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1. Art. 2 (U/Y and X/Y treaties)

QDMTT should be a tax "on income", and therefore within the scope of the treaty: Art. 2(1). 

2. Art. 4 (U/Y and X/Y treaties)

The question states that YCo is "located" in Y, under the GloBE rules. 

I will assume that this means that YCo is resident in Y only, under each of the 2 treaties. 

3. Scope of Y's QDMTT 

The question states that Y's QDMTT "is identical to the GloBE rules, except that it complies with the 2 mandatory variations described in chapter 5 of the July 2023 AG." 

This means that Y's QDMTT applies only to Constituent Entities (located in Y) of MNE Groups which are "within scope" of the GloBE rules. 

Therefore, Y's QDMTT does not apply to Y-resident companies which are members of groups which are not "within scope" of the GloBE rules – e.g., (i) MNE Groups which fall outside the scope of the GloBE rules, and (ii) 100% domestic groups. 

4. Art. 24(5) (U/Y and X/Y treaties)

[Note: (a) Art. 24(1) to (5) apply to taxes of every kind and description, notwithstanding Art. 2: Art. 24(6); and (b) Art. 24 is an exception to the "saving clause" in Art. 1(3).] 

Under Art. 24(5) of each treaty, YCo is an "enterprise of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State". 

Therefore, Art. 24(5) requires that YCo not be subjected in Y "to any taxation … which is other or more burdensome than the taxation … to which other similar enterprises of [Y] are or may be subjected." 

Which companies are the "other similar enterprises of [Y]"? 

A possible answer is that "other similar enterprises of [Y]" would include Y-resident companies which are members of groups which are not "within scope" of the GloBE rules – e.g., (i) MNE Groups which fall outside the scope of the GloBE rules, and (ii) 100% domestic groups. 

If that were the correct answer, then Art. 24(5) would prevent Y's QDMTT from applying to YCo. 

An alternative approach would be to argue that Y’s QDMTT is imposed on YCo because it is a member of an "in scope" MNE Group; however, it is not imposed on YCo because its capital is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State. In other words, the ownership or control by UPE or XCo is not the reason for Y's QDMTT to be imposed on YCo. And, therefore, Y's QDMTT imposed on YCo would not be impacted by Art. 24(5). 

This alternative approach, although not self-evident on the face of Art. 24(5), is consistent with the narrow view of Art. 24 which has been taken by the OECD Comm. 

At present, there is no guidance on the treatment of QDMTTs under Art. 24. On balance, I think that the alternative approach will probably be endorsed by the IF. 

5. Final answer 

YCo will probably not be able to avoid paying the QDMTT, based on either the U/Y or the X/Y treaty. 

Do you agree?