Article 1.5.1

40. Article 1.5.1 lists the types of Entities that are Excluded Entities. Generally these Entities would not be consolidated on a line-by-line basis with a Group of operating Entities and therefore, would not have been considered as Constituent Entities of such Group under the tests set out in Article 1.3. However, for completeness, consistency and to improve certainty of outcomes, Article 1.5.1 explicitly provides a list of Excluded Entities.

41. The Entities referred in paragraphs (a) to (d) of Article 1.5.1 are Governmental Entities, International Organisations, Non-profit Organisations, and Pension Funds. Each of these are defined in Article 10.1 and discussed more fully in the Commentary to that Article.

42. The Excluded Entities identified in para (e) and (f) are investment funds and real estate investment vehicles that are UPE of MNE group. These entities are excluded from the GloBE Rules in order to protect their status as tax neutral investment vehicles. If an Investment Fund or Real Estate Investment Vehicle is not the UPE of the MNE Group it can still be treated as a Constituent Entity of the MNE Group provided it otherwise meets the consolidation requirements of Article 1.2 and Article 1.3. However such Investment Funds and Real Estate Investment Vehicles are considered as Investment Entities and subject to special rules for calculation of ETR in Article 7.4 through to 7.6.

Article 1.5.2

43. Article 1.5.2 is an extension of the definition of an Excluded Entity in Article 1.5.1 that covers Entities owned by an Excluded Entity. Article 1.5.2 recognises that Excluded Entities may be required, for regulatory or commercial reasons, to hold assets or carry out specific functions through separate controlled entities. For example, commercial or regulatory requirements may prevent an Investment Fund referred in Article 1.5.1(e) from investing directly in an asset and may require the investment to be made through a separate vehicle to limit the Investment Fund’s liability. The rule in Article 1.5.2 addresses these types of situations and may permit such a holding vehicle to qualify as an Excluded Entity. Article 1.5.2 is divided into two paragraphs:

a) Paragraph (a) addresses the situation where an Excluded Entity under Article 1.5.1 sets up an Entity to hold its assets or invest its funds, or to carry out activities that are ancillary to the Excluded Entity’s activities.

b) Paragraph (b) addresses the situation where an Excluded Entity sets up an Entity whose financial accounting net income would otherwise be excluded from the GloBE computations because it is composed of Excluded Dividends or Excluded Equity Gain or Loss.

43.1 Where an Entity meets the definition of an Excluded Entity under Article 1.5.2 based on the totality of the activities of the Entity, including the activities of all of its PEs, the activities undertaken by the PE are not considered separate when applying the Activities Test or for determining whether “substantially all of the Entity’s income is Excluded Dividends or Excluded Equity Gain or Loss” for the purposes of Article 1.5.2. Further, where the Entity meets the definition of an Excluded Entity, the entirety of its activities, including those undertaken by its PE(s), are excluded from the GloBE Rules.

44. Article 1.5.2 does not apply if the Entity referred in paragraphs (a) or (b) is held by a Pension Services Entity (as defined in Article 10.1). As described further in the Commentary to Article 10.1, Pension Services Entities are special purpose vehicles that may perform similar functions to the Entities described in Article 1.5.2. Allowing a Pension Services Entity to establish a further separate controlled entity that qualified for Excluded Entity status would dilute the intended effect of the rules in Article 1.5.2, which are intended to be limited to those controlled entities that carry out functions for the Excluded Entity (such as the Governmental Entity, International or Non-profit Organisations or Pension Fund itself.

45. Article 1.5.2 applies where an Entity that is a member of a Group is held by an Excluded Entity as defined in Article 1.5.1 that is not a member of that Group. An Entity that is a member of a Group that is held by an Investment Fund or a Real Estate Investment Vehicle can still meet the requirements under Article 1.5.2 notwithstanding that that the Investment Fund or Real Estate Investment Vehicle is not the UPE of that Group. For example, an Investment Fund wholly-owns an Entity that is the UPE of a Group and that meets the requirements under Article 1.5.2. In this case, the UPE is an Excluded Entity under Article 1.5.2 notwithstanding that the Investment Fund is not part of the Group because it is not consolidated on a line-by-line basis with such Group.

Paragraph (a)

46. In order to qualify as an Excluded Entity under Article 1.5.2(a) the Entity must meet two tests: an ownership test and an activities test.

Ownership test

47. The ownership test is set out at the beginning of paragraph (a). Under this test, one or more Excluded Entities defined in Article 1.5.1 must own at least 95% of the value of the Entity. The 95% threshold allows for situations in which there is a small minority interest holder, such as where a fund manager holds a small percentage of an Investment Fund or where domestic law requires at least two shareholders to incorporate a corporation or where an Excluded Entity invests through a partnership and is required to have another Entity acting as the general partner for domestic law purposes.

48. Paragraph (a) also applies if the Excluded Entity under Article 1.5.1 owns at least 95% of the value of the Entity through a chain of Excluded Entities. For instance, A Co is an Excluded Entity under Article 1.5.1. A Co wholly-owns B Co (another Excluded Entity), which in turn owns 95% of the value of C Co. In this case, C Co meets the ownership test under paragraph (a) because 95% of its value is indirectlyowned by A Co. In contrast, if A Co owned 95% of Ownership Interests of B Co, then the ownership test is not met with respect to C Co because the value owned by A Co has been diluted to 90% (95% x 95%).

49. The phrase “value of the Entity” refers to the total value of the Ownership Interests issued by the Entity. In the case of shares, it refers to the value of the issued and outstanding shares that are held by shareholders. The value of the Entity is different from a direct measurement of the amount of Ownership Interests held by the Excluded Entity which refers to the underlying rights to profits, capital or reserves of such Entity. The difference between a measurement based on “value of the Entity” and a measurement based on “Ownership Interest” is that the former looks to the aggregate value of the Ownership Interests held by the Excluded Entity as a percentage of the overall value of the Ownership Interests issued by the Entity while the second one compares one or more of the specific rights (i.e., profits, capital or reserves) that are carried by the Ownership Interest.

50. The ownership test referred in this paragraph is only met where 95% or more of the value of the equity interests of the Entity are beneficially owned (either directly or indirectly) by Excluded Entities. The assessment of the value should be made as of the date of the most recent change in the Excluded Entity’s relative Ownership Interests in the Entity and should take into account the value of all the Ownership Interests held by the Excluded Entity. For instance, a newly formed Entity issues 200 ordinary shares worth EUR 1 each and 100 preferred shares worth EUR 2 each. An Excluded Entity shareholder receives all the ordinary shares and 90 of the preferred shares. In this situation, the value of the Entity would be 400 and the Excluded Entity shareholder owns 95% (380/400) of the value of the Entity for purposes of Article 1.5.2.

51. The value of an Excluded Entity’s interest in an Entity should be measured as of the date of the most recent change in the Excluded Entity’s relative Ownership Interests in the Entity. For example, if the Entity issues new shares to a minority shareholder / employee as part of a compensation package, the Excluded Entities should determine whether they still hold 95% of the value of the Ownership Interests of the Entity immediately after such share issuance. However unrealised movements in the comparative value between different classes of shares should not affect the application of the test under Article 1.5.2 until there is a change in the Excluded Entity’s relative Ownership Interests in the Entity. For example, if the value of the Ownership Interests of the Entity in the example above fell to 300 such that the ordinary shares are now worth only 100, the Excluded Entity should still be treated as holding 95% of the value of the Entity despite the fact that the total market value of its shares is 93% (280/300) of the Entity as a whole.

Activities test

52. The activities test is divided into subparagraphs (i) and (ii) of Article 1.5.2 (a).

53. Subparagraph (i) requires that the Entity operates “exclusively or almost exclusively to hold assets or invest funds.” The words “exclusively or almost exclusively” denote a facts and circumstances test that requires all or almost all of the Entity’s activities to be related to holding assets or investing funds. This language further means that in order to be an Excluded Entity under paragraph (a), the Entity must not actively carry out activities other than holding assets or investing funds. For example, subparagraph (i) could apply to a sovereign wealth fund owned by a government (in case it does not already meet the definition of a Governmental Entity under Article 10.1) that is holding assets and investing funds for the benefit of the government, but it would not extend to an airline company owned by the government, because an airline’s activities go beyond holding assets and investing funds. Subparagraph (i) also requires that the assets are held or funds invested “for the benefit of the Excluded Entity”. For example, an Excluded Entity listed in Article 1.5.1 may have a wholly owned subsidiary which borrows funds from third parties to make direct acquisitions of assets (including Ownership Interests in operating companies). Where this is the case, the borrowing and acquisition should be treated as holding assets and investing funds for the benefit of its Excluded Entity parent. This condition has to be read in conjunction with the other conditions of this Article. For example, this condition is still met even if the fund manager benefits from the investments made by such Entity in proportion to its ownership percentage.

54. Alternatively, the activities test is met under subparagraph (ii) if the Entity only carries out activities that are ancillary to the activities carried out by an Excluded Entity. This alternative activities test was included because in some situations the activities that would otherwise be performed by the Excluded Entity referred in Article 1.5.1 are outsourced to a separate legal Entity that is wholly-owned by the Excluded Entity (including those that are 95% owned). For example, if an Excluded Entity sets up an information technology service company that provides services exclusively to the Excluded Entity, then such company would meet the requirement under subparagraph (ii).

54.1 Further, an Entity should not be considered to fail the Activities Test in paragraph 1.5.2(a) where the aggregate of its activities falls within the combined scope of subparagraphs (i) and (ii). Accordingly, an Entity that carries out ancillary activities and the remainder of its activities are to exclusively or almost exclusively hold assets or invest funds for the benefit of the Excluded Entity or Entities will satisfy the Activities Test.

54.2 (tooltip 54.1 i AAG) Non-profit Organisations may set up wholly-owned subsidiaries to undertake commercial activities to raise funds for the charitable activities of the parent Non-profit Organisation. Under some Authorised Financial Accounting Standards, Non-profit Organisations are required to prepare consolidated financial statements and thus they are more likely to be the UPE of the MNE Group as compared with the other types of Excluded Entities. As the revenue of Non-profit Organisations is not excluded from the GloBE revenue threshold, smaller trading operations of subsidiaries of Nonprofit Organisations that are ultimately for the purpose of funding that entity’s charitable activities may become subject to the GloBE Rules and/or potentially subject to Top-Up Tax.

54.3 (tooltip 5.2. in AAG) To assist Non-profit Organisations with managing compliance with the GloBE Rules, the Inclusive Framework has agreed to a bright-line test to determine the ‘ancillary’ activities of 100% owned subsidiaries of Non-profit Organisations. For the purpose of determining whether activities are ancillary to those carried out by Non-profit Organisations for the purposes of subparagraph 1.5.2(a)(ii), the activities of an entity where 100% of the value is owned directly or indirectly by the Non-profit Organisation or by Non-profit Organisations will be deemed to be ancillary if the aggregate revenue of all Group Entities (excluding revenue derived by the Non-profit Organisation or by an Entity that is an Excluded Entity under subparagraph 1.5.2(a)(i) or paragraph 1.5.2(b), or that would be an Excluded Entity under subparagraph 1.5.2(a)(ii) but for the application of this bright-line test)), is less than EUR 750 million (adjusted as provided under Article 1.1.2 if the Fiscal Year is a period other than 12 months) or 25% of the revenue of the MNE Group (if lower) for the Fiscal Period. The application of this deeming does not have regard to, and is not affected by, the actual activities carried out by such subsidiary entities.

54.4 Where the aggregate revenue of all Group Entities (excluding revenue derived by the Nonprofit Organisation or Excluded Entities under subparagraph 1.5.2(a)(i), paragraph 1.5.2(b) or subparagraph 1.5.2(a)(ii) but for the application of this bright-line test), equals or exceeds 25% of the revenue of the MNE Group or EUR 750 million for the Fiscal Period, all the relevant subsidiaries that fail to meet the requirements of subparagraph 1.5.2(a)(i), subparagraph 1.5.2(a)(ii) or paragraph 1.5.2(b), independent of this deeming, will not be Excluded Entities under Article 1.5.2.

54.5 The definition of Non-profit Organisation does not depend on the status of its funder. An organisation funded by government may fall within the definition of Governmental Entity and Nonprofit Organisation. Where a Governmental Entity meets the definition of a Non-profit Organisation, it is treated as a Non-profit Organisation as well as a Governmental Entity under GloBE rules, and it could apply this guidance in respect of the ancillary income of its subsidiaries. Examples of Governmental Entities that could benefit from this guidance may include government-owned educational entities, research institutions and hospitals, as well as other government-owned healthcare providers.

Paragraph (b)

55. Paragraph (b) covers the case where an Excluded Entity referred to in Article 1.5.1 (other than a Pension Services Entity) owns at least 85% of the value of another Entity whose Financial Accounting Net Income or Loss would otherwise be excluded from the GloBE Income or Loss because it is primarily composed of Excluded Dividends or Excluded Equity Gains or Losses that are excluded from GloBE Income in accordance with Article 3.2.1(b) or (c). These type of holding vehicles would not be expected to be subject to a Top-up Tax under the GloBE Rules because all of their income is excluded from the GloBE Income. The practical effect of this provision is that it prevents these Entities from applying the charging provisions in Chapter 2. The ownership percentage in paragraph (b) is lower than in paragraph (a) in order to provide greater flexibility, in particular, in the context of vehicles held by Investments Funds where third parties may hold a greater stake or where the interests in the holding vehicle are issued to management or other employees of the operating company. The meaning of the phrase “value of the Entity” is explained in the Commentary on Paragraph (a).

56. The phrase “substantially all of its income” (i.e. all or almost all of its income) was included to avoid a situation where the Entity fails to qualify under paragraph (b) solely because it receives a small amount of income other than dividend and other equity returns on controlled companies. For example, the interest received from a bank on money that passes through the Entity’s bank account should not prevent the Entity from qualifying as an Excluded Entity under paragraph (b) provided that such interest income represents an insignificant amount of its overall income.

Article 1.5.3

57. Article 1.5.3 provides an election to ignore Article 1.5.2 with respect to an Entity that qualifies as an Excluded Entity under that Article. The election is a Five-Year Election (as defined by Article 10.1). When the election is made, the GloBE Rules will apply to the Entity described in Article 1.5.2 in the same manner as they apply to any other Constituent Entity of the MNE Group. For example, a Filing Constituent Entity may elect to treat an Entity as a Constituent Entity rather than an Excluded Entity under Article 1.5.2 in order to apply the IIR and not the UTPR with respect to the Top-up Tax of the LTCE. Take, for example, an MNE Group with a UPE that is an Investment Fund which is an Excluded Entity, but which, consolidates on a line-by-line basis with its subsidiaries under the Acceptable Financial Accounting Standard used to prepare its Consolidated Financial Statements. Such MNE Group may make this election such that the Entity can apply the IIR to its subsidiaries instead of subjecting all of its Constituent Entities to the UTPR.