GloBE Rules Series

ITQ G-

090

March 1, 2024

Question

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. It is the only Constituent Entity located in jurisdiction X.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the MNE Group. It is the only Constituent Entity located in jurisdiction Y.

In 2023, XCo issued preference shares ("pref shares") to YCo.

The pref shares, which carry an arm's length coupon dividend rate, are treated as debt in XCo's consolidation reporting package. However, for tax purposes in jurisdiction X, the pref shares are treated as equity.

The pref shares are also treated as debt in YCo's consolidation reporting package. However, for tax purposes in jurisdiction Y, the pref shares are treated as equity. Consequently, the dividends received by YCo on the pref shares qualify for a 95% exemption under the jurisdiction Y corporate income tax law.

The 2 reporting packages are used by the MNE Group to prepare its CbC Report. In that CbC Report, the dividend on the pref shares is excluded from the jurisdiction Y Revenue and PBT numbers.

For the purposes of the De minimis test for the Transitional CbCR Safe Harbour, how should the dividend on the pref shares be treated: (1) for jurisdiction X; and (2) for jurisdiction Y?

Answer

(1) Jurisdiction X

The pref shares constitute a "deduction / non-inclusion arrangement": para. 74.27 of the Safe Harbours and Penalty Relief (SHPR) report, as added by para. 35 of the December 2023 AG. The pref shares are therefore a "hybrid arbitrage arrangement": para. 74.25, SHPR report.

Therefore, for the purposes of the jurisdiction X De minimis test computation, the expense on the pref shares (i.e., the coupon dividend) is excluded: para. 74.26 of SHPR report. Thus, XCo's PBT will be increased by the amount of the coupon dividend.

(2) Jurisdiction Y

The CbC Report correctly excludes the coupon dividend from the Revenue and PBT of YCo: answer to Question 7.1 in chapter 2 of October 2022 CbCR document, referenced by para. 17, December 2023 AG.

However, that treatment must be reversed for the purposes of the De minimis test: paras. 74.16-17 of SHPR report, as added by para. 18 of the December 2023 AG.

Therefore, for the purposes of the jurisdiction Y De minimis test computation, the coupon dividend is included in YCo's Total Revenues and PBT.

Do you agree?

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