Group Financing Companies and Pillar Two

Group financing companies are popular amongst MNE groups. They allow for the distribution of cash-flows amongst group members in a tax efficient manner, and enable a centralized hub for intercompany loans. 
The tax implications of group financing companies are well documented. Not least the transfer pricing/arms-length requirements and the importance of mitigating withholding tax via double tax treaties and multilateral agreements (such as the EU Interest and Royalties Directive). 
However, the global minimum tax under Pillar Two of the OECD two-pillar solution also includes a number of provisions that can impact on group financing companies, and in particular the extent to which they will be subject to Pillar Two top-up tax, unless they are reorganised. 
In this members article we look at group financing companies from the perspective Pillar Two taking account of the different approaches under the general GloBE rules and where there is a QDMTT in place. 
Excluded Entities
The Pillar Two Rules classify certain entities as excluded entities. Whilst their revenue is still taken into account for the purpose of determining the 750 million revenue threshold, excluded entities are not subject to top-up tax or payment obligations under the income inclusion rule or the under-taxed profits rule
Investment funds that are the UPE of an MNE group are excluded entities.  It is unlikely in most cases that the group financing company would be the UPE. In addition, the definition of investment fund in Article 10 of the OECD Model Rules is relatively restrictive in that it needs to meet all of the following conditions:

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