111AQ Ultimate parent entity that is a flow-through entity

Summary

A jurisdiction’s tax system may contain rules designed to achieve a single level of taxation on business income. These approaches to single-level taxation could result in unintended outcomes under the Pillar Two Rules when they apply to the UPE. This is because the ETR of the UPE itself will be nil (or very low), potentially resulting in a significant top-up tax charge even though the burden of taxation has not been avoided but rather is borne by the entity’s owners. This section addresses this issue.

Details

General

(1) This subsection provides that where a flow-through entity is an ultimate parent entity, its qualifying income shall be reduced, for a fiscal year, by the amount of qualifying income that is attributable to the holder of an ownership interest (in this section referred to as an ‘ownership holder’) where:

• (1)(a) the ownership holder is subject to tax on such income at a nominal rate of tax that equals or exceeds the minimum tax rate, for a taxable period that ends within 12 months after the end of that fiscal year, or
• (1)(b) it can be reasonably expected that the sum of the covered taxes paid by the ultimate parent entity and other entities that are part of the tax transparent structure and taxes paid by the ownership holder on such income equals or exceeds an amount equal to that income multiplied by the minimum tax rate within 12 months after the end of the fiscal year.

(2) The qualifying income of a flow-through entity that is an ultimate parent entity shall be reduced, for a fiscal year, by the amount of qualifying income that is allocated to the ownership holder in the flow-through entity provided the ownership holder is:

• (2)(a) an individual who is tax resident in the jurisdiction where the ultimate parent entity is located, and holds ownership interests representing a right to 5 per cent or less of the profits and assets of the ultimate parent entity; or
• (2)(b) governmental entities, international organisations, non-profit organisations or pension funds who are tax resident in the jurisdiction where the ultimate parent entity is located, and hold ownership interests representing a right to 5 per cent or less of the profits and assets of the ultimate parent entity.

(3)(a) Subject to paragraph (b), the qualifying loss of a flow-through entity that is an ultimate parent entity shall be reduced, for a fiscal year, by the amount of qualifying loss that is attributable to the ownership holder in the flow-through entity.

(3)(b) Paragraph (a) shall not be applicable to the extent the ownership holder is not permitted to use the qualifying loss for the calculation of its taxable income.

(4) The covered taxes of a flow-through entity that is an ultimate parent entity shall be reduced in the same proportion as the amount of qualifying income of that flow-through entity is reduced in accordance with subsections (1) and (2).

(5) Subsections (1) to (4) shall apply to a permanent establishment through which:

1. (5)(a) a flow-through entity that is an ultimate parent entity wholly or partly carries out its business, or
2. (5)(b) the business of a tax transparent entity is wholly or partly carried out, where the ultimate parent entity’s ownership interest in that tax transparent entity is held directly or through one or more tax transparent entities.

Relevant Date: Finance Act 2024