GLOBAL MINIMUM TAX: Rules on Corporate Restructurings and Holding Structures – Multi-Parented MNE Group

[Amit Jalan]

Friends  

In the deepest overhaul of cross-border tax rules in a generation, which the OECD expects will yield an extra over $200 billion in tax income globally, the aim of Pillar-2 is to end the so-called race-tothe bottom with countries competing on tax rates to obtain inward investment. The overhaul is fast gathering steam ahead of implementation early next year.

In the last few editions, we covered various topics on corporate restructurings determining the application of GloBE Rules to MNE Groups particularly in case of mergers, demergers, acquisitions, joint ventures, etc. This edition is the last one in that series where we are discussing on special rules for Multi-Parented MNE Groups.  

We hope this bulletin adds Value in your professional Sphere.  

To recap, Chapter 6 contains rules relating to acquisitions, disposals and Joint Ventures, summarised as below:

 Article 6.1 supplements Article 1.1 by providing further rules to assess the consolidated revenue threshold for determining the applicability of the GloBE Rules to an MNE Group and its constituent entities in case of merger and demerger transactions that took place in the prior four-year period.  

 Article 6.2 provides special rules for the application of the GloBE Rules that apply when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year.  

 Article 6.3 provides special rules for the treatment of transfers of assets and liabilities including as part of a reorganisation.  

 Article 6.4 brings certain Joint Ventures within the scope of the GloBE Rules.  

 Article 6.5 provides special rules for Multi-Parented MNE Groups.  

We have covered below in detail, Article 6.5 that provides rules for two or more MNE Groups whose financial performance is presented as a single economic unit (a combined MNE Group) in accordance with a Dual-listed Arrangement or a Stapled Structure.

A Multi-Parented MNE Group is comprised of two or more Groups whose UPEs enter into an arrangement that is a Stapled Structure or Dual-listed Arrangement.  

Article 10.1 defines the terms Multi-Parented MNE Group, Dual-listed Arrangement and Stapled Structure as below:

A Multi-Parented MNE Group is two or more Groups where:  

a) the Ultimate Parent Entities of those Groups enter into an arrangement that is a Stapled Structure or a Dual-listed Arrangement; and  

b) at least one Entity or Permanent Establishment of the combined Group is located in a different jurisdiction with respect to the location of the other Entities of the combined Group. For instance, two separate domestic Groups may each hold 50% of the Ownership Interests of an Entity located in another jurisdiction (or domestic Entity with a PE in another jurisdiction). In this case, the Entity would be treated as a JV by each Group individually. However, where the UPEs of both Groups are part of a Stapled Structure or Dual-listed Arrangement the JV becomes a Constituent Entity of the combined Group and because that Entity is located in another jurisdiction, the combined Group becomes a Multi-Parented MNE Group.  

A Stapled Structure is an arrangement entered into by two or more UPEs of separate Groups, under which:  

a) 50% or more of the Ownership Interests in the UPEs of the separate Groups are “stapled” / combined together as if they were the Ownership Interests of a single Entity (form of ownership, restrictions on transfer, or other terms or conditions), and cannot be transferred or traded independently. If the combined Ownership Interests are listed, they are quoted at a single price; and  

b) one of those UPEs prepares Consolidated Financial Statements in which the assets, liabilities, income, expenses and cash flows of all the Entities of the Groups are presented together as those of a single economic unit and that are required by a regulatory regime to be externally audited  

A Dual-listed Arrangement is an arrangement whereby:  

a) Two or more UPEs combine their businesses through contract rather than bringing them under the ownership and control of a single entity;  

b) Each UPE makes distributions (with respect to dividends and in liquidation) to its shareholders based on a fixed ratio pursuant to contractual arrangements, such as an equalization agreement;  

c) The activities of the combined groups are managed collectively under contractual arrangements as if they were carried out by a single economic entity while retaining their separate legal identities;  

d) In contrast to Stapled Structures, the Ownership Interests in the UPEs under a Dual-listed Arrangement are quoted, traded or transferred independently in different capital markets;  

e) The UPEs prepare Consolidated Financial Statements in which the assets, liabilities, income, expenses and cash flows of all the Entities of the Groups are presented together as those of a single economic unit and that are required by a regulatory regime to be externally audited.  

Under Article 6.5.1 of the GloBE Rules, the following provisions apply to Multi-Parented MNE Groups:  

a) the Entities and Constituent Entities of each Group are treated as members of a single MNE Group for purposes of the GloBE Rules (the Multi-Parented MNE Group);   This paragraph refers to “Entities” and “Constituent Entities” because it has two objectives, viz. (i) to determine the composition of the combined Group, i.e. includes all Entities regardless of whether they are Constituent Entities or Excluded Entities which is important for applying the consolidated revenue threshold in Article 1.1; (ii) to identify the Constituent Entities of the Multi-Parented MNE Group (including PEs of each of the Groups) for applying the provisions of the GloBE Rules.  

b) an Entity (other than an Excluded Entity) shall be treated as a Constituent Entity if it is consolidated on a line-by-line basis by the Multi-Parented MNE Group or its Controlling Interests are held by Entities in the Multi-Parented MNE Group;   For example, MNE Group 1 and MNE Group 2 together constitute a Multi-Parented MNE Group. The UPEs of each MNE Group hold 50% of the Ownership Interests of an Entity. If each MNE Group were treated as a separate Group under the rules, the financial performance of the Entity would have been reported under the equity method and therefore, the Entity would have been treated as a JV. However, given that the Multi-Parented MNE Group collectively holds the Controlling Interests of the Entity, it is expected that such Entity would be consolidated on a line-by-line basis and therefore, considered as a Constituent Entity of the Multi-Parented MNE Group. In the case that such Entity was not consolidated on a line-by-line basis, it will still be considered as a Constituent Entity because its Controlling Interests are held by Entities of the Multi-Parented MNE Group. The same would apply, for instance, if each MNE Group held 30% of the Controlling Interests of the Entity (as the two MNE Groups would together hold 60%, i.e. more than 50% of the ownership interest in the Entity).  

c) the Consolidated Financial Statements of the Multi-Parented MNE Group shall be the Consolidated Financial Statements referred to in the definition of Stapled Structure or Duallisted arrangement (as relevant) prepared under an Acceptable Financial Accounting Standard, which is deemed to be the accounting standard of the UPE;  

d) the Ultimate Parent Entities of the separate Groups that comprise the Multi-Parented MNE Group shall be the Ultimate Parent Entities of the Multi-Parented MNE Group. When applying the GloBE Rules in respect of a Multi-Parented MNE Group, any reference to a UPE shall apply, as if they were references to multiple UPEs.  

e) the Parent Entities of the Multi-Parented MNE Group (including each UPE), in the jurisdiction in which they are located, shall apply the IIR in accordance with Article 2.1 to Article 2.3 with respect to their Allocable Share of Top-up Tax of the LTCE;  

This means that split-ownership rules are also applicable. However, the determination of whether an Entity is a Partially Owned Parent Entity (“POPE”) shall take into account both of the UPEs Ownership Interests in the Entity. For example, MNE Group-1 and MNE Group-2, both part of a Multi-Parented MNE Group, holds 60% and 40% of the Ownership Interests of SubCo respectively. SubCo holds 100% Ownership Interests of an LTCE. If each MNE Group was assessed separately, SubCo would have been a POPE of MNE Group-1 under Article 10.1 because more than 20% of its Ownership Interests are held by persons that are not Constituent Entities of MNE Group-1. However, given that MNE Group-1 and MNE Group-2 are considered a Multi-Parented MNE Group, then 100% of SubCo’s Ownership Interests are held by Constituent Entities and therefore, SubCo does not meet the definition of POPE. In this case, the UPEs of MNE Group-1 and MNE Group-2 would apply the IIR based on their Allocable Share of the Top-up Tax (60% and 40%, respectively).

It is possible that only one of the UPEs of the Multi-Parented MNE Group is subject to a Qualified IIR. In such a case, the application of the top-down approach under Article 2.1.3 will depend on the legal holding structure of the Multi-Parented MNE Group. For example, if all of the Ownership Interests of an Intermediate Parent Entity, that are held by the Multi-Parented MNE Group, are held by the UPE that is subject to a Qualified IIR, then Article 2.1.3(a) deactivates the obligation of the Intermediate Parent Entity from applying the IIR. However, if both UPEs hold Ownership Interests in the Intermediate Parent Entity, then Article 2.1.3(a) does not apply because one of its UPEs is not subject to a Qualified IIR. In this latter case, the Intermediate Parent Entity is required to apply the IIR based on its Allocable Share of the Top-up Tax of the LTCE and the UPE that is subject to a Qualified IIR would reduce its Allocable Share of the Topup Tax of the LTCE in accordance with Article 2.3  

f) All of the Constituent Entities of the Multi-Parented MNE Group in the jurisdiction in which they are located, shall apply the UTPR in accordance with Article 2.4 to Article 2.6 taking into account the Top-up Tax of each LTCE of the Multi-Parented MNE Group;  

This means a single UTPR Top-up Tax Amount is calculated for the whole Multi-Parented MNE Group by aggregating the Top-up Tax of all the members of the Multi-Parented MNE Group, taking into account the other relevant provisions such as Article 9.3. This also means that an Entity that would otherwise be a Constituent Entity of only one of the Groups can be required to apply the UTPR with respect to an amount of Top-up Tax of another Constituent Entity that would otherwise be a Constituent Entity of another Group.  

g) All of the UPEs are required to submit a GloBE Information Return in accordance with Article 8.1, unless they appoint a single Designated Filing Entity which could be one of the UPEs or another Constituent Entity of the Multi-Parented MNE Group. The return shall include the information concerning each of the Groups that comprise the Multi-Parented MNE Group.  

Friends  

In the deepest overhaul of cross-border tax rules in a generation, which the OECD expects will yield an extra over $200 billion in tax income globally, the aim of Pillar-2 is to end the so-called race-tothe bottom with countries competing on tax rates to obtain inward investment. The overhaul is fast gathering steam ahead of implementation early next year.

In the last few editions, we covered various topics on corporate restructurings determining the application of GloBE Rules to MNE Groups particularly in case of mergers, demergers, acquisitions, joint ventures, etc. This edition is the last one in that series where we are discussing on special rules for Multi-Parented MNE Groups.  

We hope this bulletin adds Value in your professional Sphere.  

To recap, Chapter 6 contains rules relating to acquisitions, disposals and Joint Ventures, summarised as below:

 Article 6.1 supplements Article 1.1 by providing further rules to assess the consolidated revenue threshold for determining the applicability of the GloBE Rules to an MNE Group and its constituent entities in case of merger and demerger transactions that took place in the prior four-year period.  

 Article 6.2 provides special rules for the application of the GloBE Rules that apply when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year.  

 Article 6.3 provides special rules for the treatment of transfers of assets and liabilities including as part of a reorganisation.  

 Article 6.4 brings certain Joint Ventures within the scope of the GloBE Rules.  

 Article 6.5 provides special rules for Multi-Parented MNE Groups.  

We have covered below in detail, Article 6.5 that provides rules for two or more MNE Groups whose financial performance is presented as a single economic unit (a combined MNE Group) in accordance with a Dual-listed Arrangement or a Stapled Structure.

A Multi-Parented MNE Group is comprised of two or more Groups whose UPEs enter into an arrangement that is a Stapled Structure or Dual-listed Arrangement.  

Article 10.1 defines the terms Multi-Parented MNE Group, Dual-listed Arrangement and Stapled Structure as below:

A Multi-Parented MNE Group is two or more Groups where:  

a) the Ultimate Parent Entities of those Groups enter into an arrangement that is a Stapled Structure or a Dual-listed Arrangement; and  

b) at least one Entity or Permanent Establishment of the combined Group is located in a different jurisdiction with respect to the location of the other Entities of the combined Group. For instance, two separate domestic Groups may each hold 50% of the Ownership Interests of an Entity located in another jurisdiction (or domestic Entity with a PE in another jurisdiction). In this case, the Entity would be treated as a JV by each Group individually. However, where the UPEs of both Groups are part of a Stapled Structure or Dual-listed Arrangement the JV becomes a Constituent Entity of the combined Group and because that Entity is located in another jurisdiction, the combined Group becomes a Multi-Parented MNE Group.  

A Stapled Structure is an arrangement entered into by two or more UPEs of separate Groups, under which:  

a) 50% or more of the Ownership Interests in the UPEs of the separate Groups are “stapled” / combined together as if they were the Ownership Interests of a single Entity (form of ownership, restrictions on transfer, or other terms or conditions), and cannot be transferred or traded independently. If the combined Ownership Interests are listed, they are quoted at a single price; and  

b) one of those UPEs prepares Consolidated Financial Statements in which the assets, liabilities, income, expenses and cash flows of all the Entities of the Groups are presented together as those of a single economic unit and that are required by a regulatory regime to be externally audited  

A Dual-listed Arrangement is an arrangement whereby:  

a) Two or more UPEs combine their businesses through contract rather than bringing them under the ownership and control of a single entity;  

b) Each UPE makes distributions (with respect to dividends and in liquidation) to its shareholders based on a fixed ratio pursuant to contractual arrangements, such as an equalization agreement;  

c) The activities of the combined groups are managed collectively under contractual arrangements as if they were carried out by a single economic entity while retaining their separate legal identities;  

d) In contrast to Stapled Structures, the Ownership Interests in the UPEs under a Dual-listed Arrangement are quoted, traded or transferred independently in different capital markets;  

e) The UPEs prepare Consolidated Financial Statements in which the assets, liabilities, income, expenses and cash flows of all the Entities of the Groups are presented together as those of a single economic unit and that are required by a regulatory regime to be externally audited.  

Under Article 6.5.1 of the GloBE Rules, the following provisions apply to Multi-Parented MNE Groups:  

a) the Entities and Constituent Entities of each Group are treated as members of a single MNE Group for purposes of the GloBE Rules (the Multi-Parented MNE Group);   This paragraph refers to “Entities” and “Constituent Entities” because it has two objectives, viz. (i) to determine the composition of the combined Group, i.e. includes all Entities regardless of whether they are Constituent Entities or Excluded Entities which is important for applying the consolidated revenue threshold in Article 1.1; (ii) to identify the Constituent Entities of the Multi-Parented MNE Group (including PEs of each of the Groups) for applying the provisions of the GloBE Rules.  

b) an Entity (other than an Excluded Entity) shall be treated as a Constituent Entity if it is consolidated on a line-by-line basis by the Multi-Parented MNE Group or its Controlling Interests are held by Entities in the Multi-Parented MNE Group;   For example, MNE Group 1 and MNE Group 2 together constitute a Multi-Parented MNE Group. The UPEs of each MNE Group hold 50% of the Ownership Interests of an Entity. If each MNE Group were treated as a separate Group under the rules, the financial performance of the Entity would have been reported under the equity method and therefore, the Entity would have been treated as a JV. However, given that the Multi-Parented MNE Group collectively holds the Controlling Interests of the Entity, it is expected that such Entity would be consolidated on a line-by-line basis and therefore, considered as a Constituent Entity of the Multi-Parented MNE Group. In the case that such Entity was not consolidated on a line-by-line basis, it will still be considered as a Constituent Entity because its Controlling Interests are held by Entities of the Multi-Parented MNE Group. The same would apply, for instance, if each MNE Group held 30% of the Controlling Interests of the Entity (as the two MNE Groups would together hold 60%, i.e. more than 50% of the ownership interest in the Entity).  

c) the Consolidated Financial Statements of the Multi-Parented MNE Group shall be the Consolidated Financial Statements referred to in the definition of Stapled Structure or Duallisted arrangement (as relevant) prepared under an Acceptable Financial Accounting Standard, which is deemed to be the accounting standard of the UPE;  

d) the Ultimate Parent Entities of the separate Groups that comprise the Multi-Parented MNE Group shall be the Ultimate Parent Entities of the Multi-Parented MNE Group. When applying the GloBE Rules in respect of a Multi-Parented MNE Group, any reference to a UPE shall apply, as if they were references to multiple UPEs.  

e) the Parent Entities of the Multi-Parented MNE Group (including each UPE), in the jurisdiction in which they are located, shall apply the IIR in accordance with Article 2.1 to Article 2.3 with respect to their Allocable Share of Top-up Tax of the LTCE;  

This means that split-ownership rules are also applicable. However, the determination of whether an Entity is a Partially Owned Parent Entity (“POPE”) shall take into account both of the UPEs Ownership Interests in the Entity. For example, MNE Group-1 and MNE Group-2, both part of a Multi-Parented MNE Group, holds 60% and 40% of the Ownership Interests of SubCo respectively. SubCo holds 100% Ownership Interests of an LTCE. If each MNE Group was assessed separately, SubCo would have been a POPE of MNE Group-1 under Article 10.1 because more than 20% of its Ownership Interests are held by persons that are not Constituent Entities of MNE Group-1. However, given that MNE Group-1 and MNE Group-2 are considered a Multi-Parented MNE Group, then 100% of SubCo’s Ownership Interests are held by Constituent Entities and therefore, SubCo does not meet the definition of POPE. In this case, the UPEs of MNE Group-1 and MNE Group-2 would apply the IIR based on their Allocable Share of the Top-up Tax (60% and 40%, respectively).

It is possible that only one of the UPEs of the Multi-Parented MNE Group is subject to a Qualified IIR. In such a case, the application of the top-down approach under Article 2.1.3 will depend on the legal holding structure of the Multi-Parented MNE Group. For example, if all of the Ownership Interests of an Intermediate Parent Entity, that are held by the Multi-Parented MNE Group, are held by the UPE that is subject to a Qualified IIR, then Article 2.1.3(a) deactivates the obligation of the Intermediate Parent Entity from applying the IIR. However, if both UPEs hold Ownership Interests in the Intermediate Parent Entity, then Article 2.1.3(a) does not apply because one of its UPEs is not subject to a Qualified IIR. In this latter case, the Intermediate Parent Entity is required to apply the IIR based on its Allocable Share of the Top-up Tax of the LTCE and the UPE that is subject to a Qualified IIR would reduce its Allocable Share of the Topup Tax of the LTCE in accordance with Article 2.3  

f) All of the Constituent Entities of the Multi-Parented MNE Group in the jurisdiction in which they are located, shall apply the UTPR in accordance with Article 2.4 to Article 2.6 taking into account the Top-up Tax of each LTCE of the Multi-Parented MNE Group;  

This means a single UTPR Top-up Tax Amount is calculated for the whole Multi-Parented MNE Group by aggregating the Top-up Tax of all the members of the Multi-Parented MNE Group, taking into account the other relevant provisions such as Article 9.3. This also means that an Entity that would otherwise be a Constituent Entity of only one of the Groups can be required to apply the UTPR with respect to an amount of Top-up Tax of another Constituent Entity that would otherwise be a Constituent Entity of another Group.  

g) All of the UPEs are required to submit a GloBE Information Return in accordance with Article 8.1, unless they appoint a single Designated Filing Entity which could be one of the UPEs or another Constituent Entity of the Multi-Parented MNE Group. The return shall include the information concerning each of the Groups that comprise the Multi-Parented MNE Group.