GloBE Rules Series

ITQ G-

042

January 6, 2023

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A. ACo became a member of the MNE Group on 1 January 2025, when 100% of its shares were purchased by the UPE from third parties.

For the MNE Group, the GloBE rules commence operation in 2024.

ACo has the following financial income for 2025 (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its Consolidated Financial Statements) (all in EUR millions):

Profit before Income Tax: 1.5
Revenue: 9.5
Income tax expense (100% Covered Taxes, no "uncertain tax positions"): 0.25
Net positive adjustments (under Art. 3.2 and following) in computing GloBE Income: 1.8
Adjusted Covered Taxes: 0.3
Substance-based Income Exclusion: 1.0

Based on this information, does jurisdiction A have a Top-up Tax in 2025?

Answer

A preliminary point to note is that the de minimis exclusion in Art. 5.5 does not apply, because ACo's GloBE Income (EUR 3.3m) exceeds the limit of EUR 1m.

However, the key issue is whether the Transitional CbCR Safe Harbour ("TSH") (described in IF Guidance issued in December 2022) will apply:

2025 is within the "Transition Period".
Although the MNE Group did not apply the TSH with respect to jurisdiction A in 2024, the “once out, always out” rule does not apply because the MNE Group had no Constituent Entities located in jurisdiction A in 2024.
De minimis test: (i) Total Revenue: EUR 9.5m; (ii) Profit before Income Tax: EUR 1.5m; (iii) Thus, the de minimis test is failed, because the Profit before Income Tax exceeds the limit of EUR 1m.
Simplified ETR test: (i) Simplified Covered Taxes: EUR 0.25m; (ii) Profit before Income Tax: EUR 1.5m; (iii) “Transition Rate” for 2025: 16%; (iv) Simplified ETR = 0.25 / 1.5 = 16.7%; (v) Thus, the simplified ETR test is passed.
Routine profits test: (i) Profit before Income Tax: EUR 1.5m; (ii) SBIE amount: EUR 1.0m; (iii) Thus, the routine profits test is failed, because the Profit before Income Tax is not equal to or less than the SBIE amount.

Therefore, as the simplified ETR test is passed, the TSH with respect to jurisdiction A is available to the MNE Group in 2025, provided the election in Art. 8.2.1 is made and the GloBE Information Return includes the correct information. If this is the case, there will be no Top-up Tax for jurisdiction A in 2025.

Do you agree?

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