GloBE Rules Series

ITQ G-

130

April 4, 2025

Question

PCo (formed in Juris. P) is treated as opaque for Juris. P tax purposes.

PCo owns 100% of XCo (formed in Juris. X). XCo is treated as: (1) transparent for Juris. P tax purposes, and as (2) opaque for Juris. X tax purposes.

XCo owns 100% of YCo (formed in Juris. Y). YCo is treated as transparent for tax purposes in each of (1) Juris. P, (2) Juris. X, and (3) Juris Y.

YCo owns 100% of ZCo (formed in Juris. Z). ZCo is treated as transparent for tax purposes in each of (1) Juris. P, (2) Juris. X, and (3) Juris. Z. However, ZCo is treated as opaque for Juris. Y tax purposes.

ZCo has a Financial Accounting Net Income or Loss of $1 million. For GloBE purposes, to which entity will that FANIL of $1 million be allocated?

Answer

This question requires the application of Art. 3.5.1 and Art. 10.2.1. The question assumes that ZCo does not have a PE.

YCo and ZCo are each “Flow-through Entities”, as defined in Art. 10.2.1: each is fiscally transparent in the jurisdiction where it was created.

PCo and XCo are not Flow-through Entities, as each is opaque in the jurisdiction where it was created.

ZCo will be a “Tax Transparent Entity” (as defined in Art. 10.2.1), if it is fiscally transparent in the jurisdiction in which its owner is located. Which entity is ZCo’s owner, for the purposes of Art. 10.2.1?

According to the Comm to Art. 10.2.1:

“Whether a Flow-through Entity (the tested Entity) is a Tax Transparent Entity or a Reverse Hybrid Entity depends on how the tax law of the jurisdiction in which the Reference Entity is located treats the tested Entity and each Entity through which the Reference Entity owns its Ownership Interest in the tested Entity. The Reference Entity is the Constituent Entity-owner that is closest in the ownership chain to the tested Entity and that is either (a) not a Flow-through Entity or (b) where there is no such Constituent Entity-owner, a Flow through Entity that is the Ultimate Parent Entity of the MNE Group (Flow-through UPE).”

XCo is ZCo’s Reference Entity, and thus its owner, for the purposes of Art. 10.2.1.

Under the Juris. X law, ZCo is fiscally transparent. Thus, ZCo is a Tax Transparent Entity.

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