Article 7.4.1

78. Article 7.4 only applies to Investment Entities and Insurance Investment Entities that are not Tax Transparent Entities. The rules contained in Article 3.5 continue to apply to the income of Investment Entities and Insurance Investment Entities that are Tax Transparent Entities. In addition, Article 7.4 does not apply to the portion of an Investment Entity’s or an Insurance Investment Entity’s income that is subject to an election under Article 7.5 or Article 7.6.

79. Where an Investment Entity or Insurance Investment Entity is a Tax Transparent Entity in part and a Reverse Hybrid Entity in part, Article 7.4.1. applies with respect to its income, expenditure, profit or loss to the extent that it is not fiscally transparent in the jurisdiction in which the owner is located. For example, if an Investment Entity is organised as a trust and taxable on its income that is not distributed to beneficiaries, Article 7.4.1 applies to the extent the Investment Entity’s or Insurance Investment Entity’s income is not distributed.

Article 7.4.2

80. Article 7.4.2 describes the rules for computing the ETR of an Investment Entity or Insurance Investment Entity. The ETR is calculated separately from any other Constituent Entities in the same jurisdiction (in other words, the GloBE Income or Loss and Covered Taxes are not blended with those of other Constituent Entities in the jurisdiction). However, if the MNE Group owns interests in multiple Investment Entities or Insurance Investment Entities located in the same jurisdiction, a single ETR is computed for all such Entities in the jurisdiction.

81. The ETR is the Investment Entity’s or Insurance Investment Entity’s Adjusted Covered Taxes (defined in Article 7.4.3) divided by the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE Income determined under Chapter 3.

Article 7.4.3

82. Article 7.4.3 provides the calculation of an Investment Entity’s or Insurance Investment Entity’s Adjusted Covered Taxes. It is the sum of Covered Taxes accrued by the Investment Entity pursuant to Article 4.1 and the Covered Taxes accrued by its Constituent Entity-owners allocable to the Investment Entity or Insurance Investment Entity pursuant to Article 4.3. The Covered Taxes paid by the Investment Entity are only those that correspond to the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income. The Covered Taxes accrued by Constituent Entity-owners taken into account under Article 7.4.3 are only those that arise with respect to their share of the Investment Entity’s or Insurance Investment Entity’s income.

Article 7.4.4

83. Article 7.4.4 defines the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE Income. It must be calculated in the same way as would have been determined by the UPE in accordance with the rules of Article 2.2.2 taking into account only Ownership Interests in the Investment Entity or Insurance Investment Entity that are not subject to an election under Article 7.5 or Article 7.6. By excluding interests subject to an election under Articles 7.5 and 7.6, the ETR computation for the Investment Entity does not double count taxes that will be taken into account under those elections.

Article 7.4.5

84. Article 7.4.5 provides the rules for computing the Top-up Tax for each Investment Entity or Insurance Investment Entity. These rules are designed to ensure that Top-up Tax arises only with respect to the MNE Group’s interest in the Investment Entity or Insurance Investment Entity and taking into account all Covered Taxes arising in respect of that interest.

85. The rules of Article 7.4.5 generally follow the jurisdictional Top-up Tax computational rules in Article 5.2. First, the Top-up Tax Percentage for the Investment Entity or Insurance Investment Entity is computed by subtracting the ETR computed under Article 7.4.2 from the Minimum Rate. Then, the Investment Entity’s or Insurance Investment Entity’s Substance-based Income Exclusion (computed pursuant to Article 7.4.6) is deducted from the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE income under Article 7.4.4. The excess of the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE income over its Substance-based Income Exclusion is then multiplied by the Top-up Tax Percentage to determine the Top-up Tax. If there is more than one Investment Entity or Insurance Investment Entity located in the jurisdiction, their attributes determined under Articles 7.4.2 to 7.4.4 are combined to determine the Top-up Tax for all such Entities. The Top-up Tax of Investment Entities and Insurance Investment Entities located in a jurisdiction shall be reduced by the amount of Qualified Domestic Minimum Top-up Tax paid in respect of such Entities.

86. In applying Article 2.2, Parent Entities must adjust the computation of their Inclusion Ratio of an Investment Entity that is a LTCE to account for the fact that the Top-up Tax computed for the Entity under Article 7.4.5 has, in effect, already been reduced by the amount that would have been attributable to other owners that are not Group Entities. For example, assume a Constituent Entity owns 90% of the Ownership Interests that carry rights to 90% of the profits of an Investment Entity and the remaining Ownership Interests are held by persons that are not Group Entities. The Investment Entity earns 100 of GloBE income for the Fiscal Year and has no Covered Taxes. Article 7.4.5 computes 13.5 of Top-up Tax based on the Constituent Entity’s share of the income, or 90. The Parent Entity’s Inclusion Ratio is 1.0 and thus the Parent Entity is allocated all 13.5 of the Investment Entity’s Top-up Tax.

Article 7.4.6

87. Generally, only Eligible Tangible Assets and Eligible Payroll Costs of Eligible Employees of the Investment Entities located in the jurisdiction are included in the calculation of the Substance-based Income Exclusion. Article 7.4.6 provides a special rule for computing the Substance-based Income Exclusion of Investment Entities. Article 7.4.6 reduces the Substance-based Income Exclusion proportionally to correspond to the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE Income or Loss. If there are multiple Investment Entities located in the same jurisdiction, their Substance-based Income Exclusions are combined and offset against the Net GloBE Income of those Entities to determine their aggregate Excess Profit.

88. Article 7.4.6 applies notwithstanding the rule in Article 5.3.2, which generally excludes assets and payroll expenses of an Investment Entity or Insurance Investment Entity from the computation of the Substance-based Income Exclusion. The rule in Article 5.3.2 is intended to prevent those assets and payroll expenses from being included in the computation of the carve-outs for both the jurisdiction and the Investment Entity or Insurance Investment Entity.