Legislation – Finance (No. 2) Act 2023

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Part 3Multinational top-up tax

Chapter 9Special provision for investment entities, joint venture groups and minority-owned members

Investment entities

220Top-up amount of investment entity

(1)

The top-up amount for an accounting period of a member of a multinational group that is an investment entity is, subject to subsection (2), determined by taking the following steps—

Step 1

Determine the adjusted profits (if any) of the entity for the period in accordance with Chapter 4. If the adjusted profits are nil or less, the top-up amount is nil. Otherwise, proceed to Step 2.
Step 2

Adjust the result of Step 1 in accordance with section 223 (to the extent applicable). If the adjusted result is nil, the top-up amount is nil. Otherwise, proceed to Step 3.
Step 3

Determine the substance-based income exclusion for the entity for the period (see section 221).
Step 4

Adjust the result of Step 3 in accordance with section 223 (to the extent applicable).
Step 5

Subtract the result of Step 4 from the result of Step 2. If the result is nil or less, the top-up amount is nil. Otherwise, proceed to Step 6.
Step 6

Determine the investment entity effective tax rate for the territory for the period (see section 222).
Step 7

Subtract the result of Step 6 from 15%. If the result is nil or less, the top-up amount is nil. Otherwise, proceed to Step 8.
Step 8

Multiply the result of Step 7 by the result of Step 5. This is the top-up amount for the entity F1, unless the entity has a positive undistributed income amount (see sections 214 and 215) for the period (in which case proceed to Step 9).

F2Step 9

Where this Step applies, the top-up amount for the entity is the sum of—
1. (a)
  the result of Step 8, and
2. (b)
  the positive undistributed income amount for the entity for the period multiplied by 15%.

F3(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3)

For the purposes of applying Chapter 4 in relation to an investment entity, the references in F4that Chapter to “standard members” of a multinational group are instead to members of the multinational group that are investment entities.

221Substance based income exclusion for investment entity

(1)

The substance based income exclusion for an investment entity is to be determined by adding together—

(a)

the payroll carve-out amount of the entity, and

(b)

the tangible asset carve-out amount of the entity,

(2)

Section 195(4) applies to the determination of the payroll carve-out amount of the entity as it applies for members of the group that are not investment entities.

(3)

Section 195(5) applies to the determination of the tangible asset carve-out amount of the entity as it applies for members of the group that are not investment entities.

(4)

If the filing member for the group elects not to calculate the substance based income exclusion for the period in a self-assessment (see F5Schedule 14), the exclusion is nil.

(5)

Paragraph 2 of Schedule 15 (annual elections) applies to an election under subsection (4).

222Investment entity effective tax rate

The investment entity effective tax rate in a territory for an accounting period is determined by taking the following steps—

Step 1

Determine the adjusted profits made by each of the investment entities in the territory, as determined under Chapter 4 and adjusted under section 223.
Step 2

Subtract the sum of the losses of those investment entities that made a loss in that period from the sum of the profits of those investment entities that made a profit in that period.
Step 3

If the result of Step 2 is nil or less, the investment entity effective tax rate is to be treated as 15%. Otherwise, proceed to Step 4.
Step 4

Determine the covered tax balance of each such investment entity in accordance with Chapter 5.
Step 5

Adjust the amounts determined in Step 4 in accordance with section 223 (to the extent applicable).
Step 6

Add together the amounts determined in Step 5 that are adjusted positive covered tax balances.
Step 7

Add together the amounts determined in Step 5 that are adjusted negative covered tax balances.
Step 8

Subtract the result of Step 7 from the result of Step 6.
Step 9

Divide the result of Step 8 by the result of F6Step 2. This is the investment entity effective tax rate.

223Adjustments

(1)

In this section each of the following amounts is a “relevant amount”—

(a)

the adjusted profits of an investment entity;

(b)

a substance based income exclusion for an investment entity;

(c)

the covered tax balance of an investment entity.

(2)

An external holding adjustment is to be made to each relevant amount if a person that is not a member of the multinational group has ownership interests in the entity and no election under section 213 (tax transparency election) has been made in relation to the entity.

(3)

An election adjustment is to be made to each relevant amount if an election under section 213 (tax transparency election) or 214 (taxable distribution method election) has been made in relation to the entity.

(4)

Where both an external holding adjustment and an election adjustment are to be made, the election adjustment is to be made after the external holding adjustment (and accordingly is to be an adjustment of a relevant amount as adjusted by the external holding adjustment).

(5)

An adjustment under this section is a reduction of the relevant amount by an adjustment amount.

(6)

An adjustment amount is the adjustment factor for the type of adjustment multiplied by the relevant amount.

(7)

The adjustment factor for an external holding adjustment is the value obtained by dividing—

(a)

the amount of profits of the entity attributable to ownership interests held by persons that are not members of the group, F7, other than ownership interests in respect of which an amount has been excluded from the adjusted profits of the entity, by

(b)

the total amount of F8adjusted profits of the entity determined under Chapter 4,

F9(but if the amount mentioned in paragraph (b) is nil, the adjustment factor is to be taken to be nil).

(8)

The adjustment factor for an election adjustment is the value obtained by dividing—

(a)

the amount of profits of the entity attributable to ownership interests held by the owners in relation to which an election has been made, F10, other than ownership interests in respect of which an amount has been excluded from the adjusted profits of the entity, by

(b)

the total amount of profits of the entity attributable to ownership interests held by members of the group,

F11(but if the amount mentioned in paragraph (b) is nil, the adjustment factor is to be taken to be nil).

(9)

The amount of profits attributable to ownership interests is to be determined in accordance with the method in section 201(2) F12and (3) for determining the amount of profits attributable to the ownership interests referred to in that section.

(10)

Where the covered tax balance of an investment entity includes an amount allocated to it under section 179(1) or 180(3)(a) (allocation of tax imposed under controlled foreign company tax regimes), only so much of its covered tax balance as is not comprised of amounts allocated under those sections is subject to adjustment under this section.

224Additional top-up amounts of investment entities

(1)

Sections 202 to 207 apply in respect of a member of a multinational group that is an investment entity such that the member may have additional top-up amounts.

(2)

For that purpose—

(a)

references in those sections to the standard members of a multinational group in a territory apply as if they were references to the investment entities of the group in the territory;

(b)

the reference in section 202(3) to Step 2 in section 132(1) applies as if it were a reference to Step 2 in section 222;

(c)

sections 204(4) and 207(2) do not apply.

225Attribution of top-up amounts and additional top-up amounts to responsible member

(1)

In this section “top-up amount” includes an additional top-up amount determined under section 224.

(2)

Section 200 applies to the attribution of a top-up amount of a member of a multinational group that is an investment entity (“the relevant member”) to a responsible member as it applies to a top-up amount of any other member of the group.

(3)

Section 201 applies for the purpose of determining the inclusion ratio of the responsible member, but—

(a)

in carrying out Step 1 in section 201(1)—

(i)

the adjusted profits of the entity determined in that Step are to be further adjusted in accordance with section 223 (to the extent applicable);

(ii)

if an election under section 214 (taxable distribution method election) has been made in relation to the entity, the adjusted profits of the entity are to be treated as including the undistributed income amount for the entity determined under section 215, and

(b)

subsection (4) of that section applies whether or not the relevant member is a flow-through entity (so that entities that are not members of the group are always ignored).

Joint venture group

226Joint venture group

(1)

For the purposes of this Part “joint venture group” means a joint venture parent of a qualifying multinational group and its joint venture subsidiaries (together its “members”).

(2)

An entity is a joint venture parent of a multinational group F13for an accounting period of that entity if—

(a)

the financial results of that entity F14for all or any part of that period are reported under the equity method in the consolidated financial statements of the ultimate parent of that group,

(b)

the ultimate parent holds at least 50% of the ownership interests in the entity F15at any time in that period,

(c)

the entity is not the ultimate parent of a F16multinational group that meets condition A in section 129(2) for that accounting period (revenue threshold exceeded in at least 2 of previous 4 accounting periods),

(d)

the entity is not an excluded entity,

(e)

the entity is not an entity owned by an excluded entity—

(i)

that only carries out activities that are ancillary to the activities of the excluded entity,

(ii)

whose activities consist, wholly or almost wholly, of the holding of assets or the investment of funds for the benefit of the excluded entity, or

(iii)

whose income is, wholly or almost wholly, excluded dividends or excluded equity gains (or a mixture of both),

(f)

the multinational group F17referred to in paragraph (a) is not composed exclusively of excluded entities, and

(g)

the entity is not a joint venture subsidiary in relation to another joint venture parent.

(3)

An entity is a joint venture subsidiary of a joint venture parent if its assets liabilities, income, expenses and cash flows are included in the consolidated financial statements of the joint venture parent.

(4)

Where the main entity of a permanent establishment is a joint venture parent of a multinational group or a joint venture subsidiary, that permanent establishment is to be treated as a separate joint venture subsidiary of the same multinational group joint venture group.

227Application of Part to joint venture groups

(1)

This Part applies to a joint venture group as it applies to a multinational group, but F18in their application by virtue of this subsection Chapters 3 to 6 and 8 of this Part F19, this Chapter other than this section and section 226 and F20Schedules 16 and 16A F21have effect as if—

(a)

references to the ultimate parent were to the joint venture parent of that group,

(b)

references to a member of a multinational group were to the members of the joint venture group, and.

(c)

references to the filing member were to the filing member of F22each respective multinational group whose ultimate parent holds at least 50% of the ownership interests in the joint venture parent.

(2)

For the purposes of the other provisions of this F23Part (in its application by virtue of subsection (1)), the members of the joint venture group are treated as members of F24each multinational group whose ultimate parent directly or indirectly holds at least 50% of the ownership interests in the joint venture parent.

(3)

But F25(in the application of this Part by virtue of subsection (1)) no member of the joint venture group is to be regarded as an intermediate parent member or a partially owned parent member of F26the joint venture group.

Minority owned members

228Minority owned members

(1)

For the purposes of this Part, a member of a multinational group is a “minority owned member” if—

(a)

the ultimate parent holds no more than 30% of the ownership interests in that member, and

(b)

the member is not an investment entity.

(2)

If—

(a)

a minority owned member (“M”) holds (directly or indirectly) ownership interests in another minority owned member, and

(b)

no other minority owned member holds (directly or indirectly) ownership interests in M,

M is the minority owned parent of a minority subgroup, and the minority owned members in which M has ownership interests are also members of that group.

(3)

For the purpose of determining the effective tax rate and top-up amounts of members of a minority subgroup, this Part applies as if references to standard members of a multinational group were instead to members of that subgroup.

(4)

For the purposes of determining the effective tax rate and top-up amounts of a minority owned member that is not a member of a minority subgroup, this Part applies as if references to standard members of a multinational group were instead to that member.

F27(5)

But neither subsection (3) nor (4) applies to the reference to “standard member” in section 199(2A) (election to treat top-up amounts of relevant members as nil).

Application to multi-parent groups

229Multi-parent groups

(1)

Where two or more consolidated groups form part of a multi-parent group—

(a)

those groups (“the constituent groups”) are to be treated as a single multinational group (and accordingly multinational top-up tax will be charged in relation to that single group), and

(b)

the group’s members include (as well as the members who are members as a result of section 126) entities who would not be a member of any of the constituent groups but in which a controlling interest is held by one or more members of the constituent groups,

(2)

This Part has effect, in its application to a multi-parent group, as if—

(a)

references (however framed) to the consolidated financial statements of the ultimate parent were to the multi-parent consolidated financial statements,

(b)

references to the ultimate parent were to all of the ultimate parents of the constituent groups, other than the reference in section 128(3)(b) (responsible members).

(3)

Where ownership interests in an intermediate parent member of a multi-parent group are held by more than one of the ultimate parents of the multi-parent group, F28section 128(3) has effect as if for paragraph (b) there were substituted—

“(b)

any of the ultimate parents of the constituent groups that have ownership interest in the intermediate parent member are not subject to Pillar Two IIR tax, and”.

(4)

Where an intermediate parent member of a multi-parent group is not a member of any of the constituent groups, section 128 has effect in relation to it as if—

(a)

paragraph (b) of subsection (3) were omitted, and

(b)

for subsection (4) there were substituted—

“(4)

Such an intermediate parent member is responsible for each member of the group it has an ownership interest provided the conditions in subsection (4A) are met in relation to that member (“the owned member”).

(4A)

Those conditions are that—

(a)

the owned member is not located in the same territory as the intermediate parent member, and

(b)

any of the ultimate parents of the constituent groups that has an ownership interest in the owned member is not subject to Pillar Two IIR tax.”

(5)

Unless a nomination under paragraph 2(2) of Schedule 14 is in force in relation to a multi-parent group—

(a)

the ultimate parents of the constituent groups are jointly the filing member of the multi-parent group, and

(b)

any liability for a penalty for a failure to comply with the obligations of the filing member is the joint and several liability of those ultimate parents.

(6)

For the purposes of this section—

two or more consolidated groups form part of a “multi-parent group” if—

(a)

the ultimate parents of those groups are party to an arrangement that is a stapled structure or a dual-listed arrangement, and

(b)

at least one of the controlled entities of those groups is not in the same territory as another of the other controlled entities of those groups;

“controlled entity” in relation to two or more consolidated groups means—

(a)

a member of any of those groups, and

(b)

any entity, other than a member of any of those groups, in which a controlling interest is held by one or more members of those groups;

“stapled structure” means an arrangement entered into by two or more ultimate parents of consolidated groups where the following conditions are met—

(a)

as a result of the arrangements, 50% or more of the ownership Interests in the ultimate parents of the consolidated groups—

(i)
are by reason of form of ownership, restrictions on transfer, or other terms or conditions combined with each other, and
(ii)
cannot be transferred or traded independently;

(b)

if the combined ownership Interests are listed, they are quoted at a single price;

(c)

one of those ultimate parents prepares, or together those parents prepare, consolidated financial statements—

(i)
in which the assets, liabilities, income, expenses and cash flows of the controlled entities of those consolidated groups are presented together as those of a single economic unit, and
(ii)
that are required by a regulatory regime to be externally audited;

“dual-listed arrangement” means an arrangement entered into by two or more ultimate parents of consolidated groups to combine their businesses by contract (rather than by the holding of ownership interests in one another) where the following conditions are met—

(a)

the arrangements provide for the ultimate parents of the groups to make distributions (with respect to dividends and in liquidation) to their shareholders based on a fixed ratio,

(b)

the arrangements provide for the management of those businesses as a single economic entity while retaining their separate legal identities,

(c)

ownership interests in the ultimate parents are quoted, traded or transferred independently in different capital markets, and

(d)

one of those ultimate parents prepares, or together those parents prepare, consolidated financial statements—

(i)
in which the assets, liabilities, income, expenses and cash flows of the controlled entities of those consolidated groups are presented together as those of a single economic unit, and
(ii)
that are required by a regulatory regime to be externally audited;

“multi-parent consolidated financial statements” means—

(a)

in relation to a multi-parent group that is a multi-parent group as a result of a stapled structure, the consolidated financial statements referred to in paragraph (c) of the definition of stapled structure, or

(b)

in relation to a multi-parent group that is a multi-parent group as a result of a dual-listed arrangement, the consolidated financial statements referred to in paragraph (d) of the definition of dual-listed arrangement.