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Article 10.3. Location of an Entity and a Permanent Establishment

Article 10.3 sets out the rules that determine the location of an Entity and a PE for purposes of the GloBE Rules. Determining the location of an Entity and PE is important for jurisdictional blending and for determining where the Top-up Tax has to be paid. Article 10.3 does not affect the domestic and treaty provisions, such as those dealing with tax residence and source taxation.

Article 10.3 has two types of provisions:

(a.) The first provides the rule for where an Entity is located for purposes of the GloBE Rules (Articles 10.3.1 to 10.3.3 and 10.3.7);

(b.) The second provides tie-breaker rules in the event a Constituent Entity is considered to be located in more than one jurisdiction (Articles 10.3.4 to 10.3.6).

172. The principle underlying the rules is to follow the treatment under local law. The rules give a priority to tax residence whenever possible. In most cases, an Entity will be a tax resident in a jurisdiction, and that will be its location for the purpose of the GloBE Rules. In the event that there is no tax residence, the location will be the place of creation. In the case of Flow-through Entities, these are considered to be located in the jurisdiction where they are created if they are the UPE or required to apply the IIR. In all other cases they are stateless Entities. In the case of a PE, in most cases it will be located in the place of business (as determined by the applicable Tax Treaty, domestic taxing rules or physical location). In limited cases, a PE will be stateless.

173. It is possible that the local law treatment results in an Entity being located in more than one jurisdiction. The GloBE tiebreaker rules follow the result of a tiebreaker that applies under an applicable Tax Treaty. If there is no result from the applicable Tax Treaty, then the Entity is located in the place with higher Covered Taxes or higher Substance (calculated under the Substance-based Income Exclusion), in that order. In limited cases, the Entity will be stateless.

174. The GloBE Rules also provide special rules for the treatment of a “stateless” Entity. These rules treat the income and taxes allocated of a Stateless Constituent Entity as subject to a stand-alone top-up tax calculation. The reason for taxing the GloBE Income allocated to a stateless Constituent Entity on a stand-alone basis is that this income will generally be “stateless income” (i.e. not treated under the laws of any jurisdiction as income of a resident taxpayer or a PE). The GloBE Rules identify two situations where a Constituent Entity could be treated as “stateless”:

(a.) the Constituent Entity is a Flow-through Entity identified in Article 10.3.2(b); or

(b.) The Constituent Entity is a PE as defined by paragraph (d) of its definition in Article 10.1 (see Article 10.3.3 (d)).

175. The income and taxes allocated to a Stateless Constituent Entity are brought into account for GloBE purposes on a standalone basis.

176. The rules for allocating income and taxes in respect of a Flow-through Entity are set out in Articles 3.5 and 4.3.2(b). In practice, the only case where the allocation of income to a Flow-through Entity will give rise to stateless income is where the Entity is a Reverse Hybrid Entity such that neither of the jurisdictions where the Entity is created or where the owners are located recognizes the income as income of a resident taxpayer. In the case of stateless PEs, the income and taxes allocated to the PE in accordance with Article 3.4.3 will be treated as stateless income and subject to a separate jurisdictional blending calculation. In this case, the residence jurisdiction is exempting the income on the grounds that the income is attributable to a foreign PE that is not recognised under the laws of another jurisdiction. Therefore, the income becomes “stateless income” under the GloBE Rules because it does not belong to a resident taxpayer or a PE.

177. The term “jurisdiction” is not defined in Article 10.1 or any other provision in the GloBE Rules. The approach that has been taken is to follow the definition of ‘Tax Jurisdiction” used for CbCR, and thus a jurisdiction for purposes of the GloBE Rules means a State as well as a non-State jurisdiction which has fiscal autonomy.

10.3.1. The location of an Entity that is not a Flow-through Entity is determined as follows:

(a) if it is a tax resident in a jurisdiction based on its place of management, place of creation or similar criteria, it is located in that jurisdiction; and

(b) in other cases, it is located in the jurisdiction in which it was created.

10.3.2. The location of an Entity that is a Flow-through Entity is determined as follows:

(a) if it is the Ultimate Parent Entity of the MNE Group or it is required to apply an IIR in accordance with Article 2.1, it is located in the jurisdiction where it was created; and

(b) in other cases, it shall be treated as a stateless Entity.

10.3.3 The location of a Permanent Establishment is determined as follows:

(a) if it is described in paragraph (a) of the definition in Article 10.1, is located in the jurisdiction where it is treated as a permanent establishment and is taxed under the applicable Tax Treaty in force;

(b) if it is described in paragraph (b) of the definition in Article 10.1, is located in the jurisdiction where it is subject to net basis taxation based on its business presence;

(c) if it is described in paragraph (c) of the definition in Article 10.1, is located in the jurisdiction where it is situated; and

(d) if it is described in paragraph (d) of the definition in Article 10.1, is considered as a stateless Permanent Establishment.

10.3.4. Where by reason of Article 10.3.1, a Constituent Entity is located in more than one jurisdiction (a dual-located Entity), then its status for purposes of the GloBE Rules shall be determined as follows:

(a) if it is located in two jurisdictions that have an applicable Tax Treaty in force: (i) it shall be located in the jurisdiction where it is considered as a deemed resident for purposes of the Tax Treaty; (ii) if the Tax Treaty requires the competent authorities to reach a mutual agreement on the deemed residence of the Constituent Entity for purposes of the Tax Treaty and no agreement exists, then paragraph (b) shall apply; (iii) if the Tax Treaty does not provide relief or exemption from tax because the Constituent Entity is a tax resident of both Contracting Parties, then paragraph (b) shall apply;

(b) if no Tax Treaty applies, then its location shall be determined as follows: (i) it shall be located in the jurisdiction where it paid the greater amount of Covered Taxes for the Fiscal Year, without considering the ones paid in accordance with a Controlled Foreign Company Tax Regime; (ii) if the amount of Covered Taxes paid in both jurisdiction is the same or zero, it shall be located in the jurisdiction where it has the greater amount of Substance-based Income Exclusion computed on an entity basis in accordance with Article 5.3; (iii) if the amount of the Substance-based Income Exclusion in both jurisdictions is the same or zero, then it is considered a Stateless Constituent Entity unless it is the Ultimate Parent Entity of the MNE Group in which case it shall be located in the jurisdiction where it was created.

10.3.5. Where, under Article 10.3.4, a dual-located Entity that is a Parent Entity is located in a jurisdiction where it is not subject to a Qualified IIR, then the other jurisdiction can require such Entity to apply its Qualified IIR unless it is restricted by an applicable Tax Treaty in force.

10.3.6. Where an Entity has changed its location during the Fiscal Year, it shall be located in the jurisdiction where it was located at the beginning of that year.

Article 10.3.1

178. Article 10.3.1 is the main rule for determining the location of an Entity that is not a Flow-through Entity. Article 10.3.1 applies to Constituent Entities that are not PEs. The provision is divided into two paragraphs.

Paragraph (a)

179. Paragraph (a) states that an Entity is located in the jurisdiction where it is considered as a tax resident based on its place of management, place of creation, or similar criteria. Whether a Constituent Entity is a resident of a jurisdiction depends on the domestic law of each jurisdiction.

180. Paragraph (a) does not require the Entity to be a legal person provided that it is considered a tax resident in a jurisdiction. For example, a partnership that is considered a tax resident in a jurisdiction would be within the scope of this paragraph. On the other hand, a corporation considered as a Flow-through Entity would fall outside this paragraph.

181. The reference to “place of management and place of creation” are non-exhaustive examples of criteria typically used by jurisdictions in their domestic tax residency rules. The words “place of creation” is used in paragraph (a) because it covers terms such as place of incorporation and place of organisation. The words “or similar criteria” allows for other criteria used in domestic tax residency rules to be taken into account, such as domicile and registration.

182. An Entity will be a tax resident if it is tax resident according to national / federal law. For example, a Constituent Entity may be a Flow-through Entity for purposes of federal or national tax law, but considered as a tax resident under local or sub-national tax law. In these cases, such Entities would not be a resident of the jurisdiction within the scope of paragraph (a).

183. Some jurisdictions may permit an Entity organised outside of the jurisdiction to make an election to claim tax residency in that jurisdiction. Such an election, on its own, is not dispositive of location for purposes of Article 10.3.1 and does not rise to the level of “other similar criteria”.

Paragraph (b)

184. Paragraph (b) states that in all other cases, an Entity that is not a Flow-through Entity is located in a jurisdiction where it was created. This would be the case of Entities created in jurisdictions with no CIT System.

Article 10.3.2

185. Article 10.3.2 refers to the location of an Entity that is a Flow-through Entity. The term Flow-through Entity is defined in Article 10.2 and can be divided into Tax Transparent Entities and Reverse Hybrid Entities. This provision does not apply to a PE through which the Flow-through Entity wholly or partly carries out its business. Article 10.3.2 is divided into two paragraphs.

Paragraph (a)

186. Paragraph (a) states that if the Flow-through Entity is the UPE or is required to apply the IIR, then it would be located in the jurisdiction where it is created.

187. In most cases, it is expected that jurisdictions may not require a Flow-through Parent Entity to apply the IIR because they are not taxable persons. However, some jurisdictions may wish to require these Entities to apply the IIR. If this the case, such Entity would be located in its jurisdiction of creation and therefore, it would be require to apply the IIR in such jurisdiction.

Paragraph (b)

188. Paragraph (b) states that in all other cases, the Flow-through Entity is considered as a stateless Entity. However, the Financial Accounting net Income or Loss of a Flow-through Constituent Entity may not be “stateless income” if it has been allocated to a different Constituent Entity under Article 3.5. The characterisation and treatment of Stateless Constituent Entities is described in the general Commentary to Article 10.3.

Article 10.3.3

189. Article 10.3.3 deals with the location of a PE. This provision should be read in conjunction with other provisions of the GloBE Rules dealing with PEs such as the definition of PE in Article 10.1 and Constituent Entity in Article1.3.

190. Article 10.3.3 is divided into the following paragraphs (which correspond to the four types of PE as provided in the definition in Article 10.1).

191. Paragraph (a) determines the location of a PE when the PE meets the definition in paragraph (a) of Article 10.1. This paragraph of the PE definition refers to a PE that is subject to tax on its net income in the source jurisdiction in accordance with a Tax Treaty in force between the source and residence jurisdiction. In this case, the GloBE Rules apply the outcome provided for under the Tax Treaty and the PE is treated as located in the source jurisdiction.

192. Paragraph (b) determines the location of a PE when it meets the definition in paragraph (b) of Article 10.1. This paragraph of the PE definition refers to a PE that is subject to tax on its net income in the source jurisdiction but there is no Tax Treaty in force between the source and residence jurisdiction. In this situation, the PE is located in the source jurisdiction.

193. Paragraph (c) determines the location of a PE when it meets the definition in paragraph (c) of Article 10.1. This paragraph of the PE definition refers to a PE that is not subject to tax on its net income in the source jurisdiction because the jurisdiction has no CIT system. In such cases, Article 10.1 says that a PE is deemed to exist for purposes of the GloBE Rules if the source jurisdiction would have treated it as a PE in accordance with the OECD Model Tax Convention and had the right to tax the income attributable to it in accordance with Article 7. In this case, it would be located in the jurisdiction that does not have a CIT.

194. Finally, paragraph (d) determines the location of a PE when it meets the definition in paragraph (d) of Article 10.1. This paragraph of the PE definition only applies to PEs that are not described in the other paragraphs of the PE definition. As noted in the Commentary to Article 10.1, Paragraph (d) of the PE definition deems a PE to be established for purposes of the GloBE Rules where the law of the residence jurisdiction exempts the income from a resident’s operations (or a portion of its operations) on the grounds that they are conducted outside of the residence jurisdiction. Where a PE arises under paragraph (d) of the PE definition Article 10.3.3(d) provides that such deemed PEs are stateless.

Article 10.3.4

195. Article 10.3.4 addresses the case where a Constituent Entity, other than a PE, is located in two or more jurisdictions in accordance with Article 10.3.1 (i.e. a resident in more than one jurisdiction). For example, a Constituent Entity may be incorporated in one jurisdiction and have its place of effective management in another, and treated as tax resident in both jurisdictions under the respective domestic definitions of tax residence.

196. This outcome is incompatible with the GloBE Rules for two reasons: 1) the tax attributes of a Constituent Entity can only be considered in one jurisdiction for purposes of the ETR and Top-up Tax computation; 2) a Constituent Entity can only be required to apply the IIR or UTPR in one jurisdiction to avoid double taxation.

197. To resolve this conflict, Article 10.3.4 determines the location of the Constituent Entity for the purpose of the GloBE Rules. This provision does not impact the taxation rights that jurisdictions have under their domestic law. Article 10.3.4 addresses two scenarios:

(a.) situations in which a Tax Treaty in force exists; and

(b.) situations in which no treaty applies.

198. Article 10.3.4 applies for each fiscal year. This means that a Constituent Entity can be located in different jurisdictions in different fiscal years depending on the outcome under the tie breaker rule. For example, where a Tax Treaty comes into force in a subsequent year, or when a Competent Authority Agreement is reached in a subsequent year, and resolves the case differently than was the result under paragraph (b). Similarly, where a Competent Authority Agreement or court decision resolves a case of dual residence and this decision applies retroactively, this may affect the GloBE computations (such as the ETR computation of the jurisdictions involved, computation of the Top-up Tax of the Constituent Entity, or where the Top-up Tax is paid). If the Competent Authority Agreement applies retroactively, any tax owed or refunded in connection with the agreement may also require an adjustment under Article 4.6 and a recalculation of the ETR and Top-up Tax under Article 5.4.1.

Applicable Tax Treaty in force

199. Paragraph (a) applies where the jurisdictions in which the Constituent Entity would otherwise be treated as being located have a Tax Treaty in force and its relevant provisions have come into effect. 200. Two outcomes are possible in this case. First, that the relevant Tax Treaty resolves the dual residence (for example, by virtue of a provision similar to Article 4(3) of the OECD Model Tax Convention (OECD, 2017[1])). In this case, the GloBE Rules follow the outcome of a treaty. This is so irrespective of the type of tiebreaker rule contained in the relevant Tax Treaty (for example, a provision resolving dual residence in favour of the place of effective management, or resolving dual residence by virtue of an agreement reached between the two competent authorities).

201. Second, that the relevant Tax Treaty does not resolve the dual residence (for example, the procedure to reach the agreement has not been initiated, no agreement has been reached between the competent authorities or where the tiebreaker rule says that the Constituent Entity shall not be treated as a resident of either of the jurisdictions for purposes of the treaty). In these cases, Article 10.3.4 (b) applies as if there was no applicable Tax Treaty in force.

No Applicable Tax Treaty in force

202. Article 10.3.4(b) deals with cases where a Tax Treaty does not apply (whether there is no Tax Treaty in force, or because the provisions of the Tax Treaty did not apply or did not resolve the dual residence). It provides a cascading set of rules to resolve the location of the Constituent Entity.

203. The starting point is that Article 10.3.4(b)(i) provides that the Constituent Entity shall be located in the jurisdiction where it paid the greater amount of Covered Taxes for the fiscal year. This rule compares only the amount of Covered Taxes paid in the jurisdictions where the Constituent Entity would otherwise be located. It does not take into account any foreign taxes paid outside those jurisdictions (including withholding taxes), including those that have benefited from a foreign tax credit in those jurisdictions. Furthermore, Article 10.3.4(b)(i) does not take into account taxes paid in accordance with CFC Tax Regime.

204. Article 10.3.4(b)(i) compares “taxes paid” for the Fiscal Year of the MNE Group. For this purpose, “taxes paid” refer to the Covered Taxes that are paid or due to be paid in each jurisdiction for a particular Fiscal Year. The information is taken from the tax returns that the Entity files or will file in each jurisdiction. Where the taxable year is different to the Fiscal Year, then the amount of taxes should be prorated and assigned to the number of months that correspond to the Fiscal Year. For instance, a Constituent Entity paid 120 of taxes for the first taxable year and 60 for the second taxable year. The taxable year runs from July 1 to June 30. The Fiscal Year equals the calendar year. In this case, the Fiscal Year runs between two taxable years. The amount of tax paid for the Fiscal Year is 90 [(120/12)6 + (60/12)6].

205. If the amount of Covered Taxes paid in both jurisdictions is the same or zero, then Article 10.3.4(b)(ii) provides that the Constituent Entity shall be located where it has the greater amount of Substance-based Income Exclusion, computed on an entity basis, in accordance with Article 5.3. This subdivision requires a special computation for purposes of determination of the location of the Constituent Entity, because ordinarily the computation under Chapter 5 would be on a jurisdiction basis, rather than on a standalone entity basis.

206. If neither of these two criteria resolve the conflict, then Article 10.3.4(b)(iii) provides that the Constituent Entity shall be considered as stateless. This is the case unless it is the UPE of the MNE Group, in which case it shall be located in the jurisdiction where it was created.

More than two jurisdictions involved

207. Article 10.3.4 also applies to cases where a Constituent Entity is considered to be located in more than two jurisdictions. First, to the extent that there are tax treaties that apply between the relevant jurisdictions, the provisions of those treaties would apply as per paragraph (a). Thereafter, if the issue has not been fully resolved by the application of the relevant treaties, then paragraph (b) will apply.

Article 10.3.5

208. The tie-breaker rule in Article 10.3.4 can result in locating a Parent Entity in a jurisdiction where it would not be subject to apply a Qualified IIR. Under these circumstances, Article 10.3.5 derogates from the outcomes under Article 10.3.4 and allows the other jurisdiction to impose its Qualified IIR on such a Parent Entity. Article 10.3.5 does not change the jurisdiction where the Constituent Entity is located for purposes of computation of the ETR and Top-up Tax. It only allows the other jurisdiction to apply a Qualified IIR.

209. The operation of Article 10.3.5 may be restricted by the application of a Tax Treaty. Where the result of the application of the tiebreaker rule in a Tax Treaty is that the Constituent Entity is resident in one jurisdiction, but not resident in the other, then under the terms of that treaty (provisions equivalent to Articles 7 or 21 of the OECD Model Tax Convention (OECD, 2017), that second jurisdiction may not be permitted to tax the Constituent Entity as its resident, including applying the IIR. Where, the tiebreaker rule in the Tax Treaty follows or is similar to Article 4(3) of the 2017 OECD Model Tax Convention (which requires an agreement between the competent authorities) such an agreement could provide that it does not restrict a jurisdiction from applying a Qualified IIR where the other jurisdiction has not adopted a Qualified IIR. Alternatively, if no Competent Authority Agreement has been reached and the Constituent Entity is not entitled to any relief or exemption from tax, then nothing restricts the other jurisdiction (under the GloBE tiebreaker rule) from applying the GloBE Rules. In this case, such restriction would not apply because the Tax Treaty would not be prohibiting the application of the GloBE Rules and therefore, Article 10.3.5 still applies.

Article 10.3.6

210. Article 10.3.6 refers to the case where an Entity changes its location during a Fiscal Year. In these cases, Article 10.3.6 states that it should be located in the jurisdiction of departure for that Fiscal Year. For the next Fiscal Year, the Entity would be located in the jurisdiction of arrival.

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