Article 7.3.1 of the OECD Model Rules permits a constituent entity to to make a Distribution Tax Regime Election. This is an annual election on a jurisdictional basis.
A distribution tax regime is a tax regime that doesn’t levy a tax charge on taxable income when it is generated, but when it is distributed.
Estonia is a good example of this, which levies a 20% corporate income tax charge when profits are distributed.
In order to ensure that expenses that are not deductible for tax purposes are also taxed, non-business expenses are treated as a deemed distribution and would also be subject to the distribution tax.
Some aspects of a distribution tax regime fit in with the Pillar Two GloBE Rules nicely.
For instance, the Estonian distribution tax relies on the financial accounts, just like the GloBE Rules. There are limited book-to-tax adjustments unlike in most traditional corporate income tax regimes.
However, the issue with distribution tax regimes relates to the timing of income and tax suffered for the purpose of calculating the GloBE ETR.
As such, ensuring that a distribution tax regime is accommodated by the Pillar Two GloBE Rules requires some specific adjustments to the general rule. Article 7.3 of the OECD Model Rules implements this.
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