty is located in a jurisdiction that is not a low-tax jurisdiction or in a jurisdiction that would not have been low-taxed if the income related to the expense had not been accrued to the counterparty.

(9) (a) On the making of an election by a filing constituent entity, an ultimate parent entity shall apply its consolidated accounting treatment to eliminate income, expense, gains and losses from transactions between constituent entities that are—

(i) located in the same jurisdiction, and

(ii) included in a tax consolidation group,

for the purpose of calculating the net qualifying income or loss of those constituent entities for a fiscal year.

(b) In the fiscal year in respect of which the election referred to in paragraph (a) is made or withdrawn, appropriate adjustments shall be made so that items of qualifying income or loss are not taken into consideration more than once or omitted as a result of such election or withdrawal.

(c) For the purposes of this subsection, constituent entities are included in a tax consolidation group if under the law of a jurisdiction the income, expenses, gains and losses of those constituent entities may for tax purposes be aggregated, surrendered to each other or otherwise shared or transferred between them as a result of a connection between those constituent entities.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD.

(10) An insurance company shall—

(a) exclude from the calculation of its qualifying income or loss, any amount charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders, and

(b) include in the calculation of its qualifying income or loss any returns to policyholders that are not reflected in its financial accounting net income or loss to the extent that the corresponding increase or decrease in liability to the policyholders is reflected in its financial accounting net income or loss.

(11) (a) Any amount that is recognised as a decrease in the equity of a constituent entity for a fiscal year and is the result of distributions made or due in respect of additional tier one capital shall be treated as an expense in the calculation of its qualifying income or loss for that fiscal year.

(b) Any amount that is recognised as an increase in the equity of a constituent entity for a fiscal year and is the result of distributions received or due to be received in respect of additional tier one capital held by the constituent entity shall be included in the calculation of its qualifying income or loss for that fiscal year.

(12) (a) A financial instrument issued by one constituent entity and held by another constituent entity in the same MNE group or large-scale domestic group shall be classified as debt or equity consistently for both the issuer and holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(b) Where constituent entities in the same MNE group or large-scale domestic group have classified a financial instrument differently, the classification adopted by the issuer of the financial instrument shall be applied by the issuer and the holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(13) On the making of an election by a filing constituent entity, foreign exchange gains or losses included in a constituent entity’s financial accounting net income or loss shall be treated as an excluded equity gain or loss to the extent that—

(a) such foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in ownership interests other than portfolio shareholdings,

(b) such foreign exchange gains or losses are recognised in other comprehensive income in the consolidated financial statements, and

(c) the hedging instrument is considered an effective hedge under the acceptable or authorised financial accounting standard used in the preparation of the consolidated financial statements.

(14) On the making of an election by a filing constituent entity, a constituent entity shall include in the calculation of its qualifying income or loss for a fiscal year all dividends received by the constituent entity with respect to a portfolio shareholding.

(15) (a) Where a movement in an insurance company’s reserves economically matches an excluded dividend, net of any investment management fee, from a security held by the insurance company on behalf of a policyholder, the movement in the insurance reserves shall not be allowed as an expense in the calculation of the constituent entity’s qualifying income or loss.

(b) Where a movement in an insurance company’s reserves is related to an excluded dividend or an excluded equity gain or loss from a security held by the insurance company on behalf of a policyholder, it shall not be allowed as a deduction in the calculation of the constituent entity’s qualifying income or loss.

(16) On the making of an election by a filing constituent entity, the amount of a debt release included in the financial accounting net income or loss of a constituent entity shall be excluded from the calculation of the constituent entity’s qualifying income or loss, where the debt release—

(a) is undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed,

(b) arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor, and it is reasonable to assume that the debtor would be insolvent within 12 months but for the release of the debt under the arrangement, or

(c) subject to subsection (17) and where paragraph (a) or (b) do not apply, occurs when the debtor’s liabilities are in excess of the fair market value of its assets determined immediately before the debt release.

(17) An amount of a debt release included in the financial accounting net income or loss of a constituent entity shall only be excluded from the calculation of the constituent entity’s qualifying income or loss in accordance with paragraph (c) of subsection (16) with respect to debts owed to a creditor that is a person that is not connected with the debtor and only to the extent of the lesser of—

(a) the excess of the debtor’s liabilities over the fair market value of its assets determined immediately before the debt release, or

(b) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release.

International shipping income exclusion

111Q. (1) In this section—

‘bareboat charter terms’ has the same meaning as it has in section 697A;

‘international shipping activities’ means—

(a) transportation of passengers or cargo by ship in international traffic, whether the ship is owned, leased or otherwise at the disposal of the constituent entity,

(b) transportation of passengers or cargo by ship in international traffic under slot-chartering arrangements,

(c) leasing of a ship to be used for the transportation of passengers or cargo in international traffic on charter fully equipped, crewed and supplied,

(d) leasing of a ship used for the transportation of passengers or cargo in international traffic, on bareboat charter terms, to another constituent entity,

(e) participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ship in international traffic, and

(f) sale of a ship used for the transportation of passengers or cargo in international traffic provided that the ship has been held for use by the constituent entity for a minimum of one year;

‘international shipping income’ means the net income obtained by a constituent entity from international shipping activities, provided that the transportation is not carried out via inland waterways within the same jurisdiction;

‘qualified ancillary international shipping activities’ means—

(a) leasing of a ship, on a bareboat charter basis, to another shipping enterprise that is not a constituent entity, provided that the duration of the charter does not exceed 3 years,

(b) sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage,

(c) leasing and short-term storage of containers,

(d) detention charges for the late return of containers, and

(e) provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff and customer services personnel;

‘qualified ancillary international shipping income’ means—

(a) the net income obtained by a constituent entity from qualified ancillary international shipping activities, provided that such activities are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic, and

(b) investment income, where the investment that generates the income is made as an integral part of carrying on the business of operating ships in international traffic.

(2) Where the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located then the international shipping income and the qualified ancillary international shipping income of that constituent entity shall be excluded from the calculation of its qualifying income or loss.

(3) Where the calculation of a constituent entity’s international shipping income or qualified ancillary international shipping income results in a loss, such loss shall be excluded from the calculation of the constituent entity’s qualifying income or loss.

(4) The aggregated qualified ancillary international shipping income of all constituent entities located in a jurisdiction shall not exceed 50 per cent of those constituent entities’ international shipping income.

(5) (a) The costs incurred by a constituent entity that are directly attributable to its international shipping activities and qualified ancillary international shipping activities shall be allocated to such activities for the purpose of calculating the international shipping income and the qualified ancillary international shipping income of the constituent entity.

(b) The costs incurred by a constituent entity that indirectly result from its international shipping activities and qualified ancillary international shipping activities shall be deducted from the constituent entity’s revenues from such activities to calculate the international shipping income and qualified ancillary international shipping income of the constituent entity on the basis of its revenues from such activities in proportion to its total revenues.

(6) All direct and indirect costs attributed to a constituent entity’s international shipping income and qualified ancillary international shipping income in accordance with subsection (5) shall be excluded from the calculation of its qualifying income or loss.

Allocation of qualifying income or loss between main entity and permanent establishment

111R. (1) (a) Subject to subsection (2), where a constituent entity is a permanent establishment to which paragraph (a), (b) or (c) of the definition in section 111A(1) of permanent establishment applies, the financial accounting net income or loss of the permanent establishment shall be the net income or loss reflected in the separate financial accounts of that permanent establishment.

(b) Where a constituent entity is a permanent establishment that does not have separate financial accounts, its financial accounting net income or loss shall be the amount that would have been reflected in its separate financial accounts if they had been prepared on a standalone basis and in accordance with the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity.

(2) (a) Where a constituent entity is a permanent establishment to which paragraph (a) or (b) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with the applicable tax treaty or domestic law of the jurisdiction where it is located, regardless of the amount of income subject to tax and the amount of tax-deductible expenses in that jurisdiction.

(b) Where a constituent entity is a permanent establishment to which paragraph (c) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with Article 7 of the OECD Model Tax Convention on Income and Capital.

(c) Where a constituent entity is a permanent establishment to which paragraph (d) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be calculated based on—

(i) the amounts and items of income that are exempt from tax in the jurisdiction where the main entity is located and attributable to the operations conducted outside of that jurisdiction, and

(ii) the amounts and items of expense that are not deducted for tax purposes in the jurisdiction where the main entity is located that are attributable to those operations.

(3) Subject to subsection (4), the financial accounting net income or loss of a permanent establishment shall not be taken into account in determining the qualifying income or loss of the main entity.

(4) (a) A qualifying loss of a permanent establishment shall be treated as an expense of the main entity for the purposes of calculating the main entity’s qualifying income or loss to the extent that the loss of the permanent establishment is treated as an expense in the calculation of domestic taxable income of the main entity in the jurisdiction it is located in and is not set off against an item of the domestic taxable income that is subject to tax under the laws of both the jurisdiction of the main entity and the jurisdiction of the permanent establishment.

(b) Qualifying income that is earned by a permanent establishment, after a qualifying loss of the permanent establishment was treated as an expense of the main entity for the purposes of calculating the main entity’s qualifying income or loss in accordance with paragraph (a), shall be treated as qualifying income of the main entity up to the amount of the qualifying loss that was previously treated as an expense of the main entity under paragraph (a).

Allocation of qualifying income or loss of flow-through entity

111S. (1) The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the amount allocable to its owners that are not members of an MNE group or large-scale domestic group and that hold their ownership interest in that flow-through entity directly or indirectly through one or more tax transparent entities, unless—

(a) the flow-through entity is an ultimate parent entity, or

(b) the flow-through entity is held, directly or indirectly, through one or more tax transparent entities by an ultimate parent entity that is a flow-through entity.

(2) The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the financial accounting net income or loss that is allocated to another constituent entity.

(3) Where a flow-through entity wholly or partially carries out business through a permanent establishment, its financial accounting net income or loss which remains after the application of subsection (1) shall be allocated to that permanent establishment in accordance with section 111R.

(4) Subject to subsection (5), where a tax transparent entity is not an ultimate parent entity, the financial accounting net income or loss of the flow-through entity which remains after the application of subsections (1) and (3) shall be allocated to its constituent entity- owners in proportion to their ownership interests that carry rights to profits in the flow-through entity.

(5) Where a flow-through entity is a tax transparent entity that is an ultimate parent entity or a reverse hybrid entity, any financial accounting net income or loss of the flow-through entity which remains after the application of subsections (1) and (3) shall be allocated to the ultimate parent entity or the reverse hybrid entity.

(6) Subsections (3), (4) and (5) shall be applied separately with respect to each ownership interest that carries rights to profits in the flow-through entity.

CHAPTER 4

Calculation of adjusted covered taxes

Covered taxes

111T. (1) The covered taxes of a constituent entity shall include—

(a) taxes recorded in the financial accounts of a constituent entity with respect to its income or profits, or its share of the income or profits of a constituent entity in which it owns an ownership interest,

(b) taxes on distributed profits, deemed profit distributions, and non- business expenses imposed under an eligible distribution tax system,

(c) taxes imposed in lieu of a generally applicable corporate income tax, and

(d) taxes levied by reference to retained earnings and corporate equity, including taxes on multiple components based on income and equity.

(2) The covered taxes of a constituent entity shall not include—

(a) the top-up tax accrued by a parent entity under a qualified IIR,

(b) the top-up tax accrued by a constituent entity under a qualified domestic top-up tax,

(c) taxes attributable to an adjustment made by a constituent entity as a result of the application of a qualified UTPR,

(d) disqualified refundable imputation tax, and

(e) taxes paid by an insurance company in respect of returns to policyholders.

(3) Covered taxes in respect of any net gain or loss arising from the disposal of local tangible assets in the fiscal year in which the election referred to in section 111P(7)(a) is made shall be excluded from the calculation of the covered taxes.

Adjusted covered taxes

111U. (1) The adjusted covered taxes of a constituent entity for a fiscal year shall be determined by adjusting the sum of the current tax expense accrued in the financial accounting net income or loss with respect to covered taxes for the fiscal year by—

(a) the net amount of the additions and reductions to covered taxes for the fiscal year as set out in subsections (2) and (3),

(b) the total deferred tax adjustment amount as set out in section 111X,

(c) any increase or decrease in covered taxes recorded in equity or other comprehensive income relating to amounts included in the calculation of qualifying income or loss that will be subject to tax under local tax rules, and

(d) the net amount of the additions and reductions to covered taxes for the fiscal year as set out in section 111W.

(2) The additions to the covered taxes of a constituent entity for the fiscal year shall include—

(a) any amount of covered taxes accrued as an expense in the profit before taxation in the financial accounts of the constituent entity,

(b) any amount of qualifying loss deferred tax asset that has been used by the constituent entity pursuant to section 111Y(2),

(c) any amount of covered taxes relating to an uncertain tax position of the constituent entity previously excluded under subsection (3)(d) that is paid in the fiscal year, and

(d) any amount of credit or refund in respect of a qualified refundable tax credit, or marketable transferable tax credit, that was accrued as a reduction to the current tax expense in the financial accounts of the constituent entity.

(3) The reductions to the covered taxes of a constituent entity for the fiscal year shall include—

(a) the amount of current tax expense with respect to income excluded from the calculation of qualifying income or loss of the constituent entity under Chapter 3,

(b) any amount of credit or refund in respect of a non-qualified refundable tax credit, or non-marketable transferable tax credit, that was not recorded as a reduction to the current tax expense in the financial accounts of the constituent entity,

(c) any amount of covered taxes refunded or credited to a constituent entity, other than a qualified refundable tax credit, or marketable transferable tax credit, that was not treated as an adjustment to current tax expense in the financial accounts of the constituent entity,

(d) the amount of current tax expense of the constituent entity which relates to an uncertain tax position,

(e) any amount of current tax expense of the constituent entity that is not expected to be paid within 3 years after the end of the fiscal year,

(f) the amount received by the originator, as defined in section 111V of a non-marketable transferable tax credit in exchange for the credit,

(g) any excess received by the purchaser of the face value of a non-marketable transferable tax credit over its purchase price in proportion to the amount of the credit used to satisfy its liability for a covered tax, and

(h) the amount of any gain received by the purchaser on the transfer of a non-marketable transferable tax credit provided the transfer occurs during the fiscal year concerned.

(4) Where an amount of covered tax is described in more than one of subsection (1), (2) or (3), the current tax expense shall only be adjusted once in the calculation of adjusted covered taxes of a constituent entity for a fiscal year.

(5) Subsection (6) applies where, for a fiscal year—

(a) there is no net qualifying income in a jurisdiction, and

(b) the amount of adjusted covered taxes for that jurisdiction is—

(i) less than zero, and

(ii) less than an amount equal to the net qualifying loss multiplied by the minimum tax rate (in this section referred to as the ‘expected adjusted covered taxes’).

(6) Subject to subsection (9), an amount calculated as the difference between—

(a) the amount of adjusted covered taxes of a jurisdiction for a fiscal year, and

(b) the amount of expected adjusted covered taxes of a jurisdiction for a fiscal year,

shall be treated as an additional top-up tax for the fiscal year.

(7) The amount of additional top-up tax referred to in subsection (6) shall be allocated to each constituent entity in the jurisdiction in accordance with section 111AF(3).

(8) For the purposes of subsection (9), excess negative tax expense means—

(a) an amount equal to the amount calculated under subsection (6) in respect of a jurisdiction for a fiscal year in which an MNE group or large-scale domestic group has—

(i) no qualifying income, or

(ii) a qualifying loss, for that jurisdiction, or

(b) an amount equal to the negative adjusted covered taxes in respect of a jurisdiction for a fiscal year in which an MNE group or large-scale domestic group has qualifying income for that jurisdiction.

(9) On the making of an election by a filing constituent entity, or where the top-up tax percentage for a jurisdiction for a fiscal year as calculated in accordance with section 111AD(2) exceeds the minimum tax rate, an MNE group or large-scale domestic group shall exclude the excess negative tax expense from its adjusted covered taxes for a jurisdiction in respect of the fiscal year and establish an excess negative tax expense carry-forward.

(10) In each fiscal year, following a fiscal year in respect of which subsection (9) applied to the calculation of adjusted cover taxes for a jurisdiction, where an MNE group or large-scale domestic group has qualifying income and adjusted covered taxes for that jurisdiction, the MNE group or large-scale domestic group shall—

(a) reduce the adjusted covered taxes for the jurisdiction by the balance of the excess negative tax expense carry-forward but the amount of adjusted covered taxes after such reduction shall not be less than zero, and

(b) reduce the balance of the excess negative tax expense carry-forward by the same amount as the amount referred to in paragraph (a).

(11) Subsection (9) shall not apply to any excess negative tax expense attributable to an amount of a loss that is carried back and applied against income for prior taxable years for domestic tax purposes.

(12) (a) Where an MNE group or large-scale domestic group disposes of one or more constituent entities located in a jurisdiction in respect of which it has made the election in accordance with subsection (9), the excess negative tax expense carry-forward shall remain an attribute of that MNE group or large-scale domestic group, as the case may be.

(b) Where an MNE group or large-scale domestic group disposes of all constituent entities located in a jurisdiction, and re-acquires or establishes constituent entities located in that jurisdiction in a subsequent fiscal year, the balance of the excess negative tax expense carry-forward shall be taken into account in determining the adjusted covered taxes for the jurisdiction beginning with that fiscal year.

Meaning of marketable transferable tax credit

111V. (1) In this section—

‘marketable price floor’ means 80 per cent of the net present value of the tax credit, where the net present value is determined based on the yield to maturity on a debt instrument issued by the government that issued the tax credit with equal or similar maturity (and up to 5-year maturity) issued in the same fiscal year as the tax credit is transferred or if not transferred, the origination year;

‘marketable transferable tax credit’ means a tax credit, or portion of a tax credit, that—

(a) can be used by the holder of the credit to reduce its liability for a covered tax in the jurisdiction that issued the tax credit,

(b) meets the legal transferability standard, and

(c) meets the marketability standard;

‘non-marketable transferable tax credit’ means a tax credit that—

(a) if held by the originator, is transferable but is not a marketable transferable tax credit, or

(b) if held by the purchaser, is not a marketable transferable tax credit;

‘originator’ means the constituent entity that engages in the activities that generates the tax credit concerned;

‘origination year’ means the fiscal year in which the eligibility criteria for a tax credit is met by a constituent entity.

(2) For the purposes of subsection (1), a tax credit meets the legal transferability standard—

(a) in respect of the originator of the tax credit, where the originator may, under the laws governing the tax credit, transfer the tax credit to an entity that is not connected with the originator—

(i) in the origination year, or

(ii) within a period of 15 months beginning on the final date of the origination year,

and

(b) in respect of the purchaser of the tax credit, where the purchaser may, under the laws governing the tax credit, transfer the tax credit to an entity that is not connected with the purchaser in the fiscal year in which that purchaser purchased the tax credit.

(3) For the purposes of subsection (1), a tax credit meets the marketability standard—

(a) in respect of the originator of the tax credit—

(i) where the tax credit is transferred to an entity that is not connected with the originator within a period of 15 months beginning on the final date of the origination year for a price equal to, or exceeding, the marketable price floor, or

(ii) where the tax credit is not transferred, or is transferred between entities connected with the originator, similar tax credits trade between entities that are not connected within a period of 15 months beginning on the final date of the origination year,

and

(b) in respect of the purchaser of the tax credit, where that purchaser acquired the credit from an entity that is not connected with that purchaser at a price equal to or exceeding the marketable price floor.

Equity investment inclusion election and qualified flow-through tax benefits of qualified ownership interests

111W. (1) In this section—

‘expected tax benefits ratio’ means the ratio of—

(a) the amount of tax credits, and

(b) the amount of any tax-deductible losses multiplied by the statutory tax rate applicable to the owner of the qualified ownership interest,

that flowed through, or are received, in respect of the qualified ownership interest in the fiscal year to the total of such items that are expected to flow-through or be received in respect of the qualified ownership interest over the term of the investment;

‘proportional amortisation method of accounting’ means an accounting method whereby an investor adjusts its tax expense by the net benefit that flows through a qualified ownership interest each year, where—

(a) the net benefit is determined based on the excess of the tax benefits that flow-through the qualified ownership interest during the year, over the proportional amount of the investment, and

(b) the proportional amount of the investment is determined based on the total investment multiplied by the ratio of the tax benefits that flow-through the qualified ownership interest during the year to the total tax benefits expected to flow-through the qualified ownership interest over the term of the investment;

‘qualified flow-through tax benefit’ means any amount of—

(a) tax credits, other than qualified refundable tax credits, and

(b) tax-deductible losses multiplied by the statutory tax rate applicable to the owner of a qualified ownership interest,

that flow through a qualified ownership interest in a tax transparent entity to the extent that it reduces the owner’s investment in the qualified ownership interest pursuant to subsection (6);

‘qualified ownership interest’ means an investment in a tax transparent entity that—

(a) is treated as an equity interest for local tax purposes, or

(b) would be treated as an equity interest under an authorised financial accounting standard in the jurisdiction in which the tax transparent entity operates,

where the assets, liabilities, income, expenses, and cash flows of the tax transparent entity are not consolidated on a line-by-line basis in the consolidated financial statements of the MNE group, and—

(i) the total return with respect to that ownership interest, excluding tax credits other than qualified refundable tax credits, is, at the time the investment is entered into, expected to be less than the total amount invested by the owner of the ownership interest such that a portion of the investment will be returned in the form of tax credits other than qualified refundable tax credits, and

(ii) the investor has a bona-fide economic interest in the flow-through entity and is not protected from loss of its investment,

but shall not include an investment in a tax transparent entity where a jurisdiction only permits the benefits of a tax credit to be transferred through such investment when the entity that originates the tax credits or investor is subject to a qualified IIR or qualified UTPR.

(2) On the making of an election by a filing constituent entity, a constituent entity which holds an ownership interest other than a qualified ownership interest shall—

(a) include in its qualifying income or loss the accounting gain, profit, or loss, adjusted as required by section 111P other than subsection (2)(c) of that section, with respect to any—

(i) fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a mark-to-market basis or on the impairment on the ownership interest, and the tax consequences of the mark-to-market movements or impairments on the ownership interest are reflected in income tax expense,

(ii) fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a realisation basis and its income tax expense includes deferred tax expense on the mark- to-market movement or impairments on the ownership interest,

(iii) profit and loss attributable to that ownership interest, where the interest is in a tax transparent entity and the owner accounts for the interest using the equity method, or

(iv) dispositions of that ownership interest which give rise to gains or losses that are included in the owner’s domestic taxable income, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief on that gain,

and

(b) notwithstanding sections 111U(3)(a) and 111X(5)(a), include all current and deferred tax expense in respect of the amounts referred to in paragraph (a) in the calculation of its adjusted covered taxes, subject to the provisions of this Part.

(3) The election referred to in subsection (2) shall apply to all ownership interests, other than a portfolio shareholding within the meaning of section 111P(1), owned by constituent entities located in the jurisdiction with respect to which the election is made.

(4) Subsections (5) to (9) shall apply to the qualified flow-through tax benefits that flow-through a qualified ownership interest to a constituent entity to which an election under subsection (2) applies.

(5) Subject to subsection (8), where this subsection applies, qualified flow-through tax benefits shall be added to the adjusted covered taxes of a constituent entity that is the direct owner of a qualified ownership interest, or an indirect owner of such an interest held via tax transparent entities that are not constituent entities of the MNE group, to the extent that the qualified flow-through tax benefit was treated as reducing tax expense accrued in the financial accounting net income or loss of the constituent entity.

(6) Subject to subsection (8), a constituent entity’s investment in a qualified ownership interest shall be treated as being reduced by receipts with respect to the qualified ownership interest in respect of—

(a) the amount of tax credits that have flowed through to the constituent entity,

(b) the amount of any tax-deductible losses that have flowed through to the constituent entity multiplied by the statutory tax rate applicable to the constituent entity,

(c) the amount of any distributions to the constituent entity, including returns of capital, or

(d) the amount of proceeds from a sale of all or part of the qualified ownership interest,

but no amount shall be treated as reducing the investment to the extent that it would reduce the investment below zero.

(7) (a) Subject to paragraph (b), any amount referred to in subsection (6)(a), (b), (c) or (d) that flows through, or is received in respect of, a qualified ownership interest, after the constituent entity’s investment in the qualified ownership interest has been reduced to zero pursuant to that subsection, shall be subtracted in the calculation of that constituent entity’s adjusted covered taxes.

(b) An amount referred to in subsection (6)(c) or (d) or a qualified refundable tax credit, shall be subtracted in the calculation of a constituent entity’s adjusted covered taxes only to the extent of the amount of any qualified flow-through tax benefits that flowed through the qualified ownership interest and that were treated as an addition in the calculation of that constituent entity’s adjusted covered taxes.

(8) (a) Where a constituent entity uses the proportional amortisation method of accounting for its investment in a qualified ownership interest, then it shall apply that method of accounting such that any of the amounts specified in subsection (6) that flow-through or are received in respect of a qualified ownership interest shall be treated as a reduction to the investment in the qualified ownership interest in proportion to the expected tax benefits ratio.

(b) The amounts specified in subsection (6) that flow-through or are received in respect of the qualified ownership interest in excess of the reduction to the investment in the qualified ownership interest pursuant to paragraph (a) shall not be included as a positive amount in the constituent entity’s adjusted covered taxes.

(9) On the making of an irrevocable election by a filing constituent entity, where the entity concerned holds a qualified ownership interest but does not use the proportional amortisation method of accounting, it may apply subsection (8) as if it used the proportional amortisation method of accounting in respect of its qualified ownership interest.

Total deferred tax adjustment amount

111X. (1) In this section—

‘disallowed accrual’ means—

(a) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position, and

(b) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to distributions from a constituent entity;

‘recapture exception accrual’ means an amount of tax expense accrued in the financial accounts of a constituent entity that is attributable to changes in associated deferred tax liabilities in respect of—

(a) cost recovery allowances on tangible assets,

(b) the cost of a licence or similar arrangement from a government for the use of immovable property or exploitation of natural resources which entails significant investment in tangible assets,

(c) research and development expenses,

(d) de-commissioning and remediation expenses,

(e) fair value accounting on unrealised net gains,

(f) foreign currency exchange net gains,

(g) insurance reserves and insurance policy deferred acquisition costs,

(h) gains from the sale of tangible property located in the same jurisdiction as the constituent entity that are reinvested in tangible property in the same jurisdiction, or

(i) additional amounts accrued as a result of accounting principle changes with respect to any item referred to in subparagraphs (a) to (h);

‘unclaimed accrual’ means any increase in a deferred tax liability recorded in the financial accounts of a constituent entity for a fiscal year that is not expected to be paid within the period referred to in subsection (9), and for which the filing constituent entity elects, in accordance with section 111AAAD, not to include in total deferred tax adjustment amount for that fiscal year.

(2) Subject to subsections (3) to (8), where the tax rate applied for the purposes of calculating the deferred tax expense in the financial accounts of a constituent entity for a fiscal year is—

(a) equal to or less than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes, or

(b) greater than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes recalculated at the minimum tax rate.

(3) The total deferred tax adjustment amount of a constituent entity for a fiscal year shall be increased by—

(a) any amount of disallowed accrual or unclaimed accrual paid during the fiscal year, and

(b) any amount of recaptured deferred tax liability determined in a preceding fiscal year in accordance with subsection (9) which has been paid during the fiscal year.

(4) Where, for a fiscal year, a loss deferred tax asset is not recognised in the financial accounts of a constituent entity because the recognition criteria are not met, the total deferred tax adjustment amount shall be reduced by the amount that would have reduced the total deferred tax adjustment amount if a loss deferred tax asset for the fiscal year had been accrued.

(5) Subject to subsection (6), the total deferred tax adjustment amount of a constituent entity for a fiscal year shall not include—

(a) the amount of deferred tax expense with respect to items excluded from the calculation of qualifying income or loss of the constituent entity under Chapter 3,

(b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals,

(c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset,

(d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate, and

(e) the amount of deferred tax expense with respect to the generation and use of tax credits.

(6) (a) Subsection (5)(e) shall not apply to an amount of deferred tax expense where a substitute loss carry-forward arises.

(b) A substitute loss carry-forward shall arise where all of the following conditions are met—

(i) the tax laws of a jurisdiction require that foreign source income offset domestic source losses before foreign tax credits may be applied against tax imposed on foreign source income,

(ii) the constituent entity has a domestic tax loss in that jurisdiction that is fully or partially offset by foreign source income, and

(iii) the tax laws in that jurisdiction allows foreign tax credits to be used to offset a tax liability in a subsequent year in relation to income that is included in the calculation of the constituent entity’s qualifying income or loss.

(7) (a) Where all of the conditions set out in subsection (6) are met, the deferred tax expense attributable to the substitute loss carry-forward deferred tax asset shall be included in the constituent entity’s total deferred tax adjustment amount in the fiscal year that it arises and in the fiscal years it reverses, but only to the extent that the foreign tax credit that gave rise to the substitute loss carry-forward deferred tax asset is used to offset a tax liability on income included in the constituent entity’s qualifying income or loss.

(b) Subject to paragraph (c), for the purposes of paragraph (a), the amount of substitute loss carry-forward deferred tax asset is equal to the lesser of—

(i) the amount of the foreign tax credit in respect of the foreign source income inclusion that, under the tax law of the jurisdiction, is allowed to be carried forward from the taxable period in which the constituent entity had a tax loss, before taking into account any foreign source income, to a subsequent fiscal year, and

(ii) the amount of the constituent entity’s tax loss for the taxable period, before taking into account any foreign source income, multiplied by the applicable domestic tax rate.

(c) Subsection (5)(a) and section 111AW(2) shall apply to the substitute loss carry-forward deferred tax asset.

(8) Where a deferred tax asset which is attributable to a qualifying loss of a constituent entity has been recorded for a fiscal year at a rate lower than the minimum tax rate, provided that the constituent entity can demonstrate that the deferred tax asset is attributable to a qualifying loss, it may be recalculated at the minimum tax rate in the same fiscal year and the total deferred tax adjustment amount shall be reduced accordingly.

(9) Subject to subsection (10), a deferred tax liability that is not reversed and has not been paid within 5 years of the end of the fiscal year in which it arose shall be recaptured to the extent that it was taken into account in the total deferred tax adjustment amount of a constituent entity, and for this purpose—

(a) the recaptured deferred tax liability for the current fiscal year is the amount of the increase in the category of deferred tax liability that was included in the total deferred tax adjustment amount in the fifth year preceding the current fiscal year that has not reversed by the end of the last day of the current fiscal year, and

(b) the amount of the recaptured deferred tax liability determined for the current fiscal year shall be treated as a reduction to the covered taxes in the fifth year preceding the current fiscal year and the effective tax rate and top-up tax of that fiscal year shall be recalculated in accordance with section 111AF.

(10) Where a deferred tax liability is a recapture exception accrual, it shall not be recaptured in accordance with subsection (9).

Qualifying loss election

111Y. (1) (a) Section 111X shall not apply where a filing constituent entity makes a qualifying loss election for a jurisdiction.

(b) Where a qualifying loss election is made for a jurisdiction, a qualifying loss deferred tax asset shall be determined for the jurisdiction for each fiscal year in which there is a net qualifying loss in that jurisdiction.

(c) For the purposes of paragraph (b), the qualifying loss deferred tax asset for a jurisdiction in respect of a fiscal year shall be calculated as—

NQL x MTR

where—

NQL is the net qualifying loss for a fiscal year for the jurisdiction, and

MTR is the minimum tax rate.

(d) A qualifying loss election shall not be made for a jurisdiction with an eligible distribution tax system within the meaning of section 111AS.

(2) An amount of qualifying loss deferred tax asset for a jurisdiction in respect of a fiscal year determined pursuant to subsection (1) shall be used in any subsequent fiscal year in which there is a net qualifying income for the jurisdiction calculated as the lesser of—

(a) NQI x MTR

where—

NQI is the net qualifying income for the fiscal year for the jurisdiction, and

MTR is the minimum tax rate, or

(b) the amount of the qualifying loss deferred tax asset that is available.

(3) The qualifying loss deferred tax asset for a jurisdiction, determined in accordance with subsection (1), shall be reduced by the amount that is used for a fiscal year and the balance remaining shall be carried forward to subsequent fiscal years.

(4) Where a qualifying loss election is withdrawn—

(a) any remaining qualifying loss deferred tax asset for a jurisdiction determined in accordance with subsection (1) shall be reduced to zero as of the first day of the first fiscal year in which the qualifying loss election is no longer applicable, and

(b) the deferred tax assets and deferred tax liabilities for the jurisdiction, if any, shall be taken into account as if they had been calculated in accordance with section 111X and 111AW for the prior fiscal year.

(5) (a) Subject to paragraph (b), the qualifying loss election shall be made in the top-up tax information return delivered, in accordance with section 111AAI, for the first fiscal year in which the MNE group or large-scale domestic group has a constituent entity located in the jurisdiction for which the election is made.

(b) Where an election has been made in respect of a jurisdiction by the MNE group or large-scale domestic group in accordance with section 111AJ(2), the qualifying loss election for that jurisdiction shall be made in the first top-up tax information return delivered, in accordance with section 111AAI, in respect of the MNE group or large-scale domestic group after the election made in accordance with section 111AJ(2) ceases to apply.

(6) Where a flow-through entity that is the ultimate parent entity of an MNE group or large-scale domestic group makes a qualifying loss election under this section, the qualifying loss deferred tax asset shall be calculated by reference to the qualifying loss of the flow-through entity after reduction pursuant to section 111AQ(3).

Specific allocation of covered taxes incurred by certain types of constituent entities

111Z. (1) In this section—

‘passive income’ means the following items of income included in qualifying income to the extent that a constituent entity-owner has been subject to tax under a controlled foreign company tax regime or as a result of an ownership interest in a hybrid entity—

(a) a dividend or dividend equivalents,

(b) interest or interest equivalents,

(c) rent,

(d) royalty,

(e) annuity, or

(f) net gains from assets of a type that produces income referred to in subparagraphs (a) to (e).

(2) A permanent establishment shall be allocated the amount of any covered taxes that are included in the financial accounts of a constituent entity and that relate to the qualifying income or loss of the permanent establishment.

(3) A constituent entity-owner shall be allocated the amount of any covered taxes that are included in the financial accounts of a tax transparent entity and that relate to qualifying income or loss allocated to a constituent entity-owner in accordance with section 111S(4).

(4) Subject to subsection (7), a constituent entity shall be allocated the amount of any covered taxes included in the financial accounts of its direct or indirect constituent entity-owners under a controlled foreign company tax regime, on the direct or indirect constituent entity-owners’ share of that constituent entity’s income.

(5) Subject to subsection (7), a constituent entity that is a hybrid entity shall be allocated the amount of any covered taxes included in the financial accounts of its constituent entity-owner which relates to qualifying income of the hybrid entity.

(6) A constituent entity that has made a distribution during the fiscal year shall be allocated the amount of any covered taxes accrued in the financial accounts of its direct constituent entity-owners on such distribution.

(7) (a) A constituent entity that was allocated covered taxes pursuant to subsection (4) or (5) in respect of passive income shall include such covered taxes in its adjusted covered taxes in an amount equal to the lesser of—

(i) the covered taxes allocated in respect of such passive income, or

(ii) TUTP x PI

where—

TUTP is the top-up tax percentage for the jurisdiction determined without regard to covered taxes incurred with respect to such passive income by the constituent entity-owner, and

PI is the amount of the constituent entity’s passive income that is included under a controlled foreign company tax regime or a fiscal transparency rule.

(b) Any covered taxes of the constituent entity-owner incurred with respect to such passive income as referred to in paragraph (a) that remains after the application of this subsection shall not be allocated under subsection (4) or (5).

(8) Where the qualifying income of a permanent establishment is treated as qualifying income of the main entity in accordance with section 111R(4), any covered taxes arising in the jurisdiction where the permanent establishment is located and associated with such income, shall be treated as covered taxes of the main entity for an amount not exceeding—

QIPE x HTR

where—

QIPE is the amount of qualifying income of the permanent establishment which is treated as qualifying income of the main entity in accordance with section 111R(4), and

HTR is the highest tax rate on ordinary income in the jurisdiction where the main entity is located.

Rules required for blended CFC regime

111AA. (1) In this section—

‘applicable rate’ means the rate at which foreign taxes on controlled foreign company income generally fully offset the controlled foreign company tax through the tax credit mechanism applicable to the controlled foreign company tax regime;

‘attributable income of the entity’ means the constituent entity-owner’s proportionate share of the income of the constituent entity in the jurisdiction in which the constituent entity is located as determined under the blended CFC tax regime;

‘blended CFC tax regime’ means a controlled foreign company tax regime that aggregates—

(a) income,

(b) losses, and

(c) creditable taxes,

of all the controlled foreign companies of a constituent entity-owner for the purposes of calculating the constituent entity-owner’s tax liability under the regime and that has an applicable tax rate of less than 15 per cent, but does not include a regime that takes into account income other than income of the controlled foreign companies except that it may allow losses incurred by the constituent entity-owner to reduce the controlled foreign company income inclusion;

‘jurisdictional ETR’ means the effective tax rate for a jurisdiction as calculated under section 111AC without regard to any covered taxes under a controlled foreign company tax regime, but including income tax expense attributable to a qualified domestic top-up tax of a jurisdiction where the blended CFC tax regime allows a foreign tax credit for the qualified domestic top-up tax on the same terms as any other creditable covered tax.

(2) For fiscal years that begin on or before 31 December 2025 but not including a fiscal year that ends after 30 June 2027, for the purposes of section 111Z(4), allocable blended CFC tax shall be allocated from a constituent entity-owner to a constituent entity in accordance with the following formula:

(blended CFC allocation key x allocable blended CFC tax)/(sum of all blended CFC allocation keys)

where—

allocable blended CFC tax is the amount of tax charge incurred by a constituent entity-owner under a blended CFC tax regime, and

blended CFC allocation key is calculated as follows:

attributable income of the entity x (applicable rate – jurisdictional ETR)

(3) Where the jurisdictional ETR equals or exceeds the applicable rate or the minimum tax rate, the blended CFC allocation key for the constituent entity shall be deemed to be zero.

Post-filing adjustments and tax rate changes

111AB. (1) (a) Subject to paragraph (b), where a constituent entity records an adjustment to its covered taxes for a previous fiscal year in its financial accounts, such adjustment shall be treated as an adjustment to covered taxes in the fiscal year in which the adjustment is made, unless the adjustment relates to a fiscal year in which there is a decrease in covered taxes for the jurisdiction.

(b) Subject to paragraph (d), where a constituent entity records a decrease in covered taxes for a previous fiscal year in its financial accounts that were included in the constituent entity’s adjusted covered taxes for a previous fiscal year, the effective tax rate and top-up tax for that fiscal year shall be recalculated in accordance with section 111AF by reducing adjusted covered taxes by the amount of the decrease in covered taxes.

(c) Where there is an adjustment to covered taxes in accordance with paragraph (b), the qualifying income for that fiscal year and any previous fiscal years shall be adjusted accordingly.

(d) On the making of an election by a filing constituent entity in accordance with section 111AAAD, where there is an aggregate decrease of less than €1,000,000 in the adjusted covered taxes determined for a jurisdiction for the fiscal year in accordance with paragraph (b), the decrease in covered taxes shall be treated as an adjustment to covered taxes in the fiscal year in which the adjustment is made.

(2) Where in a fiscal year the applicable domestic tax rate is reduced below the minimum tax rate, and such reduction results in a deferred tax expense in the financial accounts of a constituent entity for a fiscal year, the amount of the resulting deferred tax expense shall be treated as an adjustment to the constituent entity’s liability for covered taxes, that are taken into consideration pursuant to section 111U, for a previous fiscal year in accordance with subsection (1).

(3) (a) Where a deferred tax expense was recorded in the financial accounts of a constituent entity at a rate lower than the minimum tax rate, and the applicable tax rate is increased in a subsequent fiscal year, the amount of deferred tax expense that results from such increase shall be treated, upon payment of the related tax, as an adjustment to a constituent entity’s liability for covered taxes claimed for the previous fiscal year in which the deferred tax expense was recorded in accordance with subsection (1).

(b) The adjustment under paragraph (a) shall not exceed an amount equal to the deferred tax expense recalculated at the minimum tax rate.

(4) Where more than €1,000,000 of the amount accrued by a constituent entity as current tax expense, and included in adjusted covered taxes for a fiscal year, is not paid within 3 years after the end of that fiscal year, the effective tax rate and top-up tax for the fiscal year in which the unpaid amount was included as a covered tax shall be recalculated in accordance with section 111AF, by excluding such unpaid amount from the adjusted covered taxes.

CHAPTER 5

Calculation of the effective tax rate and the top-up tax

Determination of effective tax rate

111AC. (1) The effective tax rate of an MNE group or large-scale domestic group shall be calculated for—

(a) each fiscal year, and

(b) each jurisdiction,

provided that there is net qualifying income in the jurisdiction, as calculated in accordance with subsection (3).

(2) For the purpose of this Part, the effective tax rate of an MNE group or large-scale domestic group for a jurisdiction for a fiscal year, shall be calculated as follows:

ACJ / NQI

where—

ACJ is the aggregate adjusted covered taxes of all the constituent entities located in the jurisdiction, and

NQI is the positive amount, if any, of the net qualifying income of all the constituent entities located in the jurisdiction determined in accordance with subsection (3).

(3) The net qualifying income or loss of the constituent entities located in a jurisdiction for a fiscal year shall be calculated as follows:

AQI-AQL

where—

AQI is the positive sum, if any, of the qualifying income of all constituent entities located in the jurisdiction for a fiscal year, and

QL is the sum of the qualifying losses of all constituent entities located in the jurisdiction for a fiscal year.

(4) For the purposes of subsections (2) and (3), the adjusted covered taxes and net qualifying income or loss of constituent entities, that are investment entities, are excluded from the calculation of the effective tax rate in accordance with subsection (2) and the calculation of the net qualifying income in accordance with subsection (3).

(5) The effective tax rate of each stateless constituent entity shall be calculated, for each fiscal year, separately from the effective tax rate of all other constituent entities.

Calculation of top-up tax

111AD. (1) Where the effective tax rate of a jurisdiction in which a constituent entity is located is below the minimum tax rate for a fiscal year, the MNE group or large-scale domestic group shall calculate a top-up tax in accordance with this section separately for each of its constituent entities that has qualifying income included in the calculation of net qualifying income of that jurisdiction for the fiscal year.

(2) The top-up tax percentage for a jurisdiction for a fiscal year, shall be the positive percentage point difference, if any, calculated as follows:

MTR – ETR

where—

MTR is the minimum tax rate, and

ETR is the effective tax rate of the jurisdiction for the fiscal year calculated in accordance with section 111AC.

(3) The jurisdictional top-up tax for a fiscal year shall be the positive amount, if any, calculated as follows:

(TUTP x EP) + ATUJ – D

where—

TUTP is the top-up tax percentage for the jurisdiction for a fiscal year determined in accordance with subsection (2),

EP is the excess profit determined for the jurisdiction for a fiscal year in accordance with subsection (4),

ATUJ is the additional top-up tax for the jurisdiction for a fiscal year determined in accordance with section 111AF, and

D is the amount of qualified domestic top-up tax payable for the jurisdiction for the fiscal year.

(4) The excess profit for the jurisdiction for the fiscal year referred to in subsection (3), is the positive amount, if any, calculated as follows:

NQI – SBIE

where—

NQI is the positive amount, if any, of the net qualifying income of all the constituent entities in the jurisdiction determined in accordance with section 111AC(3), and

SBIE is the substance-based income exclusion amount for the jurisdiction for the fiscal year determined in accordance with section 111AE.

(5) Subject to subsection (6), the top-up tax of a constituent entity for a fiscal year shall be calculated as follows:

JTUT x (QI / AQI)

where—

JTUT is the jurisdictional top-up tax for a fiscal year as determined by subsection (3),

QI is the qualifying income of the constituent entity for a jurisdiction for a fiscal year, and

AQI is the sum, if any, of the qualifying income of all the constituent entities for a fiscal year located in the jurisdiction.

(6) Where—

(a) the jurisdictional top-up tax for a fiscal year is a result of a recalculation to which section 111AF applies, and

(b) there is no net qualifying income in respect of the jurisdiction for the fiscal year,

the top-up tax shall be allocated to each constituent entity using the calculation provided for in subsection (5), based on the qualifying income of the constituent entities in the fiscal year, for which the recalculations pursuant to section 111AF are performed.

(7) The top-up tax of each stateless constituent entity shall be calculated, for each fiscal year, separately from the top-up tax of all other constituent entities.

Substance-based income exclusion 111AE. (1) In this section—

‘eligible employees’ means—

(a) full-time or part-time employees of a constituent entity, and

(b) independent contractors participating in the ordinary operating activities of the MNE group or large-scale domestic group under the direction and control of the MNE group or large-scale domestic group;

‘eligible payroll costs’ means employee compensation expenditures, including—

(a) salaries,

(b) wages,

(c) other expenditures that provide a direct and separate personal benefit to the employee, including health insurance, pension contributions and stock-based compensation,

(d) payroll and employment taxes, and

(e) employer social security contributions; ‘eligible tangible assets’ means—

(a) property, plant and equipment located in the jurisdiction,

(b) natural resources located in the jurisdiction,

(c) a lessee’s right of use of tangible assets located in the jurisdiction, or

(d) a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets.

(2) (a) Subject to paragraph (b), for the purposes of calculating the top-up tax for a jurisdiction for a fiscal year, the net qualifying income for a jurisdiction shall be reduced by an amount not exceeding the sum of—

(i) the payroll carve-out calculated in accordance with subsection (3), and

(ii) the tangible asset carve-out calculated in accordance with subsection (4),

(in this Part referred to as the ‘substance-based income exclusion amount’) for each constituent entity located in the jurisdiction.

(b) Paragraph (a) shall not apply where a filing constituent entity elects, in accordance with section 111AAAD, not to apply the substance-based income exclusion for the fiscal year.

(3) (a) The payroll carve-out, referred to in subsection (2), of a constituent entity shall be equal to 5 per cent of its eligible payroll costs for a fiscal year, which relate to eligible employees, who perform activities for the MNE group or large-scale domestic group in the jurisdiction in which the constituent entity is located.

(b) For the purposes of paragraph (a), no account shall be taken of eligible payroll costs—

(i) capitalised and included in the carrying value of eligible tangible assets, or

(ii) attributable to income that is excluded in accordance with section 111Q.

(c) For the purposes of paragraph (a)—

(i) an eligible employee shall be considered to perform activities for the MNE group or large-scale domestic group, in the jurisdiction in which the constituent entity is located, where the eligible employee is located within that jurisdiction for greater than 50 per cent of their working time in a fiscal year, and

(ii) a constituent entity shall include only the proportionate share of the eligible payroll costs for a fiscal year for an eligible employee in the calculation of the payroll carve-out where that eligible employee is located within the jurisdiction of the constituent entity employer for 50 per cent, or less, of their working time in that fiscal year.

(4) (a) The tangible asset carve-out, referred to in subsection (2), of a constituent entity shall be equal to 5 per cent of the carrying value of its eligible tangible assets for a fiscal year located in the jurisdiction in which the constituent entity is located.

(b) For the purposes of paragraph (a)—

(i) no account shall be taken of—

(I) the carrying value of property, including land and buildings, that is held for sale, lease or investment, or

(II) the carrying value of tangible assets used to derive income that is excluded in accordance with section 111Q,

(ii) an eligible tangible asset shall be considered to be located in the jurisdiction in which the constituent entity is located where the eligible tangible asset is located within that jurisdiction more than 50 per cent of the time in a fiscal year, and

(iii) a constituent entity shall include only the proportionate share of the carrying value of the eligible tangible asset for a fiscal year in the calculation of the tangible asset carve-out where the eligible tangible asset is located in the jurisdiction of the constituent entity for 50 per cent, or less, of the time in that fiscal year.

(5) For the purpose of subsection (4), and subject to subsection (11), the carrying value of eligible tangible assets shall be the average of the carrying value of eligible tangible assets—

(a) at the beginning of the fiscal year, and

(b) at the end of the fiscal year, reduced by any accumulated depreciation, amortisation and depletion and increased by any amount attributable to the capitalisation of payroll expenses, as recorded for the purposes of preparing the consolidated financial statements of the ultimate parent entity.

(6) (a) For the purpose of subsections (3) and (4), the eligible payroll costs and eligible tangible assets, as the case may be, of a constituent entity which is a permanent establishment, shall be those that are included in its separate financial accounts in accordance with section 111R(1), provided that the eligible payroll costs and eligible tangible assets, as the case may be, are located in the same jurisdiction as the permanent establishment.

(b) The eligible payroll costs and eligible tangible assets of a permanent establishment shall not be taken into account in the calculation of eligible payroll costs and eligible tangible assets of the main entity.

(c) Where the income of a permanent establishment was wholly or partially reduced pursuant to section 111S(1) or 111AQ(5) as the case may be, the eligible payroll costs and eligible tangible assets of such permanent establishment shall be reduced in the same proportion from the calculation of the substance-based income exclusion amount for a jurisdiction for a fiscal year under this section for the MNE group or large-scale domestic group.

(7) (a) For the purpose of subsections (3) and (4)—

(i) eligible payroll costs of eligible employees paid by a flow-through entity, and

(ii) eligible tangible assets owned by a flow-through entity, that are not allocated under subsection (6), shall be allocated to—

(I) the constituent entity-owners of the flow-through entity, in proportion to the amount allocated to them pursuant to section 111S(4), provided that the eligible employees and eligible tangible assets, as the case may be, are located in the jurisdiction of the constituent entity-owners, and

(II) the flow-through entity if it is the ultimate parent entity, reduced in proportion to the income excluded from the calculation of the qualifying income of the flow-through entity pursuant to subsections (1) and (2) of section 111AQ, provided that the eligible employees and eligible tangible assets, as the case may be, are located in the jurisdiction of the flow-through entity.

(b) All eligible payroll costs and eligible tangible assets of a flow- through entity that are not allocated for a fiscal year under subsection (6) or paragraph (a) shall be excluded from the calculation of the substance-based income exclusion amount of the MNE group or large-scale domestic group.

(8) The substance-based income exclusion amount of each stateless constituent entity shall be calculated for each fiscal year separately from the substance-based income exclusion amount of all other constituent entities.

(9) The substance-based income exclusion amount calculated under this section shall not include the payroll carve-out and the tangible asset carve-out, as the case may be, of constituent entities that are investment entities in that jurisdiction.

(10) (a) Subject to subsection (11), for the purposes of subsection (4) and notwithstanding section (4)(b)(i), a constituent entity that is the lessor of property, plant or equipment leased under an operating lease may calculate a tangible asset carve-out in respect of the leased property, plant or equipment in accordance with paragraph (b) where the property, plant or equipment is located in the same jurisdiction as the constituent entity.

(b) The amount of tangible asset carve-out referred to in paragraph (a) is an amount equal to the excess, if any, of the constituent entity’s average carrying value of the property, plant or equipment concerned determined at the beginning and end of the fiscal year over the average amount of the lessee’s right-of-use asset in respect of the property, plant or equipment determined at the beginning and end of the fiscal year.

(c) For the purposes of paragraph (b) and subject to paragraph (d), where the lessee is not a constituent entity, the lessee’s right-of-use asset shall be equal to the undiscounted amount of payments remaining due under the operating lease, including any extensions that would be taken into account in determining a right-of-use asset under the financial accounting standard used to determine the qualifying income of the constituent entity.

(d) For the purposes of paragraph (c), the value of the lessee’s right-of-use asset shall be deemed to be nil where the property, plant or equipment subject to the operating lease is regularly leased several times to different lessees during the fiscal year and the average lease period, including any renewals and extensions, with respect to lessees is 30 days, or less.

(11) For the purposes of subsections (5) and (10), where a lessor leases a part of an eligible tangible asset to a lessee whilst retaining the residual part of the asset for its own use, then the carrying value of the asset shall be allocated between the different uses of the asset on a just and reasonable basis.

(12) (a) Where an adjustment to the computation of qualifying income or loss of a constituent entity for a fiscal year has been made in accordance with section 111AR, the payroll carve-out for that constituent entity shall be reduced by the amount calculated in accordance with the formula:

A x B/C

where—

A is the total eligible payroll costs of the constituent entity for the fiscal year,

B is the total qualifying income of the constituent entity excluded by section 111AR for the fiscal year, and

C is the total qualifying income of the constituent entity for the fiscal year as calculated under Chapter 3.

(b) Where an adjustment to the computation of qualifying income or loss of a constituent entity for a fiscal year has been made in accordance with section 111AR then the tangible asset carve-out for that constituent entity shall be reduced by the amount calculated in accordance with the formula:

A x B/C

where—

A is the total eligible tangible assets of the constituent entity for the fiscal year,

B is the total qualifying income of the constituent entity excluded by section 111AR for the fiscal year, and

C is the total qualifying income of the constituent entity for the fiscal year as calculated under Chapter 3.

Additional top-up tax

111AF. (1) (a) Where, pursuant to—

(i) section 111K(1),

(ii) section 111P(7)(g),

(iii) section 111X(9),

(iv) section 111AB(1)(b) and (4), and

(v) section 111AS(5),

an adjustment to covered taxes or qualifying income or loss results in the recalculation of the effective tax rate and top-up tax of the MNE group or large-scale domestic group for a jurisdiction for a prior fiscal year, the effective tax rate and top-up tax shall be recalculated in accordance with sections 111AC, 111AD and 111AE.

(b) Any amount of incremental top-up tax arising from the recalculation referred to in paragraph (a) shall be treated as an additional top-up tax for the purpose of section 111AD(3) for the fiscal year in which the relevant adjustment is made.

(2) Where, for a fiscal year and a jurisdiction—

(a) there is an additional top-up tax, and

(b) no net qualifying income,

the qualifying income of a constituent entity located in that jurisdiction for the purposes of section 111I(2) shall be an amount calculated as—

TUTA / MTR

where—

TUTA is the top-up tax allocated to the constituent entity pursuant to subsections (5) and (6) of section 111AD, and

MTR is the minimum tax rate.

(3) (a) Where, pursuant to subsections (5) and (6) of section 111U, an additional top-up tax is due for a jurisdiction, the qualifying income of a constituent entity located in that jurisdiction for the purposes of section 111I(2), shall be an amount calculated as—

TUTACE / MTR

where—

TUTACE is the additional top-up tax allocated to the constituent entity, and

MTR is the minimum tax rate.

(b) For the purposes of paragraph (a), the allocation of the additional top-up tax to a constituent entity shall be made pro-rata, to each constituent entity located in the jurisdiction, based on the following formula—

(QIQL x MTR) - ACT

where—

QIQL is the qualifying income or loss of the constituent entity for the fiscal year,

MTR is the minimum tax rate, and

ACT is the adjusted covered taxes of the constituent entity for the fiscal year.

(c) For the purposes of paragraph (a), the additional top-up tax for a jurisdiction for a fiscal year shall only be allocated to constituent entities that record an amount of adjusted covered tax that is—

(i) less than zero, and

(ii) less than the qualifying income or loss of such constituent entities multiplied by the minimum tax rate.

(4) Where a constituent entity is allocated additional top-up tax in accordance with this section or subsection (5) or (6) of section 111AD, such constituent entity shall be treated as a low-taxed constituent entity for the purposes of Chapter 2.

De minimis exclusion

111AG. (1) Notwithstanding anything in this Chapter, at the election of the filing constituent entity, the top-up tax due for a constituent entity of an MNE group or large-scale domestic group located in a jurisdiction, other than a stateless constituent entity or an investment entity, shall be equal to zero for a fiscal year, if for that fiscal year—

(a) the average qualifying revenue of all constituent entities of an MNE group or large-scale domestic group located in that jurisdiction is less than €10,000,000, and

(b) the average qualifying income or loss of all constituent entities of an MNE group or large-scale domestic group in that jurisdiction is a loss or is less than €1,000,000.

(2) (a) For the purpose of subsection (1), the average qualifying revenue, or the average qualifying income or loss, as the case may be, shall be the average of the qualifying revenue or qualifying income or loss of the constituent entities of an MNE group or large-scale domestic group located in the jurisdiction for the fiscal year and the 2 preceding fiscal years.

(b) If there are no constituent entities of an MNE group or large-scale domestic group with qualifying revenue, or qualifying income or loss, as the case may be, located in the jurisdiction in the first or second preceding fiscal years, or both, such fiscal year or years shall be excluded from the calculation of the average qualifying revenue, or average qualifying income or loss, as the case may be, of that jurisdiction.

(3) Subject to subsection (5), for the purposes of this section, the qualifying revenue of the constituent entities of an MNE group or large-scale domestic group located in a jurisdiction for a fiscal year shall be the sum of all the revenues of the constituent entities of an MNE group or large-scale domestic group located in that jurisdiction in arriving at the financial accounting net income or loss of the constituent entities for the fiscal year reduced, or increased, by any adjustment carried out pursuant to Chapter 3.

(4) Subject to subsection (5), for the purposes of this section, the qualifying income or loss of the constituent entities of an MNE group or large-scale domestic group located in a jurisdiction for a fiscal year shall be the net qualifying income or loss of that jurisdiction as calculated pursuant to section 111AC(3).

(5) The qualifying revenue and qualifying income or loss of stateless constituent entities or investment entities shall be excluded from the calculations of the average qualifying revenue and average qualifying income or loss of the constituent entities of an MNE group or large-scale domestic group for the purposes of subsection (1).

(6) The election referred to in this section shall be made annually in accordance with section 111AAAD and shall apply to all constituent entities located in the same jurisdiction.

Minority owned constituent entities

111AH. (1) In this section—

‘minority-owned constituent entity’ means a constituent entity in which the ultimate parent entity has a direct or indirect ownership interest of 30 per cent or less of the total ownership interests of the constituent entity;

‘minority-owned parent entity’ means a minority-owned constituent entity that holds, directly or indirectly, the controlling interests in another minority-owned constituent entity, except where the controlling interests in the former entity are held, directly or indirectly, by another minority-owned constituent entity;

‘minority-owned subgroup’ means a minority-owned parent entity and its minority-owned subsidiaries;

‘minority-owned subsidiary’ means a minority-owned constituent entity whose controlling interests are held, directly or indirectly, by a minority-owned parent entity.

(2) (a) The calculation of the effective tax rate and the top-up tax for a jurisdiction, with respect to members of a minority-owned subgroup, shall apply as if each minority-owned subgroup was a separate MNE group or large-scale domestic group.

(b) The adjusted covered taxes and qualifying income or loss of members of a minority-owned subgroup shall be excluded from—

(i) the determination of the residual amount of the effective tax rate for the jurisdiction of the MNE group or large-scale domestic group, calculated in accordance with section 111AC(2), and

(ii) the net qualifying income or loss for the jurisdiction of the MNE group or large-scale domestic group calculated in accordance with section 111AC(3).

(3) (a) The effective tax rate and top-up tax of a minority-owned constituent entity that is not a member of a minority-owned subgroup shall be calculated on an entity basis.

(b) The adjusted covered taxes and qualifying income or loss of the minority-owned constituent entity referred to in paragraph (a), shall be excluded from—

(i) the determination of the residual amount of the effective tax rate of the MNE group or large-scale domestic group for the jurisdiction, calculated in accordance with section 111AC(2), and

(ii) the net qualifying income or loss of the MNE group or large-scale domestic group for the jurisdiction calculated in accordance with section 111AC(3).

(c) This subsection shall not apply to a minority-owned constituent entity that is an investment entity.

Qualified domestic top-up tax safe harbour

111AI. (1) In this section—

‘OECD peer review process’ means the review process developed, and undertaken, under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, in respect of the domestic top-up tax of a jurisdiction;

‘QDTT Safe Harbour’ shall be construed in accordance with subsection (2);

‘QDTT Safe Harbour standards’ means the standards referred to as ‘Standards for a QDMTT Safe Harbour’ set out in the document referred to in paragraph (e) of the definition, in section 111B, of ‘OECD Pillar Two guidance’;

‘QDTT subgroup’ means a group, constituent entity, joint venture or joint venture affiliate that is subject to a separate qualified domestic top-up tax calculation under the tax law of the jurisdiction implementing that qualified domestic top-up tax;

‘specified return date’ has the meaning assigned to it in section 111AAF.

(2) Notwithstanding section 111AD(3), and subject to subsections (3) to (6), on the making of an election by a filing constituent entity in respect of a QDTT subgroup for a fiscal year, jurisdictional top-up tax in respect of the QDTT subgroup for the fiscal year concerned shall be deemed to be zero (in this section, referred to as the ‘QDTT Safe

Harbour’) where the qualified domestic top-up tax implemented under the tax law of that jurisdiction is determined to have met the QDTT Safe Harbour standards under an OECD peer review process prior to the specified return date in respect of that fiscal year.

(3) The QDTT Safe Harbour for a jurisdiction shall not apply where a qualified domestic top-up tax in respect of that jurisdiction—

(a) is subject, directly or indirectly, to a challenge by the MNE group in judicial or administrative proceedings, or

(b) has been determined as not assessable or collectible by the tax authority of the jurisdiction implementing the qualified domestic top-up tax,

based on—

(i) constitutional grounds,

(ii) other superior law, or

(iii) a specific agreement with the government of the jurisdiction limiting the MNE group’s tax liability.

(4) The QDTT Safe Harbour for a jurisdiction shall not apply in respect of an MNE group where—

(a) the ultimate parent entity of the MNE group is—

(i) a flow-through entity, and

(ii) located in a jurisdiction where qualified domestic top-up tax is not charged under the laws of that jurisdiction on an ultimate parent entity that is a flow-through entity,

(b) the members of the MNE group include a flow-through entity that is required to apply an IIR top-up tax and is located in the jurisdiction where qualified domestic top-up tax is not charged under the laws of that jurisdiction on that flow-through entity, or

(c) a transitional exclusion consistent with the rules laid down in Article 49 of the Directive applies to qualified domestic top-up tax applied by that jurisdiction and that exclusion is not limited to where a qualified IIR does not apply in respect of the constituent entities located in that jurisdiction.

(5) The QDTT Safe Harbour for a jurisdiction shall not apply in respect of an investment entity, that is not an excluded entity, of an MNE group where qualified domestic top-up tax is not charged under the laws of that jurisdiction on that investment entity.

(6) The QDTT Safe Harbour for a jurisdiction shall not apply in respect of a joint venture group where qualified domestic top-up tax is not charged under the laws of that jurisdiction on the members of the joint venture group.

(7) All relevant information concerning the application of the QDTT Safe Harbour shall be included in the top-up tax information return for the fiscal year in accordance with section 111AAI.

Transitional CbCR safe harbour

111AJ. (1) In this section—

‘country-by-country report’ has the same meaning as in section 891H and references in this section to ‘CbC report’ shall be construed accordingly;

‘investment entity jurisdiction’ means the jurisdiction in which an investment entity is resident for the purposes of a CbC report;

‘multi-parented MNE group’ has the meaning assigned to it in section 111AP;

‘net unrealised fair value loss’ means the sum of all losses, as reduced by any gains, which arise from changes in fair value of ownership interests (other than portfolio shareholdings) included in an MNE group’s profit or loss before income tax in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

‘profit or loss before income tax’ means an MNE group’s profit or loss before income tax in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

‘qualified CbC report’ means a CbC report prepared and provided using qualified financial statements;

‘qualified financial statements’ means—

(a) the accounts used to prepare the consolidated financial statements of the ultimate parent entity before any consolidation adjustments eliminating intra-group transactions,

(b) separate financial statements of each constituent entity, joint venture or joint venture affiliate provided they are prepared in accordance with—

(i) an acceptable financial accounting standard, or

(ii) an authorised financial accounting standard and the information contained in the financial statements is reliable,

or

(c) in the case of a constituent entity that is not included in an MNE group’s consolidated financial statements on a line-by-line basis solely due to size or materiality grounds, the financial accounts of that constituent entity that are used for preparation of the MNE group’s CbC report;

‘qualified person’ means—

(a) in respect of an ultimate parent entity that is a flow-through entity, an ownership holder referred to in subsection (1) or (2) of section 111AQ, and

(b) in respect of an ultimate parent entity that is subject to a deductible dividend regime, a dividend recipient referred to in subsection (3) of section 111AR;

‘simplified covered taxes’ means the aggregate income tax expense of all constituent entities, or joint venture and joint venture affiliates, as the case may be, of an MNE group in a jurisdiction for a fiscal year, as reported in the MNE group’s qualified financial statements, excluding—

(a) any tax that is not a covered tax in accordance with section 111T, and

(b) uncertain tax positions reported in the MNE group’s qualified financial statements;

‘simplified ETR’ has the meaning assigned to it in subsection (3);

‘total revenue’ means an MNE group’s total revenues in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

‘transitional CbCR safe harbour’ shall be construed in accordance with subsection (2);

‘transition period’ means any fiscal year beginning on or before 31 December 2026 but shall not include a fiscal year that ends after 30 June 2028;

‘transition rate’ means—

(a) for fiscal years beginning during the year 2023 or 2024, 15 per cent;

(b) for fiscal years beginning during the year 2025, 16 per cent;

(c) for fiscal years beginning during the year 2026, 17 per cent.

(2) Notwithstanding section 111AD(3), and subject to subsections (4), (7) to (11) and (14), on the making of an election by a filing constituent entity, the jurisdictional top-up tax for an MNE group in respect of a jurisdiction for a fiscal year during the transition period shall be deemed to be zero (referred to in this section as the ‘transitional CbCR safe harbour’) where, in respect of the fiscal year concerned—

(a) subject to subsection (5), the MNE group reports—

(i) total revenue of less than €10,000,000, and

(ii) profit or loss before income tax of less than €1,000,000, in respect of that jurisdiction (in this section referred to as ‘the de minimis test’),

(b) the MNE group has a simplified ETR, as determined under subsection (3), in respect of that jurisdiction that is equal to or greater than the transition rate for the fiscal year, or

(c) subject to subsection (6), the MNE group reports profit or loss before income tax in that jurisdiction that is equal to or less than the substance-based income exclusion amount as calculated in accordance with section 111AE and 111AX (in this section referred to as the ‘routine profits test’) in respect of constituent entities that are both—

(i) resident in that jurisdiction for the purposes of the qualified CbC report, and

(ii) located in that jurisdiction in accordance with section 111D.

(3) The simplified ETR of an MNE group in respect of a jurisdiction for a fiscal year shall be equal to an amount, expressed as a percentage, calculated in accordance with the formula:

(A/B) x 100

where—

A is the simplified covered taxes, and

B is the profit or loss before income tax.

(4) For the purposes of subsection (2), a net unrealised fair value loss shall be excluded from profit or loss before income tax if that loss exceeds €50,000,000 in respect of a jurisdiction for a fiscal year.

(5) For the purposes of the de minimis test, where a constituent entity is held for sale, its revenue for a fiscal year shall be aggregated with the revenue of the MNE group reported in its qualified CbC report for that fiscal year in respect of the jurisdiction in which the constituent entity is resident.

(6) For the purposes of subsection (2)(c), the routine profits test shall be deemed to be satisfied in a jurisdiction where the MNE group reports profit or loss before income tax that is zero or less than zero.

(7) Subsection (2) shall apply to a joint venture and joint venture affiliates as if they were constituent entities of a separate MNE group, subject to the profit or loss before income tax and total revenue of the joint venture and joint venture affiliates in respect of the fiscal year, and jurisdiction, concerned being the profit or loss before income tax and total revenue reported in their qualified financial statements.

(8) For the purposes of subsection (2)—

(a) subject to subsection (9), where an ultimate parent entity is a flow-through entity then the profit or loss before income tax and any associated taxes of the ultimate parent entity shall be reduced to the extent that such amount is attributable to an ownership interest held by a qualified person, and

(b) where an ultimate parent entity is subject to a deductible dividend regime within the meaning of section 111AR, then the profit or loss before income tax and any associated taxes of the ultimate parent entity shall be reduced to the extent that such amount is distributed in respect of an ownership interest held by a qualified person.

(9) Where an ultimate parent entity is a flow-through entity, subsection (2) shall not apply to an MNE group in respect of a jurisdiction where that ultimate parent entity is located unless all the ownership interests in the ultimate parent entity are held by qualified persons.

(10) Where an MNE group has not made an election to apply the transitional CbCR safe harbour in respect of a jurisdiction for a fiscal year where there is a constituent entity, joint venture or joint venture affiliate, as the case may be, of the MNE group located in that jurisdiction, then that MNE group shall not be permitted to elect to apply the transitional CbCR safe harbour in respect of that jurisdiction in any subsequent fiscal year.

(11) Notwithstanding anything in this section, the transitional CbCR safe harbour shall not apply to the following:

(a) a stateless constituent entity;

(b) a multi-parented MNE group where a single qualified CbC report does not include the information of the combined groups;

(c) a jurisdiction with constituent entities that are subject to an election made in accordance with section 111AS(1).

(12) Where the transitional CbCR safe harbour applies to an MNE group in respect of a jurisdiction for a fiscal year then—

(a) the transition year referred to in section 111AW(2) for an MNE group in respect of a jurisdiction shall be the first fiscal year where the transitional CbCR safe harbour no longer applies to that MNE group in respect of that jurisdiction,

(b) section 111AW(3) shall continue to apply to a constituent entity, joint venture or joint venture affiliates, as the case may be, of an MNE group located in that jurisdiction for that fiscal year, and

(c) the transition year referred to in section 111AW(4) for a transferring entity shall be the first fiscal year where the transitional CbCR safe harbour no longer applies to that transferring entity.

(13) (a) Subject to paragraph (b), for the purposes of subsection (2), an MNE group shall exclude from a jurisdiction an investment entity, and top-up tax in respect of such entity shall be calculated in accordance with Chapter 7.

(b) Paragraph (a) shall not apply where—

(i) the investment entity has not made an election in accordance with section 111AU(1) or 111AV(1), and

(ii) all the constituent entity owners of that entity are resident in the investment entity jurisdiction.

(c) Where paragraph (a) applies, an MNE group may apply the transitional CbCR safe harbour in respect of a jurisdiction in accordance with subsection (2) having regard to a constituent entity, joint venture or joint venture affiliate, as the case may be, that are not an investment entity.

(d) Where paragraph (a) does not apply, for the purposes of subsection (2)—

(i) the profit or loss before income tax and total revenue of an investment entity, and any associated taxes, shall be reflected only in the jurisdiction of its direct constituent entity-owners in proportion to their ownership interest in such entity, and

(ii) where a portion of the ownership interests of the investment entity is held by owners that are not members of the MNE group, the profit or loss before income tax attributable to such owners shall be excluded.

(14) All relevant information concerning the application of the transitional CbCR safe harbour shall be included in the top-up tax information return for the fiscal year in accordance with section 111AAI.

Transitional UTPR safe harbour

111AK. (1) In this section—

‘corporate income tax rate’ means the nominal rate of corporate income tax (including any sub-national corporate income taxes) generally imposed on income in a jurisdiction;

‘transition period fiscal year’ means a fiscal year not exceeding twelve months that begins on or before 31 December 2025 and ends before 31 December 2026.

(2) For the purposes of section 111N(3), on the making of an election by a filing constituent entity, the top-up tax calculated for each low-taxed constituent entity of an MNE group or member of a joint venture group located in the jurisdiction of the ultimate parent entity of the MNE group or joint venture group concerned shall, where that jurisdiction has a corporate income tax rate that is equal to, or greater than, 20 per cent, be zero for a transition period fiscal year.

(3) A filing constituent entity shall not make an election in accordance with—

(a) section 111AJ(2), and

(b) subsection (2),

in respect of the same jurisdiction for a particular fiscal year.

CHAPTER 6

Corporate restructuring and holding structures

Application of consolidated revenue threshold to group mergers and demergers

111AL. (1) In this Chapter—

‘merger’ means any arrangement where—

(a) the controlling interest in the entities of all or substantially all of 2 or more separate groups are brought under the ownership of a single entity or group to form a single group, or

(b) the controlling interest in an entity that is not a member of any group is brought under the ownership of another entity or group to form a single group;

‘demerger’ means any arrangement where the entities of a group are separated into 2 or more groups that are no longer consolidated by the same ultimate parent entity in its consolidated financial statements.

(2) Where 2 or more groups merge to form a single group (in this subsection referred to as a ‘merged group’) in any of the 4 consecutive fiscal years immediately preceding a fiscal year, for the purposes of the consolidated revenue test the revenue of the merged group shall be deemed to be greater than the consolidated revenue threshold for any fiscal year prior to the merger if the sum of the revenue included in each of their consolidated financial statements for that fiscal year is equal to or greater than the consolidated revenue threshold.

(3) Where an entity that is not a member of a group (in this subsection referred to as the ‘new member entity’) merges with an entity or a group (referred to in this subsection to as the ‘acquiring entity’) in a fiscal year, and either the new member entity or the acquiring entity did not have consolidated financial statements in any of the last 4 consecutive fiscal years immediately preceding that fiscal year, the consolidated revenue threshold shall be deemed to be satisfied for that fiscal year if the sum of the revenue included in each of their financial statements or consolidated financial statements for that fiscal year is equal to or greater than the consolidated revenue threshold.

(4) Where an MNE group or large-scale domestic group to which this Part applies demerges into 2 or more groups (each referred to in this subsection as a ‘demerged group’), the consolidated revenue test shall be deemed to be satisfied by a demerged group—

(a) with respect to the first tested fiscal year ending after the demerger, where the demerged group has revenue recorded in the group’s consolidated financial statements equal to or greater than the consolidated revenue threshold in that fiscal year, and

(b) with respect to the second to fourth tested fiscal years ending after the demerger, where the demerged group has revenue recorded in the group’s consolidated financial statements equal to or greater than the consolidated revenue threshold in at least 2 of the fiscal years following the year of the demerger.

Constituent entities joining and leaving MNE group or large-scale domestic group

111AM. (1)Where during a fiscal year (in this section referred to as an ‘acquisition year’), an entity (in this section referred to as a ‘target entity’)—

(a) becomes or ceases to be a constituent entity of an MNE group or of a large-scale domestic group as a result of a transfer of direct or indirect ownership interests in the target entity, or

(b) becomes the ultimate parent entity of a new group,

the target entity shall be treated as a member of an MNE group or large-scale domestic group for the purposes of this Part provided that a portion of its assets, liabilities, income, expenses and cash flows is included on a line-by-line basis in the consolidated financial statements of the ultimate parent entity in the acquisition year.

(2) For the purposes of this Part—

(a) in an acquisition year, an MNE group or large-scale domestic group shall take into account only the financial accounting net income or loss and adjusted covered taxes of the target entity that are included in the consolidated financial statements of the ultimate parent entity;

(b) in an acquisition year and in each subsequent fiscal year, the qualifying income or loss and adjusted covered taxes of the target entity shall be based on the historical carrying value of its assets and liabilities;

(c) in an acquisition year, the calculation of the eligible payroll costs of the target entity pursuant to section 111AE shall take into account only the costs that are reflected in the consolidated financial statements of the ultimate parent entity;

(d) the calculation of the carrying value of the eligible tangible assets of the target entity pursuant to section 111AE shall be adjusted, where applicable, in proportion to the period in which the target entity was a member of the MNE group or large-scale domestic group during the acquisition year.

(3) Subject to subsection (4), the deferred tax assets and deferred tax liabilities of a target entity that are transferred between MNE groups or large-scale domestic groups shall be taken into account by the acquiring MNE group or large-scale domestic group in the same manner and to the same extent as if the acquiring MNE group or large-scale domestic group held a controlling interest in the target entity when such assets and liabilities arose.

(4) Subsection (3) shall not apply to a qualifying loss deferred tax asset referred to in section 111Y.

(5) (a) For the purposes of section 111X(9), where a deferred tax liability of a target entity has previously been included in its total deferred tax adjustment amount, it shall be treated as reversed by the disposing MNE group or large-scale domestic group and shall be treated as arising from the acquiring MNE group or large-scale domestic group in the acquisition year.

(b) Where paragraph (a) applies, any subsequent reduction of covered taxes pursuant to section 111X(9) shall have effect in the fiscal year in which the amount is recaptured.

(6) Where during an acquisition year a target entity is—

(a) a parent entity, and

(b) a member of 2 or more MNE groups or large-scale domestic groups,

it shall apply separately the provisions of this Part to its allocable shares of the top-up tax of low-taxed constituent entities determined for each MNE group or large-scale domestic group.

(7) Notwithstanding subsections (1) to (6), where the jurisdiction in which the target entity is located or, in the case of a tax transparent entity, the jurisdiction in which the assets are located—

(a) treats the acquisition or disposal of a controlling interest in the target entity in the same, or in a similar, manner as an acquisition or disposal of assets and liabilities, and

(b) imposes a covered tax on the seller based on the difference between—

(i) the tax basis, and

(ii) either—

(I) the consideration paid in exchange for the controlling interest, or

(II) the fair value of the assets and liabilities,

then the acquisition or disposal of that controlling interest in a target entity shall be treated as an acquisition or disposal of assets and liabilities.

Transfer of assets and liabilities

111AN. (1) In this section—

‘non-qualifying gain or loss’ means the lesser of—

(a) the gain or loss of the disposing constituent entity arising in connection with a reorganisation that is subject to tax in the disposing constituent entity’s location, and

(b) the gain or loss arising in connection with the reorganisation recorded in the disposing constituent entity’s financial accounting net income or loss;

‘reorganisation’ means a transformation or transfer of assets and liabilities such as in a merger, demerger, liquidation or similar transaction—

(a) where—

(i) the consideration for the transfer is, in whole or in significant part, equity interests issued by the constituent entity acquiring the assets and liabilities (in this section referred to as the ‘acquiring constituent entity’) or by a person connected with the acquiring constituent entity,

(ii) in the case of a liquidation, the consideration for the transfer is the cancellation of the holding of the equity interests of the entity being liquidated, or

(iii) no consideration is provided and the issuance of an equity interest would have no economic significance,

(b) where the gain or loss of the constituent entity disposing of the assets and liabilities (in this section referred to as the ‘disposing constituent entity’) on the disposal of the assets and liabilities is not subject to tax, in whole or in part, and

(c) where the tax laws of the jurisdiction in which the acquiring constituent entity is located require the acquiring constituent entity to calculate taxable income after the disposal or acquisition using the value of the assets for tax purposes of the disposing constituent entity under the tax laws of the jurisdiction in which the disposing constituent entity is located at the date of the transfer, adjusted for any non-qualifying gain or loss on the disposal or acquisition.

(2) Subject to subsections (4) and (5), a disposing constituent entity shall include the gain or loss arising from the disposal of its assets and liabilities in the calculation of its qualifying income or loss for a fiscal year.

(3) Subject to subsections (4) and (5), an acquiring constituent entity shall determine its qualifying income or loss on the basis of its carrying value of the acquired assets and liabilities determined under the financial accounting standard used in preparing consolidated financial statements of its ultimate parent entity.

(4) Subject to subsection (5), on the happening of a reorganisation—

(a) the disposing constituent entity shall exclude any gain or loss arising on the disposal of its assets or liabilities from the calculation of its qualifying income or loss, and

(b) the acquiring constituent entity shall determine its qualifying income or loss on the basis of the carrying value of the acquired assets and liabilities of the disposing constituent entity upon disposal.

(5) On the happening of a reorganisation that results in a non-qualifying gain or loss for the disposing constituent entity—

(a) the disposing constituent entity shall include the gain or loss on the disposal of its assets and liabilities in the calculation of its qualifying income or loss to the extent of the non-qualifying gain or loss, and

(b) the acquiring constituent entity shall determine its qualifying income or loss after the acquisition of its assets and liabilities using the disposing constituent entity’s carrying value of the acquired assets and liabilities upon disposal, as adjusted consistently with the tax law in the jurisdiction where the acquiring constituent entity is located to account for the non-qualifying gain or loss.

(6) On the making of an election by a filing constituent entity, where a constituent entity is required or permitted to adjust the basis of its assets and the amount of its liabilities to fair value for tax purposes under the tax law in the jurisdiction where it is located (in this section referred to as the ‘tax adjustment’) then such constituent entity shall—

(a) subject to subsection (7), include in the calculation of its qualifying income or loss for a fiscal year an amount of gain or loss in respect of each of its assets and liabilities, which shall be—

(i) equal to the difference between the carrying value for financial accounting purposes of the asset or liability immediately before the date of the event that triggered the tax adjustment (hereinafter referred to as the ‘triggering event’) and the fair value of the asset or liability immediately after the triggering event as determined under the tax law in the jurisdiction where it is located, and

(ii) decreased or increased, as the case may be, by the non-qualifying gain or loss, if any, arising in connection with the triggering event,

and

(b) use the fair value for financial accounting purposes of the asset or liability immediately after the triggering event to calculate qualifying income or loss in the fiscal years ending after the triggering event.

(7) Where an election is made in accordance with subsection (6), a constituent entity may include—

(a) the net total of the amounts determined in accordance with subsection (6)(a) in the constituent entity’s qualifying income or loss in the fiscal year in which the triggering event occurs, or

(b) an amount equal to the net total of the amounts determined in accordance with subsection (6)(a) divided by 5 in the fiscal year in which the triggering event occurs and in each of the immediate 4 subsequent fiscal years, but where the constituent entity leaves the MNE group or large-scale domestic group in a fiscal year within that period, the remaining amount shall be included in that fiscal year.

Joint ventures

111AO. (1) In this section—

‘joint venture’ means an entity of which at least 50 per cent of its ownership interests are held directly or indirectly by its ultimate parent entity and whose financial results are reported under the equity method in the consolidated financial statements of the ultimate parent entity but shall not include—

(a) an ultimate parent entity of an MNE group or of a large-scale domestic group to which a qualified IIR applies,

(b) an excluded entity,

(c) an entity whose ownership interests held by the MNE group or large-scale domestic group are held directly through an excluded entity and which—

(i) operates exclusively or almost exclusively to hold assets or invest funds for the benefit of its investors,

(ii) carries out activities that are ancillary to those carried out by the excluded entity, or

(iii) has substantially all of its income excluded from the calculation of qualifying income or loss in accordance with paragraphs (b) and (c) of section 111P(2),

(d) an entity that is held by an MNE group or large-scale domestic group composed exclusively of excluded entities, or

(e) a joint venture affiliate; ‘joint venture affiliate’ means—

(a) an entity whose assets, liabilities, income, expenses and cash flows are consolidated by a joint venture under an acceptable financial accounting standard or would have been consolidated had the joint venture been required to consolidate such assets, liabilities, income, expenses and cash flows under an acceptable financial accounting standard, or

(b) a permanent establishment whose main entity is a joint venture or an entity referred to in paragraph (a);

‘joint venture group’ means a joint venture and its joint venture affiliates.

(2) For the purposes of this Part, a permanent establishment referred to in paragraph (b) of the definition, in subsection (1), of ‘joint venture affiliate’, shall be treated as a separate joint venture affiliate.

(3) Sections 111E to 111J shall apply to a parent entity that holds a direct or indirect ownership interest in a joint venture or a joint venture affiliate with respect to its allocable share of the top-up tax of that joint venture or joint venture affiliate for a fiscal year.

(4) This Part shall apply to the calculation of the top-up tax of a joint venture group for a fiscal year as if the joint venture and its joint venture affiliates were constituent entities of a separate MNE group or large-scale domestic group and the joint venture was the ultimate parent entity of that group.

(5) The top-up tax of a joint venture group for a fiscal year shall be reduced by each parent entity’s allocable share of the top-up tax under subsection (3) of each member of the joint venture group that is brought into charge under subsection (4) and any remaining amount of top-up tax shall be added to the total UTPR top-up tax amount pursuant to section 111N(3).

Multi-parented MNE and large-scale domestic groups

111AP. (1) In this section—

‘consolidated financial statements of the multi-parented MNE group or multi-parented large-scale domestic group’ means the combined consolidated financial statements referred to in the definition in this subsection of a ‘stapled structure’ or a ‘dual-listed arrangement’, prepared under an acceptable financial accounting standard, which is deemed to be the accounting standard of the ultimate parent entity;

‘dual-listed arrangement’ means an arrangement entered into by 2 or more ultimate parent entities of separate groups under which—

(a) the ultimate parent entities agree to combine their business by contract alone,

(b) pursuant to contractual arrangements the ultimate parent entities will make distributions, with respect to dividends and in liquidation, to their shareholders based on a fixed ratio,

(c) the ultimate parent entities’ activities are managed as a single economic unit under contractual arrangements while retaining their separate legal identities,

(d) the ownership interests of the ultimate parent entities that comprise the agreement are quoted, traded or transferred independently in different capital markets, and

(e) the ultimate parent entities prepare consolidated financial statements—

(i) in which the assets, liabilities, income, expenses and cash flows of entities in all of the groups are presented together as those of a single economic unit, and

(ii) that are required by a regulatory regime to be audited by an external independent auditor;

‘multi-parented large-scale domestic group’ means 2 or more groups where the ultimate parent entities enter into an arrangement that is a stapled structure or a dual-listed arrangement that does not include an entity or permanent establishment of either group subject to the arrangement which is located in a different jurisdiction with respect to the location of the other entities of the 2 groups;

‘multi-parented MNE group’ means 2 or more groups where the ultimate parent entities enter into an arrangement that is a stapled structure or a dual-listed arrangement that includes at least one entity or permanent establishment of either group subject to the arrangement which is located in a different jurisdiction with respect to the location of the other entities of the 2 groups;

‘stapled structure’ means an arrangement entered into by 2 or more ultimate parent entities of separate groups under which—

(a) 50 per cent or more of the ownership interests in the ultimate parent entities of separate groups are—

(i) if they are listed, quoted at a single price, and

(ii) by reason of form of ownership, restrictions on transfer, or other terms or conditions, combined with each other, and cannot be transferred or traded independently,

and

(b) one of the ultimate parent entities prepares consolidated financial statements—

(i) in which the assets, liabilities, income, expenses and cash flows of all the entities of the groups concerned are presented together as those of a single economic unit, and

(ii) that are required by a regulatory regime to be audited by an external independent auditor.

(2) Where entities and constituent entities of 2 or more groups form part of a multi-parented MNE group or multi-parented large-scale domestic group, the entities and constituent entities of each group shall be treated as members of one multi-parented MNE group or multi-parented large-scale domestic group, as the case may be.

(3) For the purposes of subsection (2) an entity, other than an excluded entity, shall be treated as a constituent entity if it is consolidated on a line-by-line basis in the consolidated financial statements of the multi-parented MNE group or multi-parented large-scale domestic group, or if its controlling interests are held by entities in the multi-parented MNE group or multi-parented large-scale domestic group, as the case may be.

(4) The ultimate parent entities of the separate groups that compose the multi-parented MNE group or multi-parented large-scale domestic group, as the case may be, shall be the ultimate parent entities of the multi-parented MNE group or multi-parented large-scale domestic group and in the application of this Part in respect of a multi-parented MNE group or multi-parented large-scale domestic group any references to an ultimate parent entity shall apply, as required, as if they are references to multiple ultimate parent entities.

(5) Sections 111E to 111J shall apply to the parent entities and ultimate parent entities of the multi-parented MNE group or multi-parented large-scale domestic group, as the case may be, with respect to their allocable share of the top-up tax of the low-taxed constituent entities.

(6) Sections 111L to 111N and section 111AZ shall apply to constituent entities of a multi-parented MNE group or multi-parented large-scale domestic group, as the case may be, taking into account the top-up tax of each low-taxed constituent entity that is a member of the multi-parented MNE group or multi-parented large-scale domestic group.

(7) The ultimate parent entities of the multi-parented MNE group or multi-parented large-scale domestic group shall be required to file the top-up tax information return in respect of the information concerning each of the groups that compose the multi-parented MNE group or multi-parented large-scale domestic group in accordance with section 111AAI, unless they appoint a designated filing entity.

CHAPTER 7

Tax neutrality and distribution regimes

Ultimate parent entity that is a flow-through entity

111AQ. (1) The qualifying income of a flow-through entity that is an ultimate parent entity shall be reduced, for a fiscal year, by the amount of qualifying income that is attributable to the holder of an ownership interest (in this section referred to as an ‘ownership holder’) in the flow-through entity where—

(a) the ownership holder is subject to tax on such income, for a taxable period that ends within 12 months after the end of that fiscal year, at a nominal rate of tax that equals or exceeds the minimum tax rate, or

(b) it can be reasonably expected that the sum of the covered taxes paid by the ultimate parent entity and other entities that are part of the tax transparent structure and taxes paid by the ownership holder on such income within 12 months after the end of the fiscal year equals or exceeds an amount equal to that income multiplied by the minimum tax rate.

(2) The qualifying income of a flow-through entity that is an ultimate parent entity shall be reduced, for a fiscal year, by the amount of qualifying income that is allocated to the ownership holder in the flow-through entity provided that the ownership holder is—

(a) an individual who—

(i) is tax resident in the jurisdiction where the ultimate parent entity is located, and

(ii) holds ownership interests representing a right to 5 per cent or less of the profits and assets of the ultimate parent entity,

or

(b) a governmental entity, an international organisation, a non-profit organisation or a pension fund that—

(i) is tax resident in the jurisdiction where the ultimate parent entity is located, and

(ii) holds ownership interests representing a right to 5 per cent or less of the profits and assets of the ultimate parent entity.

(3) (a) Subject to paragraph (b), the qualifying loss of a flow-through entity that is an ultimate parent entity shall be reduced, for a fiscal year, by the amount of qualifying loss that is attributable to the ownership holder in the flow-through entity.

(b) Paragraph (a) shall not apply to the extent that the ownership holder is not permitted to use the qualifying loss for the calculation of its taxable income.

(4) The covered taxes of a flow-through entity that is an ultimate parent entity shall be reduced in the same proportion as the amount of qualifying income of that flow-through entity is reduced in accordance with subsections (1) and (2).

(5) Subsections (1) to (4) shall apply to a permanent establishment through which—

(a) a flow-through entity that is an ultimate parent entity wholly or partly carries out its business, or

(b) the business of a tax transparent entity is wholly or partly carried out, where the ultimate parent entity’s ownership interest in that tax transparent entity is held directly or through one or more tax transparent entities.

Ultimate parent entity subject to a deductible dividend regime

111AR. (1) In this section—

‘cooperative’ means an entity that collectively markets or acquires goods or services on behalf of its members and that is subject to a tax regime in the jurisdiction where it is located that ensures tax neutrality in respect of goods or services that are sold or acquired by its members through the cooperative;

‘deductible dividend’ means, with respect to a constituent entity that is subject to a deductible dividend regime—

(a) a distribution of profits to the holder of an ownership interest in the constituent entity that is deductible from the taxable income of the constituent entity under the laws of the jurisdiction in which it is located, or

(b) a patronage dividend to a member of a cooperative;

‘deductible dividend regime’ means a tax regime that applies a single level of taxation on the income of the owners of an entity by deducting or excluding from the income of the entity the profits distributed to the owners or by exempting a cooperative from taxation;

‘patronage dividend’ means a distribution by a cooperative to its members;

‘supply cooperative’ means a cooperative that purchases goods or services and resells them to its members and whose profits are distributed to its members.

(2) Subject to subsection (3), an ultimate parent entity of an MNE group or of a large-scale domestic group that is subject to a deductible dividend regime shall reduce its qualifying income for the fiscal year by the amount that is distributed as deductible dividend within 12 months after the end of the fiscal year, but such a reduction shall not exceed the amount of qualifying income for the fiscal year.

(3) Subsection (2) shall apply where—

(a) the recipient of the dividend referred to in subsection (2) is subject to tax in respect of that dividend for a taxable period that ends within 12 months after the end of the fiscal year at a nominal rate of tax that equals or exceeds the minimum tax rate,

(b) it can be reasonably expected that the aggregate amount of covered taxes paid by the ultimate parent entity and taxes paid by the recipient on such dividend equals or exceeds that income multiplied by the minimum tax rate, or

(c) the recipient of the dividend referred to in subsection (2) is—

(i) an individual, and the dividend received is a patronage dividend from a supply cooperative,

(ii) an individual who is tax resident in the same jurisdiction where the ultimate parent entity is located and who holds ownership interests representing a right to 5 per cent or less of the profits and assets of the ultimate parent entity, or

(iii) a governmental entity, an international organisation, a non-profit organisation or a pension fund other than a pension services entity, that is tax resident in the jurisdiction where the ultimate parent entity is located.

(4) The covered taxes of an ultimate parent entity, other than the taxes for which a dividend deduction was allowed under a deductible dividend regime, shall be reduced in the same proportion as the amount of qualifying income of the ultimate parent entity is reduced in accordance with subsections (2) and (3).

(5) Where the ultimate parent entity holds an ownership interest in another constituent entity that is subject to a deductible dividend regime, directly or through a chain of such constituent entities, subsections (2), (3) and (4) shall apply to any other constituent entity located in the jurisdiction of the ultimate parent entity that is subject to the deductible dividend regime, to the extent that its qualifying income is further distributed by the ultimate parent entity to recipients that meet the requirements set out in subsections (2) and (3).

(6) For the purposes of subsection (3), the recipient of a patronage dividend distributed by a supply cooperative shall be treated as subject to tax in respect of such dividend insofar as that dividend reduces a deductible expense or cost in the calculation of the recipient’s taxable income or loss.

Eligible distribution tax systems

111AS. (1) On the making of an election by a filing constituent entity, a constituent entity that is subject to an eligible distribution tax system shall include the amount, determined in accordance with subsection (2) as deemed distribution tax, in the adjusted covered taxes of that constituent entity for the fiscal year.

(2) The amount of the deemed distribution tax referred to in subsection (1) shall be the lesser of—

(a) the amount necessary to increase the effective tax rate as calculated in accordance with section 111AC for the jurisdiction of the constituent entity referred to in subsection (1) for the fiscal year to the minimum tax rate, and

(b) the amount of distribution tax that would have been due if the constituent entities located in the jurisdiction referred to in paragraph (a) had distributed all of their income that is subject to the eligible distribution tax system during the fiscal year.

(3) (a) Where an election is made under subsection (1), a deemed distribution tax recapture account shall be established for each fiscal year in which such an election applies.

(b) The amount of deemed distribution tax determined in accordance with subsection (2) for the jurisdiction shall be added to the deemed distribution tax recapture account for the fiscal year in which it was established.

(c) At the end of each subsequent fiscal year, the outstanding balances in the deemed distribution tax recapture accounts established for prior fiscal years shall be reduced in chronological order by the taxes paid by the constituent entities during the fiscal year in relation to actual or deemed distributions, but such reduction shall not exceed the amount of the outstanding balances.

(d) Any residual amount in the deemed distribution tax recapture accounts remaining after the application of paragraph (c) shall be reduced in chronological order by an amount equal to the net qualifying loss of a jurisdiction for the fiscal year multiplied by the minimum tax rate but such reduction shall not exceed the residual amount.

(4) Any residual amount of net qualifying loss multiplied by the minimum tax rate after the application of subsection (3)(d), for the jurisdiction, shall be carried forward to the following fiscal years and shall reduce in chronological order any residual amount in the deemed distribution tax recapture accounts remaining after the application of subsection (3) but such reduction shall not exceed the residual amount.

(5) The outstanding balance, if any, of the deemed distribution tax recapture account, on the last day of the fourth fiscal year after the fiscal year for which such account was established shall be treated as a reduction to the adjusted covered taxes previously determined for such fiscal year in respect of which the deemed distribution tax recapture account was established and the effective tax rate and top-up tax for that fiscal year shall be recalculated in accordance with section 111AF.

(6) Taxes that are paid during the fiscal year in relation to actual or deemed distributions shall not be included in adjusted covered taxes to the extent that they reduce a deemed distribution tax recapture account in accordance with subsections (3) and (4).

(7) (a) Where a constituent entity, that is subject to an election under subsection (1)—

(i) leaves the MNE group or large-scale domestic group, or

(ii) substantially all of its assets are transferred to a person that is not a constituent entity of the same MNE group or large-scale domestic group located in the same jurisdiction,

any outstanding balance of the deemed distribution tax recapture accounts in previous fiscal years in which such an account was established shall be treated as a reduction to the adjusted covered taxes for each of those fiscal years in accordance with section 111AF.

(b) Any additional top-up tax amount that would be due pursuant to paragraph (a) shall be multiplied by the following ratio to determine the additional top-up tax due for the jurisdiction:

A/B

where—

A is the qualifying income of the constituent entity for each fiscal year in which there is an outstanding balance of the deemed distribution tax recapture accounts for the jurisdiction, and

B is the net qualifying income of the jurisdiction determined in accordance with section 111AC(3) for each fiscal year in which there is an outstanding balance of the deemed distribution tax recapture accounts for the jurisdiction.

(8) The election referred to in subsection (1) shall be made in accordance with section 111AAAD, and shall apply to all constituent entities located in the same jurisdiction for the fiscal year in which the election is made.

Determination of effective tax rate and top-up tax of investment entity

111AT. (1) Where a constituent entity of an MNE group or large-scale domestic group—

(a) is an investment entity,

(b) is not a tax transparent entity, and

(c) has not made an election in accordance with section 111AU or 111AV,

the effective tax rate of such an investment entity (in this section referred to as a ‘relevant investment entity’) shall be calculated separately from the effective tax rate of the jurisdiction in which it is located.

(2) (a) The effective tax rate of a relevant investment entity shall be equal to the relevant investment entity’s adjusted covered taxes, as determined in accordance with subsection (3), divided by an amount equal to the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of the relevant investment entity, as determined in accordance with subsection (5).

(b) Where more than one relevant investment entity is located in a jurisdiction, their effective tax rate shall be calculated by combining their adjusted covered taxes as well as the allocable share of the MNE group or large-scale domestic group in their qualifying income or loss.

(3) The adjusted covered taxes of a relevant investment entity shall be the sum of the adjusted covered taxes that are attributable to the allocable share of the MNE group or large-scale domestic group in the qualifying income of the relevant investment entity and the covered taxes allocated to the relevant investment entity in accordance with section 111Z, but shall not include any covered taxes accrued by the relevant investment entity attributable to income that is not part of the MNE group or large-scale domestic group’s allocable share of the relevant investment entity’s income.

(4) (a) The top-up tax of a relevant investment entity shall be an amount determined by the formula—

(A x (B-C)) - D

where—

A is the top-up tax percentage of the relevant investment entity, being a positive amount equal to the difference between the minimum tax rate and effective tax rate of the relevant investment entity,

B is the qualifying income of the relevant investment entity,

C is the substance-based income exclusion calculated for the relevant investment entity as determined in accordance with paragraph (c), and

D is the amount of qualified domestic top-up tax payable for the relevant investment entity for the fiscal year.

(b) Where more than one relevant investment entity of an MNE group or large-scale domestic group is located in a jurisdiction, the qualifying income or loss and substance-based income exclusion amounts of each relevant investment entity shall be combined to compute the effective tax rate of all of the relevant investment entities.

(c) The substance-based income exclusion amount of a relevant investment entity shall be determined in accordance with subsections (1) to (7) and (10) to (12) of section 111AE, taking into account only eligible tangible assets and eligible payroll costs of eligible employees of the relevant investment entity.

(5) For the purposes of this section, the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of a relevant investment entity shall be determined in accordance with section 111I taking into account only interests that are not subject to an election in accordance with section 111AU or 111AV.

Election to treat investment entity as tax transparent entity

111AU. (1) On the making of an election by a filing constituent entity, a constituent entity that is an investment entity shall be treated as a tax transparent entity for the purposes of this Part if—

(a) the constituent entity-owner is subject to tax in the jurisdiction in which it is located under a fair market value or a similar regime based on the annual changes in the fair value of its ownership interest in such entity, and

(b) the tax rate applicable to the constituent entity-owner on the annual changes in the fair value of its ownership interest referred to in paragraph (a) equals or exceeds the minimum tax rate.

(2) For the purposes of subsection (1), a constituent entity that indirectly owns an ownership interest in an investment entity (in this subsection referred to as the ‘first-mentioned investment entity’) through a direct ownership interest in another investment entity (in this subsection referred to as the ‘second-mentioned investment entity’) shall be considered to be subject to tax under a fair market value or similar regime with respect to its indirect ownership interest in the first-mentioned investment entity if it is subject to a fair market value or similar regime with respect to its direct ownership interest in the second-mentioned investment entity.