GloBE Rules Series

ITQ G-

149

November 7, 2025

Question

XCo is a Constituent Entity located in Country X where a 10% CIT rate applies.

YCo is a Constituent Entity of the same MNE Group located in Country Y where a 30% CIT rate applies.

Prior to the transaction described below, the ETR of Country X for the MNE Group is 10% and for Country B is 30%.

XCo issues an interest-bearing instrument to YCo in exchange for cash (i.e., XCo borrows from YCo), that is treated as debt for financial accounting purposes, but as equity for tax purposes in both Country X and Country Y. As a result, payments on the instrument reduce the financial accounting profits of XCo, while not reducing the Country X domestic tax liability of XCo. This is because the interest payments are included in income or expense for accounting purposes, but dividends are not included in income or expense for tax purposes in Country X and Country Y. Similarly, the payments on the instrument increase the financial accounting profits of YCo, while not increasing the Country Y domestic tax liability of YCo.

What impact does this transaction have on the GloBE Income or Loss of XCo and YCo, respectively?

Answer

Relevant definitions are in Art. 10.1.1.

The first issue is whether the loan is an “Intragroup Financing Arrangement” (IFA).

YCo is a “High-Tax Counterparty” because, notwithstanding this transaction, its ETR of 30% exceeds the Minimum Rate and therefore it is not located in a “Low-Tax Jurisdiction”. As XCo has an ETR of 10% which is lower than the Minimum Rate notwithstanding this transaction, XCo is a “Low-Tax Entity”.

Thus, the loan is an IFA, and accordingly, Art. 3.2.7 is relevant.

Under Article 3.2.7, it is necessary to determine whether, over the expected duration of the arrangement, it can be reasonably anticipated that: (a) the arrangement will increase the amount of expenses taken into account in calculating the GloBE Income or Loss of the Low-Tax Entity (XCo); and (b) without resulting in a commensurate increase in the taxable income of the High-Tax Counterparty (YCo).

Because the instrument is treated as interest-bearing debt for financial accounting purposes, it will increase the amount of expenses taken into account in calculating the GloBE Income or Loss of XCo, satisfying para. (a).

Para. (b) is also satisfied because the instrument is treated as equity for tax purposes in Country Y and accordingly it will not increase the taxable income of YCo in Country Y.

Therefore, under Art. 3.2.7, the interest expense shall be excluded from the computation of GloBE Income or Loss for XCo. There will be no impact on the computation of GloBE Income or Loss of YCo.

Do you agree?

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