Legislation – Finance Act 2026
Schedule 8Pillar Two
Introduction
1
F(No.2)A 2023 (multinational top-up tax) is amended in accordance with paragraphs 2 to 31 and 33 to 51 of this Schedule.
Application of the income inclusion rule to cases involving permanent establishments
2
In section 128 (responsible members), in each of subsections (4) and (6)—
(a)
omit the “and” at the end of paragraph (a);
(b)
“, and
(c)
every permanent establishment of a member of the group it has an ownership interest in other than a permanent establishment located in the territory it is located in.”
3
(1)
Section 237 (intermediate and partially-owned parent members) is amended as follows.
(2)
“(b)
it has—
(i)
a direct or indirect ownership interest in another member of the group, or
(ii)
a permanent establishment, and”.
(3)
“(b)
it has—
(i)
a direct or indirect ownership interest in another member of the group, or
(ii)
a permanent establishment.”
Elective qualifying domestic top-up taxes
4
“(7A)
If for an accounting period—
(a)
the application in relation to an entity located in a territory of a tax equivalent to the IIR provisions of multinational top-up tax depends on the making by any person of an election or claim, and
(b)
the tax does not apply in relation to the entity because such an election or claim is or is not made,
subsection (7)(b)(i) has effect in relation to the entity as though the tax were not in force in the territory for the period.”
5
“(5)
If for an accounting period—
(a)
the application of a qualifying domestic top-up tax in relation to the members of a multinational group located in a territory depends on the making by any person of an election or claim, and
(b)
the tax does not apply in relation to those members because such an election or claim is or is not made,
sub-paragraph (3)(a) has effect in relation to the group as though the tax did not apply in the territory for the period.”
Other provision about permanent establishments
6
In section 135 (underlying profits of permanent establishments), in subsection (1)—
(a)
in paragraph (a), after “financial accounts” insert “prepared in accordance with acceptable accounting standards”
;
(b)
in paragraph (b), for “in accordance with section 159” substitute “on the same principles as those set out in section 159(1), (2) or (3) (as the case may be)”
.
7
“(5)
See also section 135(1)(b) (by virtue of which equivalent adjustments to those set out in subsections (1) to (3) will already be reflected in the underlying profits accounts of a permanent establishment that does not have separate financial accounts from the main entity prepared in accordance with acceptable accounting standards).”
8
(1)
Section 232 (permanent establishments) is amended as follows.
(2)
In the heading, omit “treated as entities”.
(3)
In subsection (1)—
(a)
in the words before paragraph (a), omit “that”;
(b)
in paragraph (a), for “is located” substitute “that is situated”
;
(c)
“(aa)
any profits in relation to which are reflected in the financial statements of the main entity, and”;
(d)
in paragraph (b), at the beginning insert “that”
;
(4)
In subsection (2)—
(a)
in paragraphs (b) and (c), for “is in” substitute “is situated in”
;
(b)
“(ii)
the income attributable to the place of business’s operations is exempted from tax by the territory of the main entity or, where the main entity is a flow-through entity, by the territory in which the reference entity (within the meaning of section 168) is located.”
(5)
“(2A)
For the purposes of subsection (1)(a)—
(a)
section 240(2) (flow-through entities treated as stateless) is to be disregarded, and
(b)
a flow-through entity that would otherwise be a stateless entity under section 240(2) is instead treated as located in the territory in which it is created.”
(6)
“(6)
See also section 232ZA (modifications that apply where legal main entity is distinct from main entity).”
9
“232ZALegal main entity distinct from main entity
(1)
Where a permanent establishment has a legal main entity that is distinct from the main entity, this Part applies with the following modifications in relation to the permanent establishment.
(2)
In section 127 (excluded entities), in subsection (5)(a) (definition of qualifying non-profit subsidiary), the reference to the main entity is to be read as a reference to the main entity and each legal main entity.
(3)
In section 135 (underlying profits of permament establishments)—
(a)
in subsection (1)(b) (underlying profits of permanent establishment that does not have separate financial accounts), the reference to the main entity is to be read as a reference to whichever of the main entity and the legal main entities is relevant to the attribution exercise under section 159;
(b)
in subsection (3) (permanent establishments within section 232(2)(d)), the references to the main entity are to be read as references to the main entity or any legal main entity;
(c)
in subsection (4) (no double counting between permanent establishment and main entity), the reference to the main entity is to be read as a reference to the main entity or any legal main entity.
(4)
In section 159 (permanent establishment income and expense attribution), the references to the main entity are to be read as references to whichever of the main entity and the legal main entities is relevant to the attribution exercise under the subsection in question.
(5)
In section 198 (eligible payroll costs etc: permanent establishments), in subsection (5) (double counting), the references to the main entity are to be read as references to any of the main entity and the legal main entities.
(6)
In section 236 (investment funds and investment entities), in subsection (1)(f)(ii) (regulatory regime condition), the reference to the main entity is to be read as a reference to a legal main entity.
(7)
In section 253 (disqualified and qualified refundable imputation taxes), in subsection (2)(a)(ii), the reference to the main entity is to be read as a reference to a legal main entity.
(8)
For the purposes of this section a “legal main entity” in relation to a permanent establishment means—
(a)
in the case of a permanent establishment within section 232(2)(a), an entity of which it is regarded as being a permanent establishment in accordance with an applicable tax treaty;
(b)
in the case of a permanent establishment within section 232(2)(b), an entity of which it is regarded as being a permanent establishment under the domestic law of the territory in which the permanent establishment is situated;
(c)
in the case of a permanent establishment within section 232(2)(c), an entity of which it would be regarded as being a permanent establishment in accordance with Article 7 of the OECD tax model;
(d)
in the case of a permanent establishment within section 232(2)(d), any reference entity (within the meaning of section 168) by reference to which the condition in section 232(2)(d)(ii) is satisfied.”
Intragroup accounting discrepancies
10
“150AInstruments held intragroup: issuer’s accounting treatment to prevail
If—
(a)
a member of a multinational group (“the holder”) holds an interest (of any description) in another member of the group (“the issuer”), and
(b)
the interest is accounted for as equity in the underlying profits accounts of one of the members and as debt in the underlying profits accounts of the other,
the underlying profits of the holder are to be adjusted to what they would be if the interest were accounted for in the holder’s underlying profits accounts in the same way as it is accounted for in the issuer’s.”
Tax-transparent investment entities: double counting
11
“(10ZA)
Where M is treated as a flow-through entity by virtue of an election made in relation to R and M under section 213 (investment entity tax transparency election), the underlying profits of R are to be adjusted so as to exclude any gain, profit or loss—
(a)
that arises from changes in the fair value of, or from the impairment of, R’s interest in M, and
(b)
that is not an excluded equity gain or loss (taking into account any election under section 165),
but the amount excluded under this subsection is not to exceed the amount of M’s underlying profits that is allocated to R under subsection (3).”
Adjustments for ultimate parent that is a flow-through entity
12
(1)
Section 170 (adjustments for ultimate parent that is a flow-through entity) is amended as follows.
(2)
In subsection (1), in the words after paragraph (b), for “its profits” substitute “those profits”
.
(3)
In subsection (2)—
(a)
in the words before paragraph (a), for “profits” substitute “those profits”
;
(b)
in paragraph (a), for “the ultimate parent’s profits” substitute “those profits”
.
(4)
“(2A)
For the purposes of this section—
(a)
each holder of a direct ownership interest in the ultimate parent is treated as entitled as a result of that interest to a proportion of the ultimate parent’s adjusted profits (that is to say, its adjusted profits ignoring this section), and
(b)
the proportion of those adjusted profits to which each holder is treated as entitled is the proportion of those profits to which it would have been entitled had the actual amount of profits accruing to the ultimate parent been equal to its adjusted profits.”
(5)
In subsection (3), in the words before paragraph (a), for “of the group” substitute “mentioned in subsection (1)(b)”
.
(6)
“(5A)
(a)
the holder of the ownership interest is not subject to tax on an amount of the ultimate parent’s profits for a taxable period that ends within 12 months of the accounting period mentioned in subsection (1)(b), and
(b)
the holder would be subject to tax on the amount for a taxable period ending within that 12-month period but for a difference which will be eliminated over time between—
(i)
the time when any income, expense, gain or loss is recognised in the ultimate parent’s financial statements, and
(ii)
the time when that income, expense, gain or loss is reflected in the profits of the ultimate parent on which the holder is subject to tax (“the holder’s taxable profits”).
(5B)
Condition A has effect, for each accounting period up to and including the period in which that timing difference is eliminated, as if the income, expense, gain or loss were instead reflected in the holder’s taxable profits in the taxable period in which it is recognised in the ultimate parent’s financial statements.
(5C)
In a period for which, under subsection (5B), the holder’s taxable profits of a particular type are treated for the purposes of condition A as greater or less than what they actually are, it is to be assumed—
(a)
that any excess is subject to tax at the same nominal rate at which the holder’s taxable profits of that type are actually subject to tax,
(b)
that the holder pays tax on any excess at that rate,
(c)
that any shortfall is not subject to tax, and
(d)
that the holder pays no tax on any shortfall.”
Qualifying current tax expense
13
(1)
Section 174 (amount of covered tax balance) is amended as follows.
(2)
In subsection (5), in the definition of “qualifying current tax expense”, for “underlying profits” substitute “partially adjusted profits”
.
(3)
“(6)
For the purposes of the definition of “qualifying current tax expense” in subsection (5), the member’s “partially adjusted profits” are its underlying profits with the adjustments contained in the following sections applied—
section 137A (use of substituted values);
section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions);
section 140 (profits adjusted to be profits before certain purchase accounting adjustments).”
14
In section 176 (amounts to be reflected in qualifying current tax expense), in subsection (2)(i), at the end insert “in accordance with this Part”
.
15
(1)
Section 182 (total deferred tax adjustment amount) is amended as follows.
(2)
In subsection (1), from the words from “underlying profits” to the end substitute “partially adjusted profits, but with that deferred tax expense adjusted as follows”
.
(3)
“(2A)
The deferred tax expense is to be adjusted to include (so far as it would not already) any amount of deferred tax expense in respect of covered taxes within section 176(2)(g) or (h) (amounts reflected in other comprehensive income etc).”
(4)
““partially adjusted profits”, in relation to a member of a multinational group, means its underlying profits with the adjustments contained in the following sections applied—
section 137A (use of substituted values);
section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions);
section 140 (profits adjusted to be profits before certain purchase accounting adjustments).”
Intragroup transactions
16
“(3)
The reference in subsection (2)(a) to income or gains that are not included in the member’s adjusted profits does not include any income or gains that are not included in its adjusted profits solely because of an election under section 164 (intra-group transactions).”
17
In section 182 (total deferred tax adjustment amount), in subsection (2)(a), at the end insert “(other than items that are not reflected solely because of an election under section 164 (intra-group transactions))”
.
Tax equity partnerships: calculation of excess return for clawback
18
“(4)
For the purposes of this section an investor has an “excess return” from an arrangement in an accounting period (“the current period”) if the total relevant return exceeds the amount of capital investment provided by the investor to the arrangement at its commencement.
The amount of the excess return is the amount of the excess.
(5)
In subsection (4) “the total relevant return” means the sum of—
(a)
the amounts of the qualifying flow-through tax benefits provided to the investor under the arrangement that have been excluded under section 176D(1) in the current period or any earlier accounting period,
(b)
the amounts of any distributions made to the investor under the arrangement in the current period or any earlier accounting period,
(c)
the amounts received by the investor for the sale of any part of its investment in the arrangement in the current period or any earlier accounting period, and
(d)
the amounts of any qualifying refundable tax credits and marketable transferable tax credits made available to be used by the investor under the arrangement in the current period or any earlier accounting period,
less the amount of any excess return that the investor had from the arrangement in any earlier accounting period.”
Cross-border allocation of deferred tax assets and liabilities
19
In section 181B (cross-border allocation of deferred tax assets and liabilities), in subsection (5), at the end insert “(and accordingly no allocation of deferred tax assets or liabilities is to be made under this Chapter in cases to which the deferred taxes methodology applies).”
Deferred tax assets and liabilities: exclusions
20
(1)
Section 185 (inclusion of existing deferred tax assets and liabilities on entry into regime) is amended as follows.
(2)
In subsection (1), for “that is reflected” substitute “that are reflected”
.
(3)
In subsection (6)—
(a)
in the words before paragraph (a) omit “qualifying”;
(b)
“(a)
before the commencement of the first accounting period for which Pillar Two rules apply to the member and as a result of a transaction carried out after 30 November 2021, and”
(4)
“(7A)
Subsection (7D) applies to a deferred tax asset of a member of a multinational group that arises before the commencement of the first accounting period for which Pillar Two rules apply to the member and as a result of the occurrence of either of the following after 30 November 2021—
(a)
the making available of a tax credit, or other tax relief, by virtue of the exercise of a discretion in relation to a member of the group by a national, regional or local government or by a governmental entity;
(b)
the making (or modifying) of an election or of another choice by a member of the group where the effect of the election or choice is to change the tax treatment of an earlier transaction retrospectively.
(7B)
Subsection (7D) also applies to a deferred tax asset or a deferred tax liability of a member of a multinational group that arises—
(a)
after 30 November 2021 and before the commencement of the first accounting period for which Pillar Two rules apply to the member,
(b)
because of a difference between the value (or base cost) of an asset or liability for the purposes of a corporate income tax and its value for accounting purposes, and
(c)
in circumstances where the corporate income tax mentioned in paragraph (b) was introduced on or after 1 December 2021 in a territory that did not previously have a corporate income tax.
(7C)
Subsection (7D) also applies to a deferred tax asset of a member of a multinational group that arises before the commencement of the first accounting period for which Pillar Two rules apply to the member if—
(a)
where the member is located in a territory which did not have a corporate income tax before 1 December 2021 and in which one is introduced on or after that date, the deferred tax asset is attributable to a loss occurring before the fifth accounting period before the accounting period in which that corporate income tax came into force, or
(b)
the deferred tax asset arises in relation to non-economic expenses or losses (within the meaning of the Pillar Two rules) incurred after 30 November 2021.
(7D)
A deferred tax asset or deferred tax liability to which this subsection applies is to be ignored in determining the member’s deferred tax expense.”
(5)
In subsection (8), omit “qualifying”.
21
(1)
Schedule 16 (transitional provision) is amended as follows.
(2)
In paragraph 2 (intra-group transfers before entry into regime), in sub-paragraph (3)—
(a)
omit the “and” after paragraph (a);
(3)
In paragraph 5 (general transitional safe harbour election: qualifying income tax expense)—
(a)
(i)
omit the “and” after paragraph (a);
(4)
“Part 4Pre-entry deferred tax assets and liabilities
Straddle periods
14
(1)
This paragraph applies in relation to an accounting period of a member of a multinational group if—
(a)
21 July 2025 falls during the period (but is not the first day of the period),
(b)
the member has a relevant pre-entry deferred tax asset or a relevant pre-entry deferred tax liability, and
(c)
the asset or liability is reversed (to any extent) in the period.
(2)
Despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, an amount in respect of the reversal may be reflected in—
(a)
the member’s deferred tax expense for the purposes of this Part of this Act, or
(b)
the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule.
(3)
(4)
In this paragraph “the pre-commencement proportion” means—
(a)
the number of days in the accounting period before 21 July 2025, divided by
(b)
the total number of days in the accounting period.
Grace period
15
(1)
This paragraph applies for an accounting period in relation to a relevant pre-entry deferred tax asset of a member of a multinational group if—
(a)
the accounting period falls within the applicable grace period,
(b)
(2)
If any relevant pre-entry deferred tax asset falling within a particular category is reversed, an amount in respect of that reversal may, despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, be reflected in—
(a)
the member’s deferred tax expense for the purposes of this Part of this Act, or
(b)
the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule,
so far as it does not exceed the available grace period amount in relation to the category.
(3)
But an amount may not be reflected in respect of the reversal of a deferred tax asset so far as the reversal takes place as a result of (and would not have taken place but for) a change after 18 November 2024 to—
(a)
any law or election in effect in relation to the deferred tax asset,
(b)
the accounting methodology applicable to the deferred tax asset, or
(4)
Take the following steps to find the “available grace period amount” (if any) in relation to a category of deferred tax asset for an accounting period.
Step 1
Determine, in relation to each deferred tax asset of the member falling within the category, the carrying value of the asset as at the time when it was first reflected in the underlying profits of the member.
For that purpose, determine the carrying value of the asset on the basis of the lower of—
- (a)
the nominal tax rate that applied in relation to it at that time, and
- (b)
a tax rate of 15%.
Step 2
Find the sum of the values determined at Step 1.
Step 3
Multiply the result of Step 2 by 20%.
Step 4
Deduct any amount—
- (a)
that has been taken into account in determining the deferred tax expense of the member—
- (i)
in relation to assets falling within the category, and
- (ii)
in an accounting period that falls within the applicable grace period, or
- (b)
that would have been so taken into account in such a period had the Pillar Two rules applied to the member in question for that period.
(5)
For the purposes of this paragraph each of following is a “category” of relevant pre-entry deferred tax asset—
(a)
assets falling within section 185(7A)(a);
(b)
assets falling within section 185(7A)(b);
(c)
assets falling within section 185(7B).
(6)
For the purposes of this paragraph an accounting period “falls within the applicable grace period”—
(a)
(i)
it begins on or after 1 January 2024 and before 1 January 2026, and
(ii)
it ends before 1 July 2027;
(7)
General
16
(1)
In this Schedule, in relation to a member of a multinational group—
“relevant pre-entry deferred tax liability” means a deferred tax liability that arises as described in section 185(7B).
(2)
22
(1)
Schedule 16A (safe harbours) is amended as follows.
(2)
In paragraph 3 (disqualifying conditions)—
(a)
in sub-paragraph (1), for “Conditions A to D” substitute “The following conditions”
;
(b)
“(7)
Condition E is that—
(a)
a member of the group located in the territory has a relevant pre-entry deferred tax asset or relevant pre-entry deferred tax liability, and
(b)
the qualifying domestic top-up tax applying in the territory either—
(i)
(ii)
makes such corresponding provision in a way that is inconsistent with the Pillar Two commentary in relation to relevant pre-entry deferred tax assets or relevant pre-entry deferred tax liabilities.
(8)
In subsection (7) “relevant pre-entry deferred tax asset” and “relevant pre-entry deferred tax liability” have the same meaning as in Schedule 16, but for that purpose the words “or (7C)” in the definition of “relevant pre-entry deferred tax asset” are to be disregarded.”
(3)
In paragraph 4(1)—
(a)
omit paragraph (a);
(b)
in paragraph (b)—
(i)
for “after sub-paragraph (6), there were inserted” substitute “at the end there were inserted the following disqualifying condition”
;
(ii)
the inserted sub-paragraph (7) becomes an inserted unnumbered sub-paragraph.
(4)
In paragraph 5(1)(b)—
(a)
omit sub-paragraph (i);
(b)
in sub-paragraph (ii)—
(i)
for “after sub-paragraph (6), there were inserted” substitute “at the end there were inserted the following disqualifying condition”
;
(ii)
the inserted sub-paragraph (7) becomes an inserted unnumbered sub-paragraph.
Post-filing adjustments of covered taxes
23
(1)
Section 217 (post-filing adjustments of covered taxes) is amended as follows.
(2)
In subsections (2)(a) and (b) and (3), for “that liability” substitute “the relevant aggregate liability”
.
(3)
In subsection (4), for “that increase or decrease” substitute “the increase or decrease referred to in subsection (1),”
.
(4)
In subsection (5)(a), (b) and (c), after “the decrease” insert “referred to in subsection (3)”
.
(5)
In subsection (8)(a), for “the aggregate covered tax balance of the standard members of the group in the territory of the member for the prior period” substitute “the relevant aggregate liability”
.
(6)
“(9)
In this section “the relevant aggregate liability”, in relation to the member referred to in subsection (1), means the aggregate liability to covered taxes of the standard members of the group in the territory of the member for the prior period.”
Securitisation companies
24
In section 229C (UTPR: allocation of untaxed amounts to members), in subsection (3)—
(a)
omit the “or” after paragraph (a);
(b)
“, or
(c)
a securitisation company within the meaning of the Taxation of Securitisation Companies Regulations 2006 (S.I. 2006/3296).”
25
“(9)
Condition F is that the qualifying domestic top-up tax applying in the territory is not charged in respect of a member of the group located in the territory because of an exemption (however framed) or special regime relating to persons concerned in securitisation transactions.”
Location of stateless entities
26
In section 239 (location of entities)—
(a)
in subsection (7), omit paragraph (a);
(b)
“(8)
As regards stateless entities see also section 132(3)(b) (stateless member of group treated as located in its own nominal territory).”
27
“(6)
For the purposes of this paragraph, “territory” does not include the nominal territory of a stateless member of a multinational group (see section 132(3)(b)).”
Qualifying undertaxed profits tax
28
In section 241 (Pillar Two territories), omit subsection (4).
29
In section 256 (qualifying domestic top-up tax), omit subsection (5).
30
(1)
Section 257 (qualifying undertaxed profits tax) is amended as follows.
(2)
“(1A)
Regulations under subsection (1)(b) may provide for the specification of a tax to be made by notice published by the Commissioners for His Majesty’s Revenue and Customs in accordance with the regulations.”
(3)
In subsection (2), for “A tax may only be specified in regulations if the Treasury consider” substitute “A person may only specify a tax by virtue of this section if the person considers”
.
31
In Schedule 16A (safe harbours), in paragraph 2 (accredited qualifying domestic top-up tax), omit sub-paragraphs (2) and (3).
32
(1)
For the purposes of Part 3 of F(No.2)A 2023, a tax is to be treated as a qualifying undertaxed profits tax for any accounting period that ends before the first regulations under section 257 of that Act have been made if—
(a)
it is a Qualified UTPR for that accounting period for the purposes of the Pillar Two rules, or
(b)
it is reasonable to conclude that it is likely to be a Qualified UTPR for that accounting period for the purposes of the Pillar Two rules.
(2)
In sub-paragraph (1) “Pillar Two rules” has the same meaning as in Part 3 of F(No.2)A 2023 (see section 255 of that Act).
Definition of “ownership interest”
33
“(b)
that interest is accounted for as equity in—
(i)
where B is a member of a consolidated group, the consolidated financial statements of the ultimate parent of the group (ignoring any requirement to consolidate the assets, liabilities, income, expenses and cash flows of B in those statements), or
(ii)
otherwise, B’s financial statements.”
REITs: domestic top-up tax
34
“(1A)
A UK REIT is a DTT excluded entity (so far as would not already be the case by virtue of subsection (1)(b) or (c)).”
Domestic top-up tax: exchange rates
35
“(4)
The exchange rate to be used for a conversion to sterling required by Step 2 in subsection (A1) or Step 3 in subsection (1) is—
(a)
the average exchange rate published by the European Central Bank for the accounting period in question;
(b)
where no such rate is published by the European Central Bank, the average exchange rate published by the Bank of England for the accounting period in question;
(c)
where no such rate is published by either the European Central Bank or the Bank of England, such rate as appears, on a just and reasonable basis, to reflect the average exchange rate for the accounting period in question.”
Domestic top-up tax: covered tax to include group relief payments
36
Section 272 (domestic top-up tax: determining top-up amounts of entity that is a member of a group) is amended as follows.
37
In subsection (8)—
(a)
“(aa)
section 138 (profits adjusted to be before tax) has effect as if at the end of subsection (2) there were inserted—“(g)
a group relief payment so far as excluded (and for that purpose “group relief payment” and “excluded” have the meaning given in section 173(3)).”;
(ab)
section 173 (covered taxes) has effect, subject to paragraph (f) below, as if (in addition to the modification made by subsection (4)(a))—
(i)
in subsection (1), the “and” after paragraph (c) were omitted and after paragraph (d) there were inserted“, and(e)
a group relief payment so far as it is not excluded.”;
(ii)
at the end there were inserted—“(3)
For the purposes of subsection (1)(e)—
(a)
“group relief payment” means a payment—
(i)
in relation to which section 183 or 188FA of CTA 2010 applies to the member, and
(ii)
that relates to group relief which the member claims under section 130 or 188CB of that Act by virtue of the group condition being met (see sections 132 and 188CE of that Act);
(b)
a group relief payment is “excluded” so far as it exceeds 15% of the agreed loss amounts (within the meaning of section 183 or 188FA of that Act, as the case may be) to which the group relief payment relates.
(4)
It follows from subsection (1)(e) that a group relief payment, so far as not excluded, operates to reduce the covered tax balance of the recipient.”
(b)
“(f)
section 239(4)(a) (location of entities: tie-breaker by reference to covered taxes) has effect without the modification made by paragraph (ab).”
Domestic top-up tax: allocation of CFC mobile income
38
“(d)
section 179 (controlled foreign companies) has effect as if for subsection (2) there were substituted—“(2)
But the amount of qualifying current tax expense in respect of mobile income allocated to F is not to exceed 15% of the adjusted profits of F.”
Simplified calculations for non-material members
39
“Part 3Simplified calculations for non-material members of group
Election in respect of non-material members
8
(1)
The filing member of a multinational group may for an accounting period make an election under this paragraph in respect of one or more members of the group in a territory.
(2)
An election may be made only if for the accounting period in question—
(a)
the specified members are non-material members of the group,
(b)
the accounting conditions are met, and
(c)
any of the following is met—
(i)
the routine profits test;
(ii)
the de minimis test;
(iii)
the effective tax rate test.
(3)
Where an election is made, the total top-up amount for the accounting period for the territory is assumed to be nil for the purpose of determining the liability of any member of the group to multinational top-up tax.
(4)
Paragraph 2 of Schedule 15 (annual elections) applies to an election under this paragraph.
“Non-material member”
9
For the purposes of paragraph 8(2)(a), a member of a multinational group is a “non-material member” of the group for an accounting period if for the period in question—
(a)
the member’s assets, liabilities, income, expenses and cash flows are not included in the consolidated financial statements of the ultimate parent on a line-by-line basis,
(b)
their non-inclusion in those statements is solely on the grounds of size or materiality, and
(c)
an external auditor has agreed (without qualification) to their non-inclusion in those statements on those grounds,
Accounting conditions
10
(1)
For the purposes of paragraph 8(2)(b), “the accounting conditions” for an accounting period are—
(a)
that consolidated financial statements falling within section 249(1)(a) or (c) have been prepared by the ultimate parent of the group,
(b)
that those consolidated financial statements have been externally audited, and
(c)
that financial statements have been prepared in accordance with an acceptable accounting standard or an authorised accounting standard in respect of any specified member whose revenue exceeds 50 million euros.
(2)
The reference in sub-paragraph (1)(c) to the revenue of a specified member is to its revenue as it would be determined under the country-by-country reporting rules.
Routine profits test
11
(1)
(2)
The assumption is that for the period in question the adjusted profits of each specified member are equal to the revenue of that member as it would be determined under the country-by-country reporting rules.
De minimis test
12
(1)
(2)
The assumption is that for the period in question—
(a)
the revenue of each specified member, and
(b)
the adjusted profits of each specified member,
is or are equal to the revenue of that member as it would be determined under the country-by-country reporting rules.
Effective tax rate test
13
(1)
(2)
The assumption is that for the period in question—
(a)
the adjusted profits of each specified member are equal to the revenue of the member as it would be determined under the country-by-country reporting rules, and
(b)
the covered tax balance of each specified member is equal to the member’s income tax expense as it would be determined under the country-by-country reporting rules.
Interpretation etc
14
In this Part of this Schedule, in relation to an election under paragraph 8—
“the country-by-country reporting rules” means—
(a)
where legislation implementing the OECD’s guidance on country-by-country reporting has effect in the relevant territory, that legislation;
(b)
otherwise, that guidance;
“the relevant territory” means the territory in which the specified members are located;
“the specified members” means the members of the group in respect of which the election is made.
15
Nothing in this Part of this Schedule requires a country-by-country report actually to be filed in respect of a multinational group in order for an election under paragraph 8 to be made.”
Minor amendments
40
In section 131 (whether de-merged groups meet the revenue threshold), in subsection (3)(b), at the end insert “, or would do ignoring any transitional safe harbour election”
.
41
In section 132 (effective tax rate), in subsection (1), in Step 7, at the end insert “and rounded to the nearest fourth decimal place (if it would otherwise have more than four).”
42
In section 144 (adjustments for asymmetric foreign currency income and losses), in subsection (4)(b), for “income” substitute “gain”
.
43
In section 197A (operating leases), in subsections (2) and (3), for “operating lease” substitute “property”
.
44
In section 210 (transfer of assets or liabilities from a member of a multinational group), in subsection (2), for “transferee” (in each place it occurs) substitute “transferor”
.
45
In section 247 (timing of transfers of interests), in subsection (1), in the words after paragraph (b), for “earlier time when the transfer is effective” substitute “other time”
.
46
(1)
Section 267 (DTT excluded entities) is amended as follows.
(2)
In subsection (3C)—
(a)
in the words before paragraph (a), for “An investment entity that” substitute “Where an investment entity”
;
(b)
in paragraph (a), at the beginning insert “that entity”
;
(c)
in paragraph (b), for “272(8)(e)” substitute “272(3A)”
.
(3)
(a)
omit “(8)(e)”;
(b)
at the end insert “and the section 193A(2) contained in subsection (3A) of that section”
.
47
In section 272 (determining top-up amounts of entity that is a member of a group)—
(a)
in subsection (8)(da), for “in section 182(2)(e),” substitute “section 182 (total deferred tax adjustment amount) has effect as if in subsection (2)(e),”
;
(b)
in subsection (10)(a), for “(8)(e)” substitute “(3A)”
.
48
In section 273 (domestic top-up tax: determining top-up amounts of entity that is not a member of a group), in the section 132 contained in subsection (2)—
(a)
in each of Steps 1 to 3, for “member” substitute “entity”
;
(b)
in Step 6, at the end insert “and rounded to the nearest fourth decimal place (if it would otherwise have more than four).”
49
In Schedule 14 (administration of multinational top-up tax)—
(a)
in the italic heading before paragraph 50, after “Multiple” insert “tax-geared”
;
(b)
in paragraph 50—
(i)
in sub-paragraph (1), for “in”, in the second place it occurs, substitute “whose amount falls to be determined by reference to the tax payable in relation to”
;
(ii)
in sub-paragraph (2), after “penalties” insert “, so far as determined by reference to any particular part of the tax,”
;
(iii)
in that sub-paragraph, after “penalty”, in the second place it occurs, insert “(so far as so determined)”
.
50
In Schedule 15 (elections) in each of paragraphs 1(1) and 2(1), for the words before paragraph (a) substitute “For the elections to which this paragraph applies, see—”
.
51
“Transitional extension to deadline for elections
2A
(1)
Schedule 15 (multinational top-up tax: elections) has effect in its application to a pre-2026 election as if in paragraphs 1(2)(b) and 2(2)(b) of that Schedule for “no later than” there were substituted
“before the end of the period of 12 months beginning with the day after”.(2)
In sub-paragraph (1), a “pre-2026 election” means an election which specifies an accounting period ending before 31 December 2025 as—
(a)
in the case of an election to which paragraph 1 of Schedule 15 applies, the first accounting period for which the election is to have effect, or
(b)
in the case of an election to which paragraph 2 of Schedule 15 applies, the accounting period for which the election is to have effect.”
52
(1)
In FA 1989, in section 178 (setting of rates of interest), subsection (2) is amended as follows.
(2)
In paragraph (x)—
(a)
for “51” substitute “33A”
;
(b)
after “Finance” insert “(No.2)”
;
(3)
In paragraph (y), for “51” substitute “33A”
.
Commencement
53
(1)
The amendments made by paragraphs 4 and 5 (elective qualifying domestic top-up taxes) and paragraphs 28 to 31 (qualifying undertaxed profits tax) have effect in relation to accounting periods beginning on or after 31 December 2025.
(2)
The amendments made by paragraphs 20 to 22 (deferred tax assets and liabilities: exclusions) have effect in relation to accounting periods ending on or after 21 July 2025.
(3)
Paragraph 32 (qualifying undertaxed profits tax: periods before regulations come into force) is treated as having come into force on 2 December 2025.
(4)
The amendment made by paragraph 51 has effect in relation to accounting periods beginning on or after 31 December 2023.
(5)
The amendments made by the other provisions of this Schedule have effect in relation to—
(a)
where a retrospection election has been made in relation to a multinational group, a group, or a qualifying entity that is not a member of a group, accounting periods of that multinational group, group or entity beginning on or after 31 December 2023, or
(b)
otherwise, accounting periods beginning on or after 31 December 2025.
(6)
A retrospection election—
(a)
is to be made—
(i)
in the case of a multinational group or group, by the filing member, or
(ii)
in the case of a qualifying entity that is not a member of a group, by that entity,
(b)
must be made on or before the day on which the self-assessment return or below-threshold notification for the first accounting period of the multinational group, group or entity beginning on or after 31 December 2023 is made, and
(c)
may not be revoked.
(7)
But sub-paragraph (8) applies where any member, or former member, of a multinational group or group is, or would be on either or both of the relevant assumptions—
(a)
a person chargeable to domestic top-up tax that has top-up amounts or additional top-up amounts for any accounting period beginning before 31 December 2025 as a result of the person’s membership of the multinational group or group, or
(b)
a qualifying entity that has top-up amounts or additional top-up amounts for any accounting period beginning before 31 December 2025 as a result of the entity’s membership of the multinational group or group in respect of which a person is chargeable to domestic top-up tax.
(8)
Where this sub-paragraph applies, a retrospection election may not be made without the written consent of each such person.
(9)
For the purposes of sub-paragraph (7), “the relevant assumptions” are—
(a)
that the retrospection election had been made, and
(b)
that no election under section 271 of F(No.2)A 2023 had been made.
(10)
Where—
(a)
the filing member of a multinational group is not a responsible member of that multinational group, or
(b)
there is more than one responsible member of that multinational group,
a retrospection election may not be made without the written consent of each responsible member.
(11)
Sub-paragraph (12) applies where—
(a)
the filing member of a multinational group or group has made a retrospection election,
(b)
at the time the election was made it was reasonable for the filing member to consider that the consent of a person was not required,
(c)
that consent was not given,
(d)
the filing member becomes aware that the consent of that person was, or may have been, required, and
(e)
the written consent of that person is given within the period of 60 days beginning with the day on which the condition in paragraph (d) is first met.
(12)
The consent of that person is to be treated as having been given before the election was made.
(13)
References in this paragraph to a “group”, other than in the expression “multinational group”, are to a group for the purposes of Part 4 of F(No.2)A 2023 (domestic top-up tax).