Finance (No. 2) Act 2023 · Updated to 29 Dec 2023 · Chapter 6
170. Allocation of Covered Taxes from one Constituent Entity to another Constituent Entity
Feedback & supportThe Covered Taxes are allocated from one Constituent
Covered Taxes
“Covered Taxes” means— (a) taxes recorded in the financial accounts of a Constituent Entity with respect to its income or profits or its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest; (b) taxes on distributed profits, deemed profit distributions, and non-business expenses imposed under an Eligible Distribution Tax System; (c) taxes imposed in lieu of a generally applicable corporate income tax; and (d) taxes levied by reference to retained earnings and corporate equity, including a Tax on multiple components based on income and equity, Finance (No. 2) but does not include any amount of— (a) Multinational Top-up Tax accrued by a Parent Entity under a Qualified Income Inclusion Rule; (b) Qualified Domestic Top-up Tax accrued by a Constituent Entity; (c) taxes attributable to an adjustment made by a Constituent Entity as a result of the application of a set of rules equivalent to Articles 2.4 to 2.6 of the GloBE Model Rules (including any provisions of the GloBE Model Rules associated with those articles) that are included in the domestic law of a jurisdiction and that are implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Model Rules provided that such jurisdiction does not provide any benefits that are related to such rules; (d) a Disqualified Refundable Imputation Tax; (e) taxes paid by an insurance company in respect of returns to policy holders;
Entity to another Constituent Entity in the following manner:
Entity
“Entity” means— (a) any legal person (other than a natural person); or (b) an arrangement that prepares separate financial accounts, such as a partnership or trust;
the amount of any Covered Taxes included in the financial accounts of a Constituent Entity with respect to GloBE Income or Loss of a Permanent
Establishment is allocated to the Permanent
Establishment;
the amount of any Covered Taxes included in the financial accounts of a Tax Transparent
Entity with respect to GloBE Income or Loss allocated to a Constituent Entity-owner pursuant to paragraph 168(1)(b) is allocated to that Constituent
Entity-owner;
in the case of a Constituent Entity whose Constituent
Entity-owners are subject to a Controlled Foreign
Company Tax Regime, the amount of any Covered
Taxes included in the financial accounts of its direct or indirect Constituent Entity-owners under a Controlled Foreign Company Tax Regime on their share of the controlled foreign company’s income are allocated to the Constituent Entity;
in the case of a Constituent Entity that is a Hybrid Entity, the amount of any Covered Taxes included in the financial accounts of a Constituent
Entity-owner on income of the Hybrid Entity is allocated to the Hybrid Entity; and
the amount of any Covered Taxes accrued in the financial accounts of a Constituent Entity’s direct
Constituent Entity-owners on distributions from the
Constituent Entity during the Financial Year are allocated to the distributing Constituent Entity.
The Covered Taxes allocated to a Constituent Entity pursuant to paragraphs (1)(c) and (d) in respect of Passive
Constituent Entity
“Constituent Entity” means— (a) any Entity that is included in a Group; or (b) any Permanent Establishment of a Main Entity that is within paragraph (a) and which is treated as separate from the Main Entity and any other Permanent Establishment of that Main Entity, but does not include an Excluded Entity;
Income are included in such Constituent Entity’s Adjusted
Covered Taxes in an amount equal to the lesser of—
the Covered Taxes allocated in respect of such
Passive Income; or
the Multinational Top-up Tax Percentage for the
Constituent Entity’s jurisdiction, determined without regard to the Covered Taxes incurred with respect to such Passive Income by the Constituent Entity-owner, multiplied by the amount of the Constituent Entity’s
Passive Income that can be included under any
Controlled Foreign Company Tax Regime or fiscal transparency rule.
Finance (No. 2)
Any Covered Taxes of the Constituent Entity-owner incurred with respect to such Passive Income that remain after the application of subsection (2) shall not be allocated under paragraph (1)(c) or (d).
Constituent Entity-owner
“Constituent Entity-owner” means a Constituent Entity that directly or indirectly owns an Ownership Interest in another Constituent Entity of the same Multinational Enterprise Group;
Where the GloBE Income of a Permanent Establishment is treated as GloBE Income of the Main Entity pursuant to subsections 167(6) and (7), any Covered Taxes arising in the location of the Permanent Establishment and associated with such income are treated as Covered Taxes of the Main
Permanent Establishment
“Permanent Establishment” means— (a) a place of business including a deemed place of business situated in a jurisdiction and treated as a permanent establishment in accordance with an applicable Tax Treaty in force provided that such jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 of the OECD Model Tax Convention; (b) if there is no applicable Tax Treaty in force, a place of business including a deemed place of business in respect of which a jurisdiction taxes under its domestic law the income attributable to such place of business on a net basis similar to the manner in which it taxes its own tax residents; (c) if a jurisdiction has no corporate income tax system, a place of business including a deemed place of business situated in that jurisdiction that would be treated as a permanent establishment in accordance Finance (No. 2) with the OECD Model Tax Convention provided that such jurisdiction would have had the right to tax the income attributable to it in accordance with Article 7 of that model; or (d) a place of business or a deemed place of business that is not already described in paragraphs (a) to (c) through which operations are conducted outside the jurisdiction where the Entity is located provided that such jurisdiction exempts the income attributable to such operations;
Entity up to an amount not exceeding such income multiplied by the highest corporate tax rate on ordinary income in the jurisdiction where the Main Entity is located.
For the purposes of this section, “Passive Income”
means income included in GloBE Income that is—
a dividend or dividend equivalents;
interest or interest equivalent;
rent;
royalty;
annuity; or
net gains from property of a type that produces income described in paragraphs (a) to (e), but only to the extent a Constituent Entity-owner is subject to tax on such income under a Controlled Foreign Company
Tax Regime or as a result of an Ownership Interest in a
Hybrid Entity.