Domestic Approaches to Including the Initial Phase of International Activity Exemption for QDMTT Purposes

Article 9.3 of the OECD Model Rules provides for an exclusion from the under-taxed profits rule (UTPR) for MNEs that are in the initial phase of their activity for a five-year period. Jurisdictions are given the option of whether to include this exemption if they implement a domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax (‘QDMTT’)). In this article we look at the different jurisdictional approaches to including this exemption for QDMTT purposes.

What is the Initial Phase of International Activity Exemption?

In order to benefit from the exclusion, the requirements in Article 9.3.2 of the OECD Model Rules need to be met:

Firstly, the MNE group can qualify for the exclusion if it has constituent entities in no more than five jurisdictions outside the ‘reference jurisdiction’. The reference jurisdiction is defined in Article 9.3.3 of the OECD Model Rules as the jurisdiction where the MNE group has the highest total value of its tangible assets based on the net book value of the assets held by constituent entities in that jurisdiction.

As always with the Pillar Two GloBE rules the net book value of assets is based on the financial accounts. In particular it is the average value of tangible fixed assets at the start and end of the accounting period, as adjusted for depreciation and impairments.

The exclusion is for a five-year period but the jurisdictions don’t have to remain the same, they can differ over the five-year period provided there are no more than five.

Secondly, the value of tangible assets (defined as above) cannot exceed 50 million euros in all jurisdictions aside from the reference jurisdiction. Therefore the total value of the assets outside the main base of operations must be 50 million euros or less.

Excluded entities are by their nature outside the scope of these provisions (eg they are not considered when determining assets held or the number of jurisdictions). However, investment entities that aren’t excluded entities are still excluded.

Similarly joint ventures (JVs) or a JV group are not taken into account as they are not required to apply the IIR, however, minority owned entities are taken into account.

The exclusion applies for a five year period from when the MNE group first comes within the scope of the Pillar Two GloBE rules.

In many cases an MNE group may already be within the scope of the GloBE rules but the domestic legislation may implement the UTPR after the IIR. In this case, the five-year exclusion applies from when the UTPR comes into effect.

For instance, if a jurisdiction implemented an IIR from January 1, 2024, but delayed the UTPR until January 1, 2026, the UTPR exclusion would apply from January 1, 2026 to December 31, 2030.

If an MNE group fell outside the scope of the GloBE rules during the five-year period, this would not suspend the five-year period (and in this case the MNE group would derive no benefit from the rule).

Including the Initial Phase of International Exemption for QDMTT Purposes

The UTPR exclusion for MNEs in their initial phase of international activity does not need to be included in a QDMTT, however, it can be included. The Second Set of OECD Administrative Guidance provides jurisdictions with three options regarding the temporary UTPR exclusion in their QDMTT legislation.

Option one allows the jurisdiction not to adopt it.

Option two allows the jurisdiction to adopt it but limits it to cases where no Parent Entity is required to apply a Qualified Income Inclusion Rule with respect to Constituent Entities of an MNE Group located in the QDMTT jurisdiction.

Option three allows the jurisdiction to adopt it without any limitations.

(Note, if a jurisdiction opts for Option three, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).

Jurisdictional Approaches