Finance (No. 2) Act 2023 · Updated to 29 Dec 2023 · Chapter 7
180. Substance-based Income Exclusion
Feedback & supportThe Net GloBE Income for the jurisdiction shall be reduced by the Substance-based Income Exclusion for the jurisdiction to determine the Excess Profit for the purpose of computing the Multinational Top-up Tax under sections 175 to 179.
Net GloBE Income
“Net GloBE Income” means the amount as determined in accordance with subsection 174(4);
A Filing Constituent Entity of a Multinational Enterprise
Filing Constituent Entity
“Filing Constituent Entity” means an Entity filing the return in accordance with section 201 or 202;
Group may make an Annual Election not to apply the
Group
“Group” means— (a) a collection of Entities that are related through ownership or control such that the assets, liabilities, income, expenses and cash flows of those Entities are— (i) included in the Consolidated Financial Statements of the Ultimate Parent Entity; or Finance (No. 2) (ii) excluded from the Consolidated Financial Statements of the Ultimate Parent Entity solely on size or materiality grounds, or on the grounds that the Entity is held for sale; or (b) an Entity that is located in one jurisdiction and has one or more Permanent Establishments located in other jurisdictions provided that the Entity is not a part of another Group mentioned in paragraph (a);
Substance-based Income Exclusion for a jurisdiction by not computing the exclusion or claiming it in the computation of Multinational Top-up Tax for the jurisdiction in the information return filed for the Financial Year.
Substance-based Income Exclusion
“Substance-based Income Exclusion” means the jurisdictional payroll carve-out and the tangible asset carve-out for each Constituent Entity as determined under section 180;
Finance (No. 2)
The Substance-based Income Exclusion amount for a jurisdiction is the sum of the payroll carve-out and the tangible asset carve-out for each Constituent Entity, except for Constituent Entities that are Investment Entities, in that jurisdiction.
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;
The payroll carve-out for a Constituent Entity located in a jurisdiction is equal to five per cent of its Eligible
Payroll Costs of Eligible Employees that perform activities for the Multinational Enterprise Group in such jurisdiction, except Eligible Payroll costs that are—
Eligible Employees
“Eligible Employees” means employees, including part-time employees, of a Constituent Entity that is a member of the Multinational Enterprise Group and independent contractors participating in the ordinary operating activities of the Multinational Enterprise Group under the direction and control of the Multinational Enterprise Group;
capitalised and included in the carrying value of
Eligible Tangible Assets;
attributable to a Constituent Entity’s International
Shipping Income and Qualified Ancillary International
Shipping Income under subsections 166(4) to (6)
that is excluded from the computation of GloBE
Income or Loss for the Financial Year.
The tangible asset carve-out for a Constituent Entity located in a jurisdiction is equal to five per cent of the carrying value of Eligible Tangible Assets located in such jurisdiction.
Eligible Tangible Assets
“Eligible Tangible Assets” means— (a) property, plant, and equipment located in that jurisdiction; (b) natural resources located in that jurisdiction; (c) a lessee’s right of use of tangible assets located in that jurisdiction; and (d) a licence or similar arrangement from the Government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets;
For this purpose, the tangible asset carve-out computation shall not include the carrying value of property including land or buildings that is held for sale, lease or investment.
The tangible asset carve-out computation shall not include the carrying value of tangible assets used in the generation of a Constituent Entity’s International Shipping Income and
International Shipping Income
“International Shipping Income” means the net income obtained by a Constituent Entity from the following activities: (a) the transportation of passengers or cargo by ships that it operates in international traffic, whether the ship is owned, leased or otherwise at the disposal of the Constituent Entity; (b) the transportation of passengers or cargo by ships operated in international traffic under slot-chartering arrangements; (c) leasing a ship, to be used for the transportation of passengers or cargo in international traffic, on charter fully equipped, crewed and supplied; (d) leasing a ship on a bare boat charter basis, for the use of transportation of passengers or cargo in international traffic, to another Constituent Entity; (e) the participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ships in international traffic; (f) the sale of a ship used for the transportation of passengers or cargo in international traffic provided that the ship has been held for use by the Constituent Entity for a minimum of one year, Finance (No. 2) and shall not include net income obtained from the transportation of passengers or cargo by ships via inland waterways within the same jurisdiction;
Qualified Ancillary International Shipping Income such as ships and other maritime equipment and infrastructure.
Qualified Ancillary International Shipping Income
“Qualified Ancillary International Shipping Income” means net income obtained by a Constituent Entity from the following activities that are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic: (a) leasing a ship on a bare boat charter basis to another shipping enterprise that is not a Constituent Entity, provided that the charter does not exceed three years; (b) sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage; (c) leasing and short-term storage of containers or detention charges for the late return of containers; (d) provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff, and customer services personnel; (e) investment income where the investment that generates the income is made as an integral part of the carrying on the business of operating the ships in international traffic;
The carrying value of tangible assets attributable to a Constituent Entity’s excess income over the limit for
Qualified Ancillary International Shipping Income under subsection 166(3) shall be included in the tangible asset carve-out computation.
The computation of carrying value of Eligible Tangible
Assets for the purposes of subsections (5) to (8) shall be based on the average of the carrying value after deducting any accumulated depreciation, amortisation, or depletion and including any amount attributable to capitalisation of payroll expense at the beginning and ending of the
Reporting Financial Year as recorded for the purpose of preparing the Consolidated Financial Statements of the
Reporting Financial Year
“Reporting Financial Year” means the Financial Year that is the subject of the information return or the Top-up Tax return;
Ultimate Parent Entity.
Ultimate Parent Entity
“Ultimate Parent Entity” means either— (a) an Entity that— (i) owns directly or indirectly a Controlling Interest in any other Entity; and (ii) is not owned, with a Controlling Interest, directly or indirectly by another Entity; or (b) the Main Entity of a Group that is located in one jurisdiction and has one or more Permanent Establishments located in other jurisdictions provided that the Entity is not a part of another Group;
For the purposes of subsections (4) to (8), the
Eligible Payroll Costs and Eligible Tangible Assets of a Constituent Entity that is a Permanent Establishment are those included in its separate financial accounts as determined by subsections 167(1) and (2) and adjusted in accordance with subsection 167(3), provided that the
Eligible Payroll Costs
“Eligible Payroll Costs” means employee compensation expenditures (including salaries, wages, and other expenditures that provide a direct and separate personal benefit to the employee, such as health insurance and pension contributions), payroll and employment taxes, and employer social security contributions; Finance (No. 2)
Eligible Employees and Eligible Tangible Assets are located in the jurisdiction where the Permanent Establishment is located.
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;
The Eligible Payroll Costs and Eligible Tangible Assets of a Permanent Establishment are not taken into account for the Eligible Payroll Costs and Eligible Tangible Assets of the Main Entity.
Main Entity
“Main Entity” means, in respect of a Permanent Establishment— (a) the Entity that includes the Financial Accounting Net Income or Loss of the Permanent Establishment in its financial statements; and (b) is deemed to have the Controlling Interests of its Permanent Establishment;
The Eligible Payroll Costs and Eligible Tangible Assets of a Permanent Establishment whose income has been wholly or partly excluded in accordance with subsections 168(3)
and 189(4) are excluded from the Substance-based Income
Exclusion computations of the Multinational Enterprise Group in the same proportion.
Multinational Enterprise Group
“Multinational Enterprise Group” means any Group that includes at least one Entity or Permanent Establishment that is not located in the jurisdiction of the Ultimate Parent Entity; Finance (No. 2)
For the purposes of subsections (4) to (8), Eligible
Payroll Costs and Eligible Tangible Assets of a Flow-through
Entity that are not allocated under subsections (10) to (12)
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;
are allocated in the following manner:
if the Financial Accounting Net Income or Loss of the Flow-through Entity has been allocated to the
Constituent Entity-owner under paragraph 168(1)(b), then the Entity’s Eligible Payroll Costs and Eligible
Tangible Assets are allocated in the same proportion to the Constituent Entity-owner provided it is located in the jurisdiction where the Eligible Employees and Eligible Tangible Assets are located;
Finance (No. 2)
if the Flow-through Entity is the Ultimate Parent
Entity, then Eligible Payroll Costs and Eligible
Tangible Assets located in the jurisdiction where the Ultimate Parent Entity is located are allocated to it and reduced in proportion to the income that is excluded under subsection 189(1); and
all other Eligible Payroll Costs and Eligible Tangible
Assets of the Flow-through Entity are excluded from the Substance-based Income Exclusion computations of the Multinational Enterprise Group.