GloBE Rules Series

ITQ G-

076

November 3, 2023

Question

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. In particular, the UPE of the MNE Group is not an "Excluded Entity", as defined in Art. 1.5.1 of the GloBE rules.

XCo operates in several different sectors, including real estate. One of its real estate investments is an office building located in jurisdiction Y. All of the offices in the building are leased by XCo to unrelated lessees, in return for market-based rent. To facilitate the leasing activity (e.g., negotiate and enter into leases with lessees), and to manage the maintenance of the building, XCo employs 5 employees who are permanently located in a management office in the building. For regulatory purposes in jurisdiction Y, the leasing activity and the building are registered as a branch in jurisdiction Y.

The X/Y double tax treaty is identical to the 2017 OECD model treaty (with Art. 23B). Under the jurisdiction X corporate income tax law, the income derived in jurisdiction Y is taxable, with a credit for any jurisdiction Y tax paid.

Jurisdiction Y has implemented a QDMTT.

Is jurisdiction Y permitted to impose QDMTT on XCo's jurisdiction Y branch?

Answer

(1) Treatment of building / branch under X/Y double tax treaty

XCo derives income from immovable property situated in Y. Therefore, Art. 6(1) allows Y to impose tax on that income, without limitation.

XCo's management office in the building would constitute a PE, as defined in Art. 5. The offices which are leased to lessees might not be part of that PE, or individual PEs in their own right, on the basis that they are not "at the disposal" of XCo: see para. 36 of 2017 OECD Comm to Art. 5.

In any event, regardless of the scope of the PE, Art. 7 does not apply: Art. 7(4) gives priority to Art. 6(1).

(2) Treatment of building / branch under GloBE rules

Is the definition of "Permanent Establishment" in Art. 10.1.1 satisfied?

Para. (a): no – Y does not tax the income attributable to XCo's place of business "in accordance with a provision similar to Article 7 of the OECD [model treaty]". Art. 6 is not similar to Art. 7.

Para. (b): no – There is an applicable treaty.

Para. (c): no – Y has a corporate income tax system in place.

Para. (d): no – X does not exempt the income attributable to the building / branch in Y.

As the "PE" definition in Art. 10.1.1 is exhaustive ("means"), the conclusion is that the building / branch is not a PE for GloBE purposes.

Therefore, the building / branch is not a "Constituent Entity": Art. 1.3.1.

[Aside: Is it possible that the building / branch is an "Entity", as defined in Art. 10.1.1: "an arrangement that prepares separate financial accounts, such as a partnership or trust"? IMHO: no – such a conclusion would make the reference to PEs in para. (b) of Art. 1.3.1 largely redundant. Also, the word, "arrangement", suggests the involvement of one or more other persons, such as in a partnership or trust – a building or branch does not have that attribute.]

(3) QDMTT

Para. 118.4 (of the Art. 10.1.1 definition of "QDMTT") requires that: "(a) the definition of … Constituent Entity in the QDMTT [needs] to correspond with the [definition] in the GloBE Rules; and (b) the QDMTT must compute the tax liability for the jurisdiction by taking into account the income and covered taxes of Constituent Entities that are located in the jurisdiction as determined under the GloBE Rules."

As the building / branch is not a "Constituent Entity", there is no income and covered taxes, and therefore no Top-up Tax, for QDMTT purposes.

[Note that XCo is located, for GloBE purposes, in X: Art. 10.3.1. Thus, Y cannot impose QDMTT on XCo as a Constituent Entity.]

Thus, final answer: no, Y is not permitted to impose QDMTT on XCo’s Y branch.

Do you agree?

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