GloBE Rules Series

ITQ G-

022

July 22, 2022

Question

The UPE of an MNE Group is a sovereign wealth fund which is 100% owned by the government of jurisdiction U. The UPE’s principal purpose is to invest the government’s assets through the making and holding of share investments. The UPE does not carry on a trade or business.

The MNE Group is within scope of the GloBE rules.

The UPE owns 70% of the shares in UCo, a company located in jurisdiction U. The other 30% is owned by third parties. UCo carries on a manufacturing business.

The UPE also owns 90% of the shares in ACo 1, a company located in jurisdiction A. The other 10% is owned by third parties.

ACo 1's only assets are shares in other companies. The shares are held by ACo 1 as long-term investments. None of those other companies is an Investment Entity (defined in Art. 10.1.1).

ACo 1 owns 100% of the shares in ACo 2, a company which is also located in jurisdiction A. ACo 2 carries on a manufacturing business.

ACo 1 also owns 90% of the shares in BCo 1, a company located in jurisdiction B. The other 10% is owned by third parties. BCo 1’s only assets are shares in other companies. The shares are held by BCo 1 as long-term investments. None of those other companies is an Investment Entity (defined in Art. 10.1.1).

BCo 1 owns 100% of the shares in BCo 2, a company which is also located in jurisdiction B. BCo 2 carries on a goods trading business.

All shares in all companies are common shares, with equal right to profit distributions and capital.

All of the above-mentioned jurisdictions have implemented the GloBE rules.

In the current Fiscal Year, there are amounts of Jurisdictional Top-up Tax in both jurisdiction A and jurisdiction U.

Which company or companies (if any) within the MNE Group will be subject to IIR tax or UTPR tax?

Answer

UPE should satisfy the definition of "Governmental Entity" (Art. 10.1.1), and it should therefore be an "Excluded Entity" (Art. 1.5.1). UPE should therefore be exempt from the GloBE rules (Art. 1.1.3).

ACo 1 should satisfy the definition of "Excluded Entity" in Art. 1.5.2(b): substantially all of its income should be Excluded Dividends or Excluded Equity Gain or Loss. ACo 1 should therefore be exempt from the GloBE rules (Art. 1.1.3).

BCo 1 does not satisfy the definition of "Excluded Entity" in Art. 1.5.2(b), despite the fact that its only assets are shares in other companies, and those shares are held as long-term investments. BCo 1 does not satisfy the "at least 85%" test: UPE's proportionate interest in BCo 1 is 81%. Note that the "at least 85%" test measures the UPE’s interest, not ACo 1’s interest, in BCo 1. BCo 1 is therefore not exempt from the GloBE rules.

ACo 2, BCo 2 and UCo are also not exempt from the GloBE rules.

In regard to the total Top-up Tax from jurisdictions A and U: (1) no IIR tax will apply; (2) UTPR tax will be allocated to jurisdictions A, B, and U (the allocation will be in accordance with the formula in Art. 2.6.1).

The UTPR tax (i) which is allocated to A will be imposed on ACo 2 (as ACo 1 is exempt from the GloBE rules); (ii) which is allocated to B will be imposed on BCo 1 and/or BCo 2, in accordance with the jurisdiction B law; and (iii) which is allocated to U will be imposed on UCo (as UPE is exempt from the GloBE rules).

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.