GloBE Rules Series

ITQ G-

052

March 24, 2023

Question

ACo is a company located in jurisdiction A. ACo runs the public hospital system in jurisdiction A. It is incorporated as a company by Act of parliament, it is required to provide comprehensive hospital services and not pursue profits, and it is exempt from jurisdiction A corporate income tax.

ACo has several subsidiaries (with ACo's shareholding percentage indicated):

Sub Co 1 (100%), which is located in jurisdiction B, but with a PE in jurisdiction F. Sub Co 1 carries out administrative activities which are ancillary to ACo’s hospital activities in jurisdiction A. Sub Co 1 also invests funds for the benefit of ACo. Both of these activities are performed in the Main Entity and the PE.
Sub Co 2 (97%), which is located in jurisdiction C. The other 3% shareholding is owned by senior management in Sub Co 2. Sub Co 2 has been funded by equity from ACo and has borrowed from third parties. It has used the funding to acquire a broad range of debt and equity investments.
Sub Co 3 (100%), which is located in jurisdiction D. Sub Co 3 has also been funded by equity from ACo and has borrowed from third parties. It has used the funding to acquire shares, from which Sub Co 3 derives only Excluded Dividends and Excluded Equity Gains or Losses.
Sub Co 4 (100%), which is located in jurisdiction E. Sub Co 4 operates several private hospitals in jurisdiction E, using IP and services provided by ACo.

ACo prepares consolidated financial statements in accordance with the applicable financial accounting standard in jurisdiction A, and as required by jurisdiction A law. For the latest fiscal year, those consolidated financial statements report revenue of EUR 3 billion.

Also for that latest fiscal year, the "separate entity" revenue for the 5 companies in the group is:

ACo: EUR 2.5b
Sub Co 1: EUR 250m (comprising: (i) Main Entity: EUR 180m; and (ii) PE: EUR 70m)
Sub Co 2: EUR 150m
Sub Co 3: EUR 100m
Sub Co 4: EUR 200m

All of the 6 jurisdictions (A to F) have implemented the GloBE rules (IIR and UTPR) and a QDMTT (which is effectively identical to the GloBE rules).

Based on this information, ACo's tax director has told you that it is not possible for any of those 5 companies to have an IIR, UTPR or QDMTT tax liability for that fiscal year.

Do you agree?

Answer

Introductory point:

If any of the 5 companies is not a "Constituent Entity", then these taxes (in its location jurisdiction) will not apply to it: IIR (Art. 2.1), UTPR (Art. 2.4.1), and QDMTT (because there would be no Top-up Tax in that jurisdiction: Arts. 5.1 & 5.2).

ACo:

ACo is a "Non-profit Organisation" (Art. 10.1.1 definition), and thus it is an "Excluded Entity" (Art. 1.5.1(c)).

ACo is therefore not a "Constituent Entity" (Art. 1.3.3).

Sub Co 1:

Is Sub Co 1 an "Excluded Entity" under Art. 1.5.2(a)?

The fact that Sub Co 1 performs 2 activities (i.e., administrative activities which are ancillary to ACo's hospital activities, and investing funds for the benefit of ACo) does not disqualify it from "Excluded Entity" status (para. 54.1 in new Commentary to Art. 1.5.2, added by AG).

Also, in assessing its compliance with Art. 1.5.2, the activities of the whole of the Entity (i.e., Main Entity and PE) are considered together – and, if the definition is satisfied, the whole of the Entity is an "Excluded Entity": para. 43.1 in new Commentary to Art. 1.5.2, added by AG.

Thus, Sub Co 1 (Main Entity and PE) is an "Excluded Entity" (Art. 1.5.2(a)), and it is thus not a "Constituent Entity" (Art. 1.3.3).

Sub Co 2:

The fact that Sub Co 2 has borrowed from third parties does not disqualify it from "Excluded Entity" status under Art. 1.5.2(a) (para. 53 in new Commentary to Art. 1.5.2, added by AG) – subject to one qualification: the new Commentary provides an example of a "wholly owned subsidiary" (cf. Sub Co 2, which is 97% owned by ACo). Does that make a difference?

IMHO: That should not make a difference, having regard to the fact that para. (a) in Art. 1.5.2 requires only "at least 95%" ownership. Also, note that, even with the 3% "leakage", Sub Co 2 does "almost exclusively" hold assets or invest funds for the benefit of ACo.

Thus, IMHO: Sub Co 2 should be an "Excluded Entity" (Art. 1.5.2(a)), and thus it is not a "Constituent Entity".

Sub Co 3:

Apart from the third party borrowing, Sub Co 3 would clearly satisfy Art. 1.5.2(b).

There is nothing in Art. 1.5.2(b), the Commentary, or the AG to indicate that the third party borrowing would make a difference.

Thus, Sub Co 3 is an "Excluded Entity" (Art. 1.5.2(b)), and thus it is not a "Constituent Entity".

Sub Co 4:

Based on the text in the GloBE rules, Sub Co 4 does not satisfy either para. (a) or (b) of Art. 1.5.2.

However, the AG has introduced a "bright-line test" which can deem "ancillary activities" status under Art. 1.5.2(a)(ii).

Application of test: Is Sub Co 4's revenue (EUR 200m) less than (1) EUR 750m, or (2) 25% of "revenue of MNE Group" (i.e., 25% x EUR 3b = EUR 750m) (whichever is lower)? Yes!

Therefore, Sub Co 4 is deemed to satisfy Art. 1.5.2(a)(ii). Thus, Sub Co 4 is an "Excluded Entity" (Art. 1.5.2(a)), and it is thus not a "Constituent Entity".

Final answer:

ACo's tax director is correct.

Do you agree?

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