International Participation Exemption Regimes & Pillar Two

Participation Exemptions and Pillar Two

Participation exemptions in many domestic tax regimes provide for a corporate income tax (or in some cases a withholding tax) exemption on dividends and capital gains on disposals of equity interests between group or connected companies. 

The Pillar Two GloBE Rules include a participation exemption when calculating GloBE income. This will not, however, always tie into the domestic law treatment. 

Articles 3.2.1(b) and (c) of the OECD Model Rules provide that excluded dividends and excluded equity gains or losses are deducted (or in the case of losses, added back) from financial accounting profits/losses when calculating GloBE income. 

The aim is to try and harmonise the measure of taxable profit for Pillar Two purposes (GloBE income) with domestic taxable income. 

Excluded Dividends are defined in Article 10 of the OECD Model Rules as generally dividends (or other distributions) received or accrued from an ownership interest except where they had the right to less than 10% of the profits, capital, reserves, or voting rights of an entity and which had been held for less than one year.

Excluded Equity Gains or Losses include gains and losses from the disposal of an ownership interest except where they had the right to less than 10% of the profits, capital, reserves, or voting rights of an entity. 

Note that for Pillar Two purposes, dividends arising from a <10% ownership could still be excluded if they had been held for a year or more, however, gains or losses on the holding wouldn’t be. 

The First Set of OECD Administrative Guidance provides for two potential elections to adjust this treatment:

 – MNE Groups can 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.

 – MNE Groups can make an Equity Investment Inclusion Election. This then includes gains, profits, and losses from equity investments in the computation of GloBE Income or Loss (ie they are no longer excluded) but the related current and deferred tax expenses are also included. 

Domestic Law

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