111AV Election to apply taxable distribution method

Summary

This section introduces the taxable distribution method which reduces the exposure to top-up tax to the extent that the investment entity makes distributions of its income within a four-year period that are taxable in the hands of the recipients at or above the minimum rate.

Detail

General

(1) Provides that an election may be made to apply a taxable distribution method (as detailed below) with respect to a constituent entity’s ownership interest in an investment entity where the constituent entity-owner is not an investment entity, and the constituent entity-owner can be reasonably expected to be subject to tax on distributions from that investment entity at a tax rate that equals or exceeds the minimum tax rate.

(2) Under the taxable distribution method:

• (2)(a) distributions and deemed distributions of the qualifying income of an investment entity shall be included in the qualifying income of the constituent entity-owner that received the distribution, provided that it is not an investment entity;
• (2)(b) the amount of covered taxes incurred by the investment entity that is creditable against the tax liability of the constituent entity-owner arising from the distribution of the investment entity shall be included in the qualifying income and adjusted covered taxes of the constituent entity-owner that received the distribution;
• (2)(c) the constituent entity owner’s proportionate share of the investment entity’s undistributed net qualifying income arising in the third year preceding the fiscal year (the “tested year”) is treated as qualifying income of that investment entity for the fiscal year and the amount equal to such qualifying income multiplied by the minimum tax rate shall be treated as top up tax of a low-taxed constituent entity for the fiscal year, i.e. if the qualifying income has not been distributed within a period of four years then it is treated as qualifying income of the investment entity; and
• (2)(d) the qualifying income or loss of an investment entity and the adjusted covered taxes attributable to such income for the fiscal year shall be excluded from the calculation of the effective tax rate in accordance with Chapter 5 and subsections (1) to (4) of section 111AT, except for the amount of covered taxes referred to above as creditable against the tax liability of the constituent entity-owner arising from the distribution of the investment entity.

(3) For the purpose of subsection (2)(c), the undistributed net qualifying income of an investment entity for the tested year shall be the amount of qualifying income of that investment entity for a tested year reduced by the amount, if any, of —

• (3)(a) the covered taxes of the investment entity,
• (3)(b) distributions and deemed distributions to shareholders that are not investment entities during the period starting with the first day of the third year preceding the fiscal year and ending with the last day of the current fiscal year in which the ownership interest was held (hereinafter referred to as the “testing period”),
• (3)(c) qualifying losses arising during the testing period, and
• (3)(d) any residual amount of qualifying losses that has not already reduced the undistributed net qualifying income of that investment entity for a previous tested year,

but such reduction shall not exceed the amount of qualifying income and the undistributed net qualifying income of that investment entity shall not be reduced by:

1. distributions or deemed distributions that already reduced the undistributed net qualifying income of that investment entity for a previous tested year, or
2. the amount of qualifying losses that already reduced the undistributed net qualifying income of that investment entity for a previous tested year.

(4) Provides that a deemed distribution shall arise when a direct or indirect ownership interest in the investment entity is transferred to an entity that is not a member of the MNE group or large-scale domestic group and is equal to the share of undistributed net qualifying income attributable to such ownership interest on the date of such transfer, determined without regard to the deemed distribution.

(5)(a) Where an election made pursuant to subsection (1) is withdrawn, the constituent entity-owner’s share in the undistributed net qualifying income of the investment entity for the tested year at the end of the fiscal year preceding the fiscal year the withdrawal is made shall be treated as qualifying income of the investment entity for the fiscal year.

(5)(b) The amount equal to the qualifying income multiplied by the minimum tax rate shall be treated as top-up tax of a low-taxed constituent entity for the fiscal year for the purpose of Chapter 2.

(6) The election referred to in this section shall be made in accordance with section 111AAAD.

Relevant Date: Finance Act 2024