111AT Determination of effective tax rate and top-up tax of investment entity.

Summary

Investment Entities that are the UPE are excluded from the operation of the Pillar Two Rules. However, the income of a controlled investment entity is consolidated with the MNE Group and brought within the Pillar Two Rules. This section provides a mechanism for calculating the ETR of a controlled investment entity that is not subject to an election to treat it as a tax transparent entity. The ETR and top-up tax of these entities is calculated on a standalone basis.

This section also seeks to ensure that minority investors are not subject to top-up tax on their interest in a low-taxed investment entity controlled by an MNE Group. It does so by calculating the ETR and top-up tax of a controlled investment entity only to the extent that the income is attributable to the MNE Group.

Details

General

(1) Where a constituent entity of an MNE group or large-scale domestic group

• (1)(a) is an investment entity,
• (1)(b) is not a tax transparent entity, and
• (1)(c) has not elected to be treated as a tax transparent entity under section 111AU or an election to apply a taxable distribution method under section 111AV,

the effective tax rate of such investment entity (referred to as a relevant investment entity) shall be calculated separately from the effective tax rate of the jurisdiction in which it is located.

(2)(a) The effective tax rate of the investment entity shall be equal to the investment entity’s adjusted covered taxes divided by an amount equal to the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of that investment entity.

(2)(b) Where more than one investment entity is located in a jurisdiction, their effective tax rate shall be calculated by combining their adjusted covered taxes as well as the allocable share of the MNE group or large-scale domestic group in their qualifying income or loss.

(3) The adjusted covered taxes of an investment entity referred to in subsection (1) shall be the sum of the adjusted covered taxes that are attributable to the allocable share of the MNE group or large-scale domestic group in the qualifying income of the investment entity and the covered taxes allocated to the investment entity in accordance with section 111Z (specific allocation of covered taxes to certain types of entities), but shall not include any covered taxes accrued by the investment entity attributable to income that is not part of the MNE group or large-scale domestic group’s allocable share of the investment entity’s income.

(4)(a) The top-up tax of an investment entity referred to in subsection (1) shall be an amount determined by multiplying the top-up tax percentage of the investment entity (being a positive amount equal to the difference between the minimum tax rate and effective tax rate of such investment entity), by the sum of the qualifying income of the investment entity less the substance-based income exclusion (calculated for the investment entity as determined in paragraph (c)), and finally, from that amount is deducted the amount of qualified domestic top-up tax payable for the investment entity for the fiscal year.

where—

A is the top-up tax percentage of the relevant investment entity, being a positive amount equal to the difference between the minimum tax rate and effective tax rate of the relevant investment entity,

B is the qualifying income of the relevant investment entity,

C is the substance-based income exclusion calculated for the relevant investment entity as determined in accordance with paragraph (c), and

D is the amount of qualified domestic top-up tax

(4)(b) Where more than one relevant investment entity of an MNE group or large-scale domestic group is located in a jurisdiction, the qualifying income or loss and substance-based income exclusion amounts of each relevant investment entity shall be combined to compute the top-up tax of all of the relevant investment entities.

(4)(c) The substance-based income exclusion amount of a relevant investment entity shall be determined in accordance with subsections (1) to (7) and (10) to (12) of section 111AE, taking into account only eligible tangible assets and eligible payroll costs of eligible employees of the relevant investment entity.

(5) For the purposes of this section, the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of an investment entity shall be determined by taking into account only interests that are not subject to an election to treat an investment entity as a tax transparent entity under section 111AU or to apply a taxable distribution method under section 111AV.

Relevant Date: Finance Act 2024