Article 7.2.1

38. Similar to Article 7.1.1, Article 7.2.1 allows for a reduction of the UPE’s GloBE Income (but not below to zero) by the amount of Deductible Dividends if the UPE is subject to a Deductible Distribution Regime. The provision applies if the Deductible Dividends are distributed within 12 months of the end of the UPE’s Fiscal Year. The Constituent Entity must maintain records sufficient to demonstrate the amount of GloBE Income for a Fiscal Year that was distributed within 12 months of the end of the Fiscal Year. Furthermore, it only applies in the cases described in paragraphs (a) to (c).

Paragraph (a)

39. Paragraph (a) requires that the Deductible Dividends are subject to tax in the hands of the recipient within 12 months of the end of the UPE’s Fiscal Year. It further requires that one of the conditions set out in subparagraphs (i) to (iii) is met.

40. Subparagraph (i) sets out the general test for determining whether the Deductible Dividends reduce the UPE’s GloBE Income for the Fiscal Year. Under the primary test, the UPE’s GloBE Income is reduced by Deductible Dividends to recipients that are subject to a nominal tax rate that equals or exceeds the Minimum Rate.

41. Subparagraph (ii) sets out an alternative, independent test. The conditions under paragraph (ii) are met if it can be reasonably expected that the aggregate amount of Covered Taxes (paid by the UPE) and taxes paid by the owner on the income attributable to its Ownership Interest equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate. Subparagraph (ii) does not require an ETR computation. The conditions under this paragraph are met if the UPE demonstrates that it is reasonable to expect that tax paid in respect of its income will equal or exceed the tax liability on that income at the minimum rate.

42. Subparagraph (iii) contains a special rule for patronage dividends distributed to natural persons that are members of supply Cooperatives. A supply Cooperative is a Cooperative that purchases goods or services and resells them to its members or patrons. Profits earned by the supply Cooperative are distributed to the members, typically in proportion to their purchases from the Cooperative. Most supply Cooperatives are organised for the acquisition of goods for a group of merchants. However, some supply Cooperatives are organised for the benefit of consumers that are natural persons. Unless they are engaged in business as a sole proprietor, natural persons generally are not able to deduct the cost of the goods acquired through a supply Cooperative. To ensure that the GloBE Rules accommodate supply Cooperatives with members that are consumers, patronage dividends paid to natural persons from a supply Cooperative are treated in the same manner as distributions that are subject to tax at or above the Minimum Rate. This special rule means that such dividends are treated as subject to tax when received irrespective of whether they are in fact taxable receipts of the recipient.

Paragraph (b)

43. Paragraph (b) covers the case where the dividend recipient is a natural person that is tax resident in the UPE Jurisdiction and that holds Ownership Interests that in aggregate carry rights to 5% or less of the profits and assets of the UPE. The Commentary to Article 7.1.1(b) is applicable to Article 7.1.2 (b) as both provisions use the same language and are intended to have the same scope.

Paragraph (c)

44. Paragraph (c) covers the case where the dividend recipient is a Governmental Entity, an International Organisation, a Non-profit Organisation or a Pension Fund that is not a Pension Services Entity. Paragraph (c) only applies where these Entities are “resident” in the UPE jurisdiction. The term “resident” in paragraph (c) is not the same as “tax residence” as used in Tax Treaties or Article 10.2. For purposes of Article 7.2.1, these Entities are resident in the jurisdiction where they are created and managed. A Governmental Entity is resident only in the jurisdiction of the government (including any political subdivision or local authority thereof) that it is a part of or that wholly-owns it. Whether an Entity is resident in a jurisdiction is determined based on all facts and circumstances.

45. Paragraph (c) of Article 7.2.1 differs from paragraph (c) of Article 7.1.1 in that it only applies in the case of a Pension Fund that is not a Pension Services Entity. Thus, Article 7.2.1(c) only applies in relation to a dividend paid to the parent Pension Fund by a UPE in the Pension Fund’s jurisdiction. Without this limitation, Article 7.2.1(c) could allow Pension Funds to take advantage of Deductible Dividend Regimes to earn income exempt from the GloBE Rules from UPEs located anywhere in the world by simply establishing a Pension Services Entity in the UPE’s jurisdiction. The paragraph also differs from Article 7.1.1(c) by not imposing a limitation on the amount that can be owned by the Entities. As explained in the Commentary to Article 7.1.1(c), that limitation prevents circumvention of the rules that generally prevent these Entities from carrying on a trade or business. Deductible Dividend Regimes typically apply to Entities that engage in investment activities or to Cooperatives, and are more difficult to use, and thus less likely to be used, as a means of circumventing the prohibition on carrying on a trade or business.

Article 7.2.2

46. Article 7.2.2 is similar to Article 7.1.3. It generally requires a reduction of the UPE’s Covered Taxes in proportion to the income distributed as a Deductible Dividend. However, this reduction does not apply to any taxes paid on undistributed GloBE Income pursuant to the Deductible Dividend Regime itself (including taxes that are based on corporate equity or retained earnings). All of the tax paid under the Deductible Dividend Regime (including taxes that are based on corporate equity or retained earnings) in respect of undistributed income is included in the Entity’s Covered Taxes and taken into account along with the undistributed income in determining the ETR for the jurisdiction.

47. Article 7.2.2 also requires a reduction of the UPE’s GloBE Income by the amount of the reduction in the Covered Taxes. This is necessary because of two features of the GloBE Rules concerning Deductible Dividend Regimes. First, GloBE Income is computed under Article 3.2 by adding back Covered Taxes to the Financial Accounting Net Income or Loss. Second, Article 7.2.1 reduces the UPE’s income by the amount of distributions, which are necessarily comprised of after-tax income. Thus, if the UPE incurs any taxes related to distributed income, the amount of the distribution will not reduce the UPE’s GloBE Income to zero; the GloBE income must also be reduced by the tax that was included in the GloBE Income under Article 3.2. Without this rule, Top-up Tax could arise even where all of the UPE’s earnings were distributed as Deductible Dividends.

48. For example, assume that a UPE has 90 of Financial Accounting Net Income, which includes 10 of accrued Covered Tax expense. The UPE distributes the 90 of income for which it receives a deduction under the applicable Deductible Dividend Regime. The UPE’s GloBE Income, however, is 100 because the 10 of Covered Taxes is added back to Financial Accounting Net Income or Loss pursuant to Article 3.2.1(a). Accordingly, the 90 distribution will not reduce its 100 GloBE Income to zero. Article 7.2.2 requires a further reduction of 10 to the UPE’s GloBE Income to ensure that the MNE Group is not subject to Topup Tax in respect of the Covered Taxes added back to the determination of GloBE Income or Loss.

Article 7.2.3

49. Article 7.2.3 is similar to Article 7.1.4. It extends the rules applicable to the UPE to other Constituent Entities located in the UPE Jurisdiction that are subject to the Deductible Dividend Regime and held through an ownership chain made up exclusively of such Entities. However, the income of the Constituent Entities that are not the UPE is reduced only to the extent it is distributed to the UPE and then by the UPE to recipients that meet the requirements of Article 7.2.1. The Ultimate Parent Entity must maintain records sufficient to demonstrate that such distributions occurred within 12 months of the end of the Fiscal Year of the subsidiary Entity subject to the Deductible Dividend Regime. The UPE may use any reasonable method of determining the source of any intra-group distributions from other Entities, including determining the income of Entities that are subject to a Deductible Dividend Regime and Entities that are subject to an ordinary income tax, that have not been distributed to the UPE’s owners.

Article 7.2.4

50. Article 7.2.4 provides rules to clarify the application of Article 7.2.1 with respect to certain patronage dividends distributed by supply Cooperatives. The rule applies to dividend recipients other than natural persons because distributions from supply Cooperatives to natural persons are always treated as a reduction to the UPE’s GloBE Income under Article 7.2.1(a)(iii).

51. Patronage dividends from a supply Cooperative may not be subject to tax in the same way that patronage dividends from a marketing cooperative are subject to tax. A marketing Cooperative is one in which members sell their products or services to the Cooperative and the Cooperative re-sells those products or services to its customers. Patronage dividends received by a business from a marketing cooperative essentially represent additional sales price for the goods or services provided by the cooperative member. Patronage dividends received by a business from a supply cooperative, on the other hand, essentially represent a reduction in the cost of goods or services acquired through the cooperative. Because of the difference in the character, from an accounting, and perhaps tax perspective, Article 7.2.4 treats patronage dividends from a supply Cooperative as “subject to tax” in the hands of the recipient to the extent they reduce an expense or cost that is deductible in the computation of the dividend recipient’s taxable income. Whether the dividend is then subject to tax at a rate above the Minimum Rate is determined based on the relevant rules in Article 7.2.1.