GloBE Rules Series

ITQ G-

131

April 11, 2025

Question

XCo, a company which is treated as a tax resident entity (i.e., opaque) under Jurisdiction X tax law, is the UPE of an MNE Group which is “within scope” of the GloBE rules.

XCo owns 80% of YCo, which is formed in Jurisdiction Y. YCo is treated as fiscally transparent under the Jurisdictions X and Y tax laws. The other 20% of YCo is owned by ACo, a company which is formed in Jurisdiction A. YCo is treated as a non-resident entity (i.e., opaque) under Jurisdiction A tax law.

YCo owns 100% of ZCo, which is formed in Jurisdiction Z. ZCo is treated as fiscally transparent under the Jurisdictions X, Y and Z tax laws.

ZCo has $1 million of Financial Accounting Net Income or Loss (FANIL). For GloBE purposes, how will the FANIL of $1 million be allocated?

Answer

ZCo is a Flow-through Entity: Art. 10.2.1.

ZCo’s Reference Entity is XCo: para. 154.1 of Comm to Art. 10.2.1.

Thus, ZCo is a Tax Transparent Entity (Art. 10.2.1(a)) and its Constituent Entity-owner is XCo.

ZCo’s FANIL is allocated to XCo “in accordance with [its] Ownership Interests”: Art. 3.5.1(b).

However, prior to the application of Art. 3.5.1, Art. 3.5.3 requires ZCo’s FANIL to be reduced “by the amount allocable to its owners that are not Group Entities and that hold their Ownership Interest in [ZCo] directly or indirectly through a Tax Transparent Structure.”

ACo is not a Group Entity, in regard to ZCo (Art. 10.1.1).

According to para. 231 of Comm to Art. 3.5.3: “An Entity that is not a Group Entity is considered to indirectly own its interest in [ZCo] through a Tax Transparent Structure where the non-Group Entity owns an interest in a Flow-through Entity that sits between the Reference Entity and [ZCo] in the MNE Group’s ownership structure.”

ACo satisfies that condition: it owns an interest in YCo (a Flow-through Entity) which sits between XCo (Reference Entity) and ZCo in the MNE Group.

Thus, Art. 3.5.3 will require that ZCo’s FANIL to be reduced by $200,000. According to the June 2024 AG, the fact that jurisdiction A treats YCo as opaque for tax purposes, is irrelevant.

What is the amount of FANIL allocated to XCo? If you apply Art. 3.5.1(b) and Art. 3.5.3 literally, you might conclude that $640,000 (i.e., 80% x $800,000) would be allocated to XCo. However, it is clear from the discussion in the June 2024 AG that the amount allocated to XCo would be $800,000.

Do you agree?

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