<< Go back to overview

Next article>>

Article 5.6. Minority-Owned Constituent Entities

Special rules are included in Article 5.6 for computing the ETR and Top-up Tax of Minority-Owned Constituent Entities. A Minority-Owned Constituent Entity is a Constituent Entity of the MNE Group where the UPE holds directly or indirectly 30% or less of its Ownership Interests. The Entities are Constituent Entities because the UPE holds their Controlling Interests, despite the small ownership percentage. Special rules are needed for Minority–Owned Constituent Entities because a UPE may have several Minority-Owned Constituent Entities with operations in the same jurisdiction but with different groups of owners that are not Group Entities. If the income and taxes of these different Constituent Entities were blended in the jurisdictional ETR computations, low-tax outcomes in one Entity could result in a Top-up Tax for the jurisdiction, some of which would be borne by non-Group Entity owners of a different Constituent Entity. While this can occur to some extent under the normal jurisdictional blending rules, the magnitude of the effect in the context of Minority-Owned Constituent Entities and the potential detrimental impact on these investment structures justifies a different rule.

The special rules in Article 5.6 can also apply to Permanent Establishments if the Main Entity and the Permanent Establishment meet the definition of a Minority-Owned Constituent Entity.

Article 5.6.1 applies with respect to members of a Minority-Owned Subgroup, which is a subgroup within the MNE Group comprised of a Minority-Owned Parent Entity and its Minority-Owned Subsidiaries. Article 5.6.2 covers the case where a Minority-Owned Constituent Entity is not part of a Minority-Owned Subgroup. The terms Minority-Owned Constituent Entity, Minority-Owned Subgroup, Minority-Owned Parent Entity and Minority-Owned Subsidiary are defined in Article 10.1 and discussed below.

A Minority-Owned Parent Entity is a Minority-Owned Constituent Entity that holds directly or indirectly the Controlling Interests of another Minority-Owned Constituent Entity. If there are two or more Parent Entities that meet the definition of Minority-Owned Constituent Entity in the same ownership chain, only the Entity that is in the highest level in the ownership chain is considered to be the Minority-Owned Parent Entity.

A Minority-Owned Subsidiary is defined as a Minority-Owned Constituent Entity whose Controlling Interests are held, directly or indirectly, by a Minority-Owned Parent Entity. The Minority-Owned Parent Entity and its Minority-Owned Subsidiaries comprise a Minority-Owned Subgroup.

Not all Constituent Entities whose Controlling Interests are held by a Minority-Owned Parent Entity are considered Minority-Owned Subsidiaries and members of a Minority-Owned Subgroup. They must also meet with the definition of a Minority-Owned Constituent Entity. For instance, assume that UPE holds 60% of the Ownership Interests of B Co, but the Controlling Interests of B Co are held through A Co, a Constituent Entity that is the Minority-Owned Parent Entity of a Minority-Owned Subgroup. In this case, B Co does not meet the requirements to be a Minority-Owned Constituent Entity because the UPE holds more than 30% of its Ownership Interests. The fact that its Controlling Interests are held through a MinorityOwned Parent Entity does not make it a Minority-Owned Subsidiary and member of the Minority-Owned Subgroup.

5.6.1. The computation of the Effective Tax Rate and Top-up Tax for a jurisdiction in accordance with Chapters 3 to 7, and Article 8.2 with respect to members of a Minority-Owned Subgroup shall apply as if they were a separate MNE Group. The Adjusted Covered Taxes and GloBE Income or Loss of members of a Minority-Owned Subgroup are excluded from the determination of the remainder of the MNE Group’s Effective Tax Rate in Article 5.1.1 and Net GloBE Income in Article 5.1.2.

5.6.2. The Effective Tax Rate and Top-up Tax of a Minority-Owned Constituent Entity that is not a member of a Minority-Owned Subgroup is computed on an entity basis in accordance with Chapters 3 to 7, and Article 8.2. The Adjusted Covered Taxes and GloBE Income or Loss of the Minority-Owned Constituent Entity are excluded from the determination of the remainder of the MNE Group’s Effective Tax Rate in Article 5.1.1 and Net GloBE Income in Article 5.1.2. This provision does not apply if the Minority-Owned Constituent Entity is an Investment Entity.

Article 5.6.1

103. Article 5.6.1 is a special rule that only applies to Minority-owned Constituent Entities that are members of a Minority-Owned Subgroup. It states that the computation of the ETR and Top-up Tax for a jurisdiction in accordance with Chapters 3 to 7, and Article 8.2 shall apply as if they were a separate MNE Group. This means that jurisdictional computations made with respect to members of the Minority-Owned Subgroup shall be done separately from the rest of the MNE Group. The second sentence further clarifies that the Adjusted Covered Taxes and GloBE Income or Loss of members of a Minority-Owned Subgroup are excluded from the determination of the remainder of the MNE Group’s ETR in Article 5.1.1 and Net GloBE Income in Article 5.1.2.

104. Thus, an MNE Group could have two or more computations with respect to Constituent Entities located in a jurisdiction, one for members of the Minority-Owned Subgroup and the other for the rest of the MNE Group. The result does not change regardless that a portion of the Ownership Interests are held directly by the UPE or other Parent Entities that are not part of the Minority-Owned Subgroup. For example, the UPE holds 20% of the Ownership Interests of A Co, which owns 90% of B Co 1 and B Co 2 (located in jurisdiction B). The remainder 10% of the Ownership Interests of B Co 1 and B Co 2 are held directly by the UPE. All Entities are Constituent Entities of an MNE Group. A Co is a Minority-Owned Parent Entity, while B Co 1 and B Co 2 are its Minority-Owned Subsidiaries. In this situation, the ETR of jurisdiction B with respect to B Co 1 and B Co 2 is computed separately from the ETR computation of any other Constituent Entities of the MNE Group located in jurisdiction B.

105. Article 5.6.1 does not change the mechanics of the provisions of GloBE Rules other than the computation of the jurisdictional ETR and the consequential changes to the Top-up Tax computation of the members of the Minority-Owned Subgroup. For instance, if the Minority-Owned Parent Entity is a Flowthrough Entity, its Financial Accounting Net Income or Loss is allocated to its Constituent Entity-owners in accordance with Article 3.5.1(b) (unless it has been allocated to a PE under Article 3.5.1(a)). Equally, Article 5.6.1 has no effect on the eligibility of a jurisdiction for the de minimis exclusion provided in Article 5.5 (see above the Commentary on the conditions for the exclusion under Article 5.5.1). Furthermore, the charging provisions in Chapter 2 apply normally. For example, the Minority-Owned Parent Entity is not treated as the UPE of the Minority-Owned Subgroup. The UPE of the MNE Group is still required to apply the IIR with respect to the members of the Minority-Owned Subgroup. Similarly, the Minority-Owned Parent Entity and any other Parent Entity that is a POPE are still required to apply the IIR with respect to their Ownership Interests in the Minority-Owned Constituent Entities of the Minority-Owned Subgroup.

Article 5.6.2

106. Article 5.6.2 is a rule that applies only to a Minority-Owned Constituent Entity that is not a member of a Minority-Owned Subgroup. The provision states that the ETR and Top-up Tax of the Entity is computed on an entity basis in accordance with Chapters 3 to 7, and Article 8.2. It further clarifies that its Adjusted Covered Taxes and GloBE Income or Loss are excluded from the determination of the remainder of the MNE Group’s ETR in Article 5.1.1 and Net GloBE Income in Article 5.1.2. This provision prevents the 70% or more of the Net Income or Loss and Adjusted Covered Taxes of the Entity, which do not effectively belong to the UPE, from being blended with the Net Income or Loss and Adjusted Covered Taxes of the other Constituent Entities of the MNE Group. However, Article 5.6.2 has no effect on the eligibility of a jurisdiction for the de minimis exclusion provided in Article 5.5 (see above the Commentary on the conditions for the exclusion under Article 5.5.1).

107. The last sentence of this provision states that it does not apply if the Minority-Owned Constituent Entity is an Investment Entity. Therefore, the special provisions applicable to Investment Entities in Articles 7.4 and 7.5 have priority and apply in these situations.

No examples have been published by the OECD regarding this article.

Your Content Goes Here

Country Profile – Japan

|0 Comments

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi.

Model Rules – QDMTT and UTPR Safe Harbours

|0 Comments

QDMTT and UTPR Safe Harbours QDMTT Safe Harbour 1. A Qualified Domestic Minimum Top-up Tax (QDMTT) is a domestic minimum tax imposed by a jurisdiction on those Constituent Entities of an MNE Group [...]

Introduction to the GloBE Rules – OECD Commentary

|0 Comments

Introduction to the GloBE Rules - OECD Commentary 1. The Global Base Erosion rules (GloBE Rules) have been developed as part of the solution for addressing the tax challenges of the digital economy. [...]

Model Rules – Globe Information Return

|0 Comments

<< Go back to overview Next article>> Globe Information Return (GIR) The GloBE Information Return (GIR) contains the information a tax administration needs to perform an appropriate risk assessment [...]

Model Rules – Transitional Penalty Relief

|0 Comments

<< Go back to overview Next article>> Transitional Penalty Relief The penalty relief described in this Chapter is designed to provide transitional relief for MNE groups in the initial [...]

Model Rules – Permanent Safe Harbour

|0 Comments

<< Go back to overview Next article>> Permanent Safe Harbour Where an MNE’s operations in a jurisdiction do not meet the requirements of a transitional safe harbour, they may [...]