111AAD Determining top-up amounts of qualifying entity

Summary

This section provides for the determination of the domestic top-up tax of a qualifying entity.

Details

Application

(1) Subject to subsections (2) to (8), Chapters 3 to 8 shall apply for the purposes of determining the domestic top-up tax of a qualifying entity (in this section referred to as ‘domestic purposes’), as those Chapters apply for the purpose of determining the top-up tax of a constituent entity for the purposes of this Part.

(2) For the purposes of subsection (1), this Part has effect for domestic purposes as if:

• (2)(a) references to a constituent entity were to a qualifying entity,
• (2)(b) the formula in section 111AD(3) (which calculates the amount of top-up tax) took no account of qualified domestic top-up tax payable, i.e. a credit against domestic top-up tax is not available for domestic top-up tax payable,
• (2)(c) sections 111T(1)(b), 111AI and 111AS (provisions relating to the qualified domestic top-up tax and eligible distribution tax systems) were omitted,
• (2)(d) references to financial accounting net income or loss for the fiscal year, where it is determined in accordance with a local accounting standard pursuant to paragraph (e), were to the financial accounting net income or loss determined for a constituent entity, joint venture or joint venture affiliate, as the case may be, in preparing financial statements in accordance with that local accounting standard for an accounting period,
• (2)(e) there were inserted in section 111O (determination of qualifying income or loss) the below subsections after subsection (3). These subsections provide that qualifying income or loss may, in certain circumstances, be calculated based on a local accounting standard. The subsections also provide for a tie-breaker test where a qualifying entity prepares more than one set of accounts under a local accounting standard.

  ‘(3A) Notwithstanding subsections (2) and (3) and subject to subsection (3B), the financial accounting net income or loss of a qualifying entity for the fiscal year shall be determined in accordance with a local accounting standard where:

  1. the qualifying entity is an entity within the meaning of section 111AAB(1)(c) (i.e. a standalone entity), or
  2. all of the qualifying entities of the MNE group, large-scale domestic group or joint venture group, as the case may be, located in the State have financial accounts prepared in accordance with a local accounting standard and the accounting period of all such accounts is the same as the fiscal year of the consolidated financial statements of the MNE group, large-scale domestic group or joint venture group as the case may be, and:
     1. all such constituent entities are required to prepare or use such accounts for the purposes of determining their liability to tax in the State or to comply with any other law of the State, or
     2. such financial accounts are subject to an external financial audit.

  (3B) (a) Subject to paragraph (b), where any of the qualifying entities of an MNE group, large-scale domestic group or joint venture group, as the case may be, located in the State prepare financial accounts under more than one local accounting standard then, for the purposes of subsection (3A), the financial accounting net income or loss of a constituent entity for the fiscal year shall be determined in accordance with:

  1. the local accounting standard used for the purposes of determining the profits, losses or gains of the qualifying entity for the purposes of Case I or II of Schedule D, or
  2. where no such profits, losses or gains exist, the local accounting standard used for the preparation of the financial accounts that are annexed to the annual return to be filed with the Registrar in accordance with the Companies Act 2014, for the accounting period which corresponds to the fiscal year.
  2. Where a qualifying entity does not prepare financial accounts:
     1. for the purposes of determining the profits, losses or gains of the qualifying entity for the purposes of Case I or II of Schedule D, or
     2. that are annexed to the annual return to be filed with the Registrar in accordance with the Companies Act 2014, for the accounting period which corresponds to the fiscal year,

  the financial accounting net income or loss of a constituent entity for the fiscal year shall be determined in accordance with subsections (2) and (3).’,

• (2)(f) subject to subsection (8), subsections (4), (5) and (7) of section 111Z (in relation to the allocation of certain covered taxes) did not apply,
• (2)(g) any covered tax of a main entity that is allocable to a permanent establishment located in the State under subsection (2) of 111Z was not allocated to that permanent establishment,
• (2)(h) a reference to covered taxes in section 111Z(6) (in relation to the allocation of covered taxes on distributions) is construed as only including withholding taxes imposed on the distribution of a qualifying entity in the State,
• (2)(i) subsections (3) and (5) of section 111AO (regarding the charging provisions for joint ventures) did not apply, and
• (2)(j) subsections (5) to (7) of section 111AP (regarding the charging provisions for multi-parented MNE and large-scale domestic groups) did not apply.

(2A) Where the financial accounting net income or loss for a fiscal year is determined in accordance with a local accounting standard in accordance with section 111O (determination of qualifying income or loss) (as modified by subsection (2)(e)), then, for the purposes of subsection (1), this Part shall have effect for domestic purposes as if:

• (2A)(a) the reference in section 111P(6)(a) (adjustments to determine qualifying income or loss) to consolidated financial statements were to financial statements prepared in accordance with the local accounting standard,
• (2A)(b) the reference in section 111AE(5) (substance-based income exclusion) to consolidated financial statements of the ultimate parent entity were to financial statements prepared in accordance with the local accounting standard, and
• (2A)(c) the reference in section 111AN(3) (transfer of assets and liabilities) to consolidated financial statements of its ultimate parent entity were to financial statements prepared in accordance with the local accounting standard.

(3) For the purposes of subsection (1), this Part has effect for domestic purposes in respect of a qualifying entity within the meaning of section 111AAB(1)(c), i.e. a standalone entity, as if:

• (3)(a) references in this Part to member of a group, member of an MNE group and member of a large-scale domestic group were to qualifying entity,
• (3)(b) references in this Part to the consolidated financial statements of the ultimate parent were to the standalone financial statements of the qualifying entity, and
• (3)(c) the following sections of this Part were omitted (on the basis that they are not relevant to the calculation of top-up tax for a standalone entity):
  1. section 111R;
  2. section 111S;
  3. section 111Z;
  4. section 111AA;
  5. section 111AH;
  6. section 111AO;
  7. section 111AP;
  8. section 111AQ;
  9. section 111AR;
  10. section 111AU;
  11. section 111AV.

(4) Provides that section 111AY (in relation to the initial phase of exclusion) shall apply for domestic purposes (i.e. replicating the exclusion for the purposes of the domestic top-up tax):

• (4)(a) where none of the ownership interests in a qualifying entity are held by a parent entity other than a partially-owned parent entity, subject to a qualified IIR, or
• the ownership interests in a qualifying entity are held by a parent entity located outside the State that is subject to a qualified IIR and the ownership interests in the parent entity are directly or indirectly held by an ultimate parent entity located in the State, or an intermediate parent entity located in the State (when the ultimate parent entity is an excluded entity), and
• (4)(b) as if the following were substituted for subsection (1) of that section:

  ‘(1) The domestic top-up tax due by a qualifying entity in accordance with section 111AAC(1) shall be reduced to zero where:

  1. the qualifying entity is a member of an MNE group, in the first 5 years of the initial phase of the international activity of the MNE group starting from the first day of the fiscal year in which the MNE group falls within the scope of this Part for the first time, notwithstanding the requirements laid down in Chapter 5,
  2. the qualifying entity is a member of a large-scale domestic group, in the first 5 years, starting from the first day of the fiscal year in which the large-scale domestic group falls within the scope of this Part for the first time, or,
  3. the qualifying entity is an entity within the meaning of section 111AAB (1)(c), in the first 5 years, starting from the first day of the accounting period in which entity falls within the scope of this Part for the first time.’.

(5)(a) For the purposes of this subsection, “new transition year” means the first fiscal year that a qualifying entity is subject to a qualified IIR or a qualified UTPR in a jurisdiction, where that fiscal year begins on a date later than the beginning of the first fiscal year that a qualifying entity falls within the scope of domestic top-up tax.

(5)(b) For the purposes of determining the domestic top-up tax of a qualifying entity in respect of a new transition year:

1. any excess negative tax expense carry-forward shall be eliminated at the beginning of the new transition year;
2. section 111X(9) (deferred tax liability recapture) shall not apply to any deferred tax liability that was taken into account in calculating the effective tax rate for the purposes of determining the domestic top-up tax of the qualifying entity for a fiscal year prior to the new transition year, that was not recaptured prior to the new transition year;
3. section 111X(9) shall apply to deferred tax liabilities that are taken into account in, and subsequent to, the new transition year;
4. any qualifying loss deferred tax asset in respect of a fiscal year preceding the new transition year shall be eliminated and the filing constituent entity may make a new election in accordance with section 111Y(1)(a) and, notwithstanding section 111Y(5), the filing constituent entity may make a new election in the top-up tax information return of the MNE group for the new transition year in accordance with section 111Y(1)(a);
5. the deferred tax assets and deferred tax liabilities taken into account in determining the effective tax rate for a jurisdiction in accordance with section 111AW(2) (transition period deferred tax attributes) shall be eliminated and that subsection shall be applied at the beginning of the new transition year;
6. section 111AW(3) shall apply to transactions occurring after 30 November 2021 and before the beginning of the new transition year but where domestic top-up tax was payable due to the application of section 111U(6) in respect of a deferred tax asset attributable to a tax loss, such deferred tax asset shall not be treated as arising from items excluded from the calculation of qualifying income or loss under Chapter 3.

(6) This subsection provides that where an election may be made with regards to the Part, then that election may be made for domestic purposes to the extent that such an election would affect the calculation of domestic top-up tax for a qualifying entity.

(7) For the purposes of subsection (6), a foreign IIR election is to be treated as an election made under this Part.

(8) Notwithstanding subsection (2)(f), for the purposes of this section, a qualifying entity that is a hybrid entity or reverse hybrid entity shall be allocated the amount of any covered taxes included in the financial accounts of its constituent entity-owner where the taxes:

• are allocated to the qualifying entity under section 111Z(5) (Specific allocation of covered taxes incurred by certain types of constituent entities),
• are imposed by the jurisdiction in which the constituent entity is located, and
• relate to the income of the qualifying entity.

Relevant Date: Finance Act 2024