Article 10.2.1

151. Article 10.2.1 defines the term Flow-through Entity. The provision treats an Entity as a Flowthrough 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. An example of a Flow-through Entity is a fiscally transparent partnership. The test for whether an Entity is treated as fiscally transparent is explained further in the Commentary to Article 10.2.2 below.

152. The last part of the sentence of Article 10.2.1 establishes an exception to the definition. It states that an Entity is not a Flow-through Entity if it is a tax resident and subject to a Covered Tax on its income or profit in another jurisdiction. For example, assume an Entity incorporated in Country A has its place of effective management in Country B. The Entity has elected to be treated as fiscally transparent in Country A (the jurisdiction where it was created). The tax residency test in Country B is place of effective management and therefore, Country B taxes the Entity as a tax resident. In this case, the Entity would not be a Flow-through Entity under the GloBE Rules because it is a tax resident of Country B.

153. Part of this exception requires the Entity to be subject to a Covered Tax in the jurisdiction where it is resident. This ensures that the Entity is not only considered as a tax resident but effectively subject to a Covered Tax in that jurisdiction even if it does not pay tax in a particular Fiscal Year because, for example, it is in a loss position.

154. Flow-through Entities can further be divided into two categories: Tax Transparent Entities and Reverse Hybrid Entities. The difference between these terms depends on how the direct owners (i.e. holders of their Ownership Interest) are treating them under their domestic tax law.

155. A Flow-through Entity is a Tax Transparent Entity if the domestic tax law of the owners also treat it as fiscally transparent and require the owner to recognize the income, expenditure, profit or loss of the Flow-through Entity as if it was income earned or expenditure borne by the owners.

156. On the other hand, a Flow-through Entity is a Reverse Hybrid Entity if the domestic tax law of the owners are not treating it as fiscally transparent and therefore, it does not recognize the income, expenditure, profit or loss when earned or incurred by the Entity, but until the Entity distributes profits or make an equivalent payment to its owners.

157. All three definitions include the phrases “with respect to its income, expenditure, profit or loss” and “to the extent that”. These phrases ensure that the rules in Article 10.2 can apply to an entity in relation to a specific item of income or expenditure or a portion of its profit or loss. The application of this language to different situations is described below.

158. In the case of the definition of a Flow-through Entity, the phrases “with respect to its income, expenditure, profit or loss” and “to the extent” cover the situation in which the jurisdiction where the Entity is created does not treat the Entity as entirely fiscally transparent. For instance, the jurisdiction where a trust is created treats that trust as fiscally transparent only with respect to the income that it treats as income of a beneficiary. The income not attributable to the beneficiary is treated as taxable at the trust level. In this case, the trust is a Flow-through Entity but only to the extent and with respect of the beneficiary income. The trust is not considered as a Flow-through Entity to the extent and with respect to the income that is taxed at the trust level.

159. In the case of the definitions of Tax Transparent Entity and Reverse Hybrid Entity, these phrases accommodate the case where the same Flow-through Entity is treated differently by owners that are tax resident in different jurisdictions and therefore apply different entity characterisation rules to the same Entity such that the same Entity is treated as a Tax Transparent Entity and a Reverse Hybrid Entity in respect of different owners. For example, when applying Article 3.5.1, the Financial Accounting Net Income or Loss attributable to the owners that treat the Flow-through Entity as a Tax Transparent Entity is allocated to such owners in accordance with Article 3.5.1(b). The Financial Accounting Net Income or Loss attributable to the owners that treat the Flow-through Entity as a Reverse Hybrid Entity is allocated to the Entity in accordance with Article 3.5.1 (c).

Article 10.2.2

160. Article 10.2.2 describes what is meant by fiscally transparent in Articles 10.2.1 and 10.2.5. It states that an Entity is treated as fiscally transparent under the laws of a jurisdiction, if such jurisdiction treats the income, expenditure, profit or loss of that Entity as if they were derived or incurred by the direct owner of the Entity in proportion to its interest.

161. An Entity is treated as fiscally transparent in the jurisdiction in which it is created if that jurisdiction does not impose a Covered Tax on the Entity and treats the owners of the Entity as earning their respective shares of the Entity’s income directly for purposes of that Covered Tax. This rule does not require the jurisdiction to treat the owners as incurring their respective shares of the Entity’s net losses. Accordingly an Entity may also be considered fiscally transparent where the laws of the jurisdiction where it is established allow for the pass-through of income but requires net losses to be carried forward by the Entity itself and taken into account in the computation of the Entity’s income in a subsequent period. An example of this kind of Entity can be a trust which allocates income of a specific category or class to certain beneficiaries but it is allowed to carry forward any net loss from one taxable year to the next one in order to be offset against future income in that year. An Entity should not be treated as fiscally transparent under the laws of a jurisdiction solely because it is treated for tax purposes in that jurisdiction as forming part of another Constituent Entity because it is a member of a tax consolidated group.

162. An Entity may be subject to Covered Tax at a local, state or regional level but treated as fiscally transparent for tax purposes under national or federal law. Such an Entity may still be treated as fiscally transparent under GloBE with respect to its income or profits even if those amounts are subject to a Covered Tax imposed by a local or sub-national tax authority in the same jurisdiction.

163. An Entity is fiscally transparent in the jurisdiction in which the owner is located if the owner is subject to tax on its share of the Entity’s income or loss in its tax jurisdiction in a similar manner as if the owner directly earned its share. The owner is subject to tax in a similar manner if it is subject to tax on all of the income items of the Entity, which may be net of expenses and losses applied in that Entity, that would have been subject to tax if they had been earned directly by the owner. However, the item of income that has been passed through to the owner on an item-by-item basis does not need to be subject to tax as if it were taxed at the Entity level. For example, a jurisdiction may impose limitations on capital losses incurred by an Entity that are different from the limitations imposed on capital losses incurred directly by the owner.

Article 10.2.3

164. Article 10.2.3 defines a Tax Transparent Structure as a chain of Tax Transparent Entities through which an owner has an Ownership Interest in an Entity or a PE. This term is used in Article 3.5.3 to describe the situation in which a non-member of the MNE Group has an Ownership Interest in a Flow-through Entity through a Tax Transparent Structure.

Article 10.2.4

165. Article 10.2.4 is a deeming provision that treats a Constituent Entity as a Flow-through Entity and Tax Transparent Entity if such Entity has no tax residency and is not subject to a Covered Tax or a Qualified Domestic Minimum Tax, and its owners treats it as fiscally transparent. The most common case covered by this provision is where a Constituent Entity, with no tax residency, is created in a jurisdiction with no CIT and its owners treat that Entity as fiscally transparent. This scenario is not covered by Article 10.2.1 because these Entities are not fiscally transparent in the jurisdiction where they are created because they are not subject to a CIT legislation that treats their income, expenditure, profit or loss as derived or incurred by its owners.

166. Article 10.2.4 is only triggered if several conditions are met. First, the Constituent Entity shall not have a tax residence and not subject to a Covered Tax or a Qualified Domestic Minimum Top-up Tax based on its place of management, creation or similar criteria. Second, the jurisdiction of its owners shall treat the Entity as fiscally transparent. Third, Entity shall not have a place of business in the jurisdiction where it is created. Lastly, its income, expenditure, profit or loss shall not be attributable to a PE. The last three conditions are described in paragraphs (a) to (c) of the provision.

167. Similar to Article 10.2.1, Article 10.2.4 applies in respect of the income, expenditure, profit or loss of the Entity to the extent that the conditions in paragraphs (a) to (c) are met. Thus, an Entity could be treated as a Flow-through Entity and Tax Transparent Entity, and at the same time, treated as an Entity that is not a Flow-through Entity. In the latter case, the Entity is not treated as a Reverse Hybrid Entity because it is not a Flow-through Entity (i.e., the jurisdiction of creation does not treat the income, expenditure, profit or loss as derived or incurred by its owners).

168. For example, C Co is a Constituent Entity created in Country C, a jurisdiction with no CIT. C Co has no place of business in the jurisdiction where it was created and its income is not attributable to a PE. The Ownership Interests of C Co are equally distributed among A Co and B Co, which are Constituent Entities of the same MNE Group. A Co is a resident of Country A, which treats C Co as fiscally transparent. B Co is a resident of Country B, which does not treat C Co as fiscally transparent. In this case, only 50% of the income of C Co is treated as being derived by a Tax Transparent Entity (which is subject to Article 3.5). The remaining 50% of the income of C Co is treated as being derived by an Entity that is not a Flowthrough Entity (not subject to Article 3.5).

Article 10.2.5

169. Article 10.2.5 defines a Hybrid Entity as an Entity that is treated as a separate taxable person for income tax purposes in the jurisdiction where it is located (i.e. a tax resident) but treated as fiscally transparent in the jurisdiction where its owners are located. Similar to other definitions in Article 10.2, the phrase “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” allows that an Entity can be considered a Hybrid Entity only with respect to the owners that treat it as fiscally transparent. The term Hybrid Entity is relevant for purposes of Article 4.3.2 (d).