Finance (No. 2) Act 2023 · Updated to 29 Dec 2023 · Chapter 9
191. Eligible Distribution Tax Systems
Feedback & supportA Filing Constituent Entity may make an Annual
Filing Constituent Entity
“Filing Constituent Entity” means an Entity filing the return in accordance with section 201 or 202;
Election with respect to a Constituent Entity that is subject to an Eligible Distribution Tax System to add the amount of Deemed Distribution Tax to Adjusted Covered Taxes for the Financial Year.
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;
An election under this section shall apply to all
Constituent Entities located in the jurisdiction.
An annual Deemed Distribution Tax Recapture Account is established for each Financial Year in which the election in this section applies.
A Deemed Distribution Tax Recapture Account is increased by the amount of the Deemed Distribution Tax as determined in accordance with the definition of “Deemed
Distribution Tax” for the jurisdiction for the Financial Year for which it was established.
Financial Year
“Financial Year” means an accounting period with respect to which the Ultimate Parent Entity of the Multinational Enterprise Group prepares its Consolidated Financial Statements and in the case of Consolidated Financial Statements as defined in paragraph (d) of the definition of “Consolidated Financial Statements”, Financial Year means the calendar year;
At the end of each succeeding Financial Year, the outstanding balances of Deemed Distribution Tax Recapture
Accounts established for prior Financial Years are reduced in chronological order and to the extent thereof, but not below zero—
first by Taxes paid by the Constituent Entities during the Financial Year in relation to actual or deemed distributions;
then by the amount of any Net GloBE Loss of the jurisdiction multiplied by the Minimum Rate; and
then by any amount of Recapture Account Loss
Carry-forward applied to the current Financial Year pursuant to subsections (6) to (8).
A Recapture Account Loss Carry-forward shall be established for the jurisdiction when the amount described in paragraph (5)(b) exceeds the outstanding balance of the
Deemed Distribution Tax Recapture Accounts.
The Recapture Account Loss Carry-forward shall be in an amount equal to such excess and shall be taken into account in subsequent Financial Years as a reduction to Deemed
Distribution Tax Recapture Accounts in such Financial Years.
When such amount is taken into account in a subsequent
Financial Year, the Recapture Account Loss Carry-forward must be reduced by that amount.
If there is an outstanding balance of a Deemed Distribution
Tax Recapture Account maintained in accordance with subsections (3) to (5) on the last day of the fourth Financial
Year after the Financial Year for which such account was established, the Effective Tax Rate and Multinational Top-up
Effective Tax Rate
“Effective Tax Rate” means, in respect of a Multinational Enterprise Group, the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction divided by the Net GloBE Income of the jurisdiction for the Financial Year;
Tax for the Financial Year for which the account was established must be recalculated under subsection 181(1) by treating the balance of the Deemed Distribution Tax Recapture Account as a reduction to the Adjusted Covered Taxes previously determined for such year.
Adjusted Covered Taxes
“Adjusted Covered Taxes” means an amount as determined under section 169;
Taxes paid during the Financial Year in relation to actual or deemed distributions are not included in Adjusted
Covered Taxes to the extent they reduce a Deemed Distribution
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;
Tax Recapture Account under subsections (3) to (5).
In the Financial Year that a Departing Constituent
Entity leaves the Multinational Enterprise Group or transfers substantially all of its assets outside the Multinational
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;
Enterprise Group or outside the jurisdiction—
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);
the Effective Tax Rate and Multinational Top-up
Tax for each preceding year for which a Deemed
Distribution Tax Recapture Account is outstanding is re-calculated in accordance with the principles of subsection 181(1) by treating the balance of the
Deemed Distribution Tax Recapture Account as a reduction to the Adjusted Covered Taxes previously determined for such year; and
any amount of incremental Multinational Top-up Tax resulting from such recalculation shall be multiplied by the Disposition Recapture Ratio to determine the Additional Current Multinational Top-up Tax for the purposes of subsection 177(1).
Finance (No. 2)
The Disposition Recapture Ratio is determined for each Departing Constituent Entity in accordance with the following formula:
A
B where
A is the GloBE Income of the Constituent
Entity, being the sum of GloBE Income of the Departing Constituent Entity determined in accordance with Chapter 5 of this Part for each Financial Year corresponding to the
Deemed Distribution Tax Recapture Accounts for the jurisdiction; and
B is the Net Income of the Jurisdiction as determined in accordance with subsection 174(4) for each Financial Year corresponding to the Deemed Distribution
Tax Recapture Accounts for the jurisdiction.
For the purposes of this section—
“Deemed Distribution Tax” means the lesser of—
the amount necessary to increase the Effective Tax
Rate computed under section 175 for the jurisdiction for the Financial Year to the Minimum Rate; or
the amount of distribution tax that would have been due if the Constituent Entities located in the jurisdiction had distributed all of their income that is subject to the Eligible Distribution Tax Regime during such year;
“Deemed Distribution Tax Recapture Account” means an account maintained in accordance with subsections (3)
to (5);
“Departing Constituent Entity” means a Constituent Entity that is subject to an election under subsections 191(1) and (2)
and that leaves the Multinational Enterprise Group or transfers substantially all of its assets to a person that is not a Constituent Entity of the same Multinational Enterprise
Group located in the same jurisdiction;
“Disposition Recapture Ratio” means a ratio as determined in subsection (12).