GloBE Rules Series

ITQ G-

133

May 2, 2025

Question

XCo, YCo and ZCo are 100% subsidiaries in an MNE Group which is “within scope” of the GloBE rules.

XCo is formed in jurisdiction X, where it is treated as opaque for tax purposes.

YCo is formed in jurisdiction Y, where it is treated as opaque for tax purposes.

ZCo is formed in jurisdiction Z. ZCo is treated as transparent under the jurisdiction X and Z tax laws, but it is treated as opaque under the jurisdiction Y tax law.

YCo owns 100% of XCo, and XCo owns 100% of ZCo.

ZCo has Financial Accounting Net Income or Loss of 100, on which it incurs Z tax of 20.

Under the jurisdiction Y CFC rules, YCo incurs tax of 5 (after foreign tax credit for ZCo tax) in respect of YCo’s indirect interest in ZCo.

Q1: What will be the allocation of ZCo’s FANIL of 100 and tax of 20, and YCo’s tax of 5? Please ignore: (i) Art. 4.3.3; (ii) Blended CFC Regime; and (iii) cross-crediting of FTCs.

Q2: Same as Q1, except that XCo owns 100% of YCo, and YCo owns 100% of ZCo.

Answer

ZCo is a Flow-through Entity: Art. 10.2.1.

Q1:

ZCo is a Tax Transparent Entity, because it is fiscally transparent in the jurisdiction in which its owner is located (i.e., jurisdiction X). XCo is ZCo’s Reference Entity, and it is therefore ZCo’s owner for the purposes of Art. 10.2.1: para. 154.1 of Comm to Art. 10.2.1.

ZCo’s FANIL of 100 will be allocated to XCo: Art. 3.5.1(b).

ZCo’s tax of 20 will be allocated to XCo: Art. 4.3.2(b).

YCo’s CFC tax of 5 will be allocated to ZCo: Art. 4.3.2(c). That tax of 5 will then be re-allocated to XCo: Art. 4.3.2(b).

Thus, FANIL of 100 will be allocated to XCo, and tax of 25 will be allocated to XCo.

Q2:

ZCo is a Reverse Hybrid Entity, because it is not fiscally transparent in the jurisdiction in which the owner is located (i.e., jurisdiction Y). YCo is ZCo’s Reference Entity, and it is therefore ZCo’s owner for the purposes of Art. 10.2.1: see para. 154.1 of Comm to Art. 10.2.1.

ZCo’s FANIL of 100 will be allocated to ZCo: Art. 3.5.1(c).

ZCo’s tax of 20 will be retained by ZCo.

YCo’s CFC tax of 5 will be allocated to ZCo. It will not be re-allocated.

Thus, FANIL of 100 will be allocated to ZCo, and tax of 25 will be allocated to ZCo.

Do you agree?

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