Corporate Investments and Pillar Two

The Pillar Two GloBE treatment of holding structures, particularly fund investments,  will depend to a large extent on the nature of the activities, the accounting treatment and the ownership interest.

When looking at fund investments, pension funds, sovereign wealth funds and investment funds, in many cases they should generally qualify as excluded entities and would therefore be carved-out from the scope of Pillar 2 (aside from when determining the 750 million euro revenue threshold). This also applies to qualifying subsidiaries of such entities.

Insurance companies do not get a specific carve out under the excluded entity rules, and therefore the GloBE rules will apply to them, subject to certain specific provisions for insurance investment entities.

The first consideration will be the accounting treatment of the investee in the investor’s financial account, and in particular whether the results are consolidated or not. 

Consolidated

If  the interest in the investee is consolidated due to the investor exercising control, then the general rules apply. The Pillar Two rules use the consolidated financial statements and therefore the income and tax of a the entity would be taxed as a standard constituent entity.  

Non-Consolidated

For accounting purposes, the key criterion is whether there is significant influence.

20%-50%

Under IAS 28, it is presumed that if an investor controls 20%-50% of the voting rights of the entity that there is significant influence, but there can be cases where significant influence can apply even below this threshold (eg significant transactions between the entities or participation in board meetings etc).

Under accounting rules such entities are usually classed as ‘associates’.

Where there is significant influence, the interest in the entity is accounted for under the equity method and the results are not consolidated.

Essentially the initial investment is recorded at cost and then adjusted for the actual performance of the entity.

Note that there is still an impact on the consolidated accounts.

In the consolidated statement of profit or loss, dividend income received from the entity is replaced by bringing in one line that shows the parent’s share of the entity’s results immediately before the consolidated profit before tax.

If, by contrast, the investor controlled the investee then the results of the investee would be consolidated on a line-by-line basis in the consolidated financial statements.

For Pillar Two purposes, under the general rules an MNE group’s share of the income of an entity that it did not control would not be brought into account as the entity is not consolidated on a line-by-line basis as is required by Article 1.2 of the OECD Model Rules.

Therefore, there is a separate rule for JVs.

Article 10 of the OECD Model Rules defines a JV as an entity whose financial results are reported under the equity method in the Consolidated Financial Statements of the MNE Group provided that the UPE holds directly or indirectly at least 50% of its ownership interests.

Therefore, an associate that was accounted for under the equity method and where the UPE held less than 50% of the ownership interest would not be subject to the special JV rule.

For example, in a limited partnership, limited partners are not considered controlling if the general partner controls the investment, even if a limited partner owns a large share of the investment. For GloBE purposes, the income and tax items attributable to these would be excluded from the ETR calculation.

In addition, an excluded entity or a JV that is the UPE of an MNE group already within the Pillar Two rules is not classed as JVs for this purpose.

<20%

Where an investors share is less than 20%, this is generally classed as a financial asset under IFRS.

For financial accounting purposes this would usually be reported at fair value with a revaluation at the end of each period with changes taken to the P&L.  Distributions as well as gains and losses on disposal are recognised in the P&L.  Deferred tax also needs to be recognized for temporary differences between the tax and IFRS carrying amounts.

For Pillar Two GloBE purposes the standard rules apply. The financial accounting profit or loss and current tax expense are used as the starting point and then subject to the usual GloBE income and tax adjustments.

This leads to a significant difference dependent on whether the ownership interest is 10% or more, or less than 10%.

10% or More

Article 3.2.1(b) of the OECD Model Rules provides that dividends (or other distributions on shares) are excluded where the MNE group holds 10% or more of the ownership interest.

Gains and losses from the sale of an ownership interest are also excluded under Article 3.2.1(e) of the OECD Model Rules.

Article 4.1.2(a) of the OECD Model Rules also excludes any connected taxes related to these from the GloBE ETR/Top-Up Tax Calculation.

As such, these investments should have a limited impact on the investor for GloBE purposes.  It should be borne in mind that costs related to the investments would reduce the financial accounting profit (and increase the GloBE ETR), given such costs are not added back under the GloBE rules (unlike in many domestic jurisdictions).

<10%

In order for a dividend to be an excluded dividend under the GloBE rules it would need to be either held by the investor for a year or more or they would need to have 10% or more of the ownership.

Therefore, for the first year, dividend income and any related taxes would be included in the GloBE ETR and Top-Up Tax calculation. After the first year they would be excluded.

Unlike a more than 10% holding, gains and losses from the disposal of an ownership interest are not excluded for GloBE purposes, however a realization election and capital gains election are available to mitigate the impact.

As a simplification measure, Article 3.5 of the February 2023 OECD Administrative Guidance provides that MNE Groups can (for each Constituent Entity) elect to include dividends from all their Portfolio Shareholdings (including long-term Portfolio Shareholdings) in their GloBE Income or Loss calculation. This is a Five-Year Election.

This could be useful if the investor was subject to high taxation, as under the jurisdictional blending rules it would offset low-taxed income and potentially reduce the overall jurisdictional ETR.

Note that if an entity was an investment entity, it would be subject to separate ETR calculations for GloBE purposes and not the standard jurisdictional blending. As such it would be offsetting against its own low-taxed income.