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• Entry into force: 2022-12-23 (the publisher's qualifier, word for word: DATPUB +1 V ART 58)
• Deadline: 2022-12-23 (the publisher's qualifier, word for word: V ART 53.2)
• Deadline: 2023-06-30 (the publisher's qualifier, word for word: B-19.12 V ART 57)

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32022L2523, eng, the consolidated wording of 2022-12-22 (the publisher's consolidation date)

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59 articles quoted, 0 held without text.

Page 1 of 2: Article 1 to Article 24.

1. 001 Article 1

   Article 1 Subject-matter 1. This Directive establishes common measures for the minimum effective taxation of multinational enterprise (MNE) groups and large-scale domestic groups in the form of: (a) an income inclusion rule (IIR) in accordance with which a parent entity of an MNE group or of a large-scale domestic group computes and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of the group; and (b) an undertaxed profit rule (UTPR) in accordance with which a constituent entity of an MNE group has an additional cash tax expense equal to its share of top-up tax that was not charged under the IIR in respect of the low-taxed constituent entities of the group. 2. Member States may elect to apply a qualified domestic top-up tax in accordance with which top-up tax shall be computed and paid on the excess profit of all the low-taxed constituent entities located in their jurisdiction pursuant to this Directive.

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2. 002 Article 2

   Article 2 Scope 1. This Directive applies to constituent entities located in a Member State that are members of an MNE group or of a large-scale domestic group which has an annual revenue of EUR or more, including the revenue of the excluded entities referred to in paragraph 3, in its ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years immediately preceding the tested fiscal year. 2. Where one or more of the four fiscal years referred to in paragraph 1 is longer or shorter than 12 months, the revenue threshold referred to in that paragraph shall be adjusted proportionally for each of those fiscal years. 3. This Directive does not apply to the following entities (‘excluded entities’): (a) a governmental entity, an international organisation, a non-profit organisation, a pension fund, an investment fund that is an ultimate parent entity or a real estate investment vehicle that is an ultimate parent entity; (b) an entity where at least 95 % of the value of the entity is owned by one or more entities referred to in point (a), directly or through one or several excluded entities, except pension services entities, and that: (i) operates exclusively, or almost exclusively, to hold assets or invest funds for the benefit of the entity or entities referred to in point (a); or (ii) exclusively carries out activities ancillary to those performed by the entity or entities referred to in point (a); (c) an entity where at least 85 % of the value of the entity is owned, directly or through one or several excluded entities, by one or more entities referred to in point (a), except pension services entities, provided that substantially all of its income is derived from dividends or equity gains or losses that are excluded from the computation of the qualifying income or loss in accordance with Article 16(2), points (b) and (c). By way of derogation from the first subparagraph of this paragraph, the filing constituent entity may make an election, in accordance with Article 45(1), not to treat an entity referred to in points (b) and (c) of that subparagraph as an excluded entity.

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3. 003 Article 3

   Article 3 Definitions For the purposes of this Directive, the following definitions apply: (1) ‘entity’ means any legal arrangement that prepares separate financial accounts or any legal person; (2) ‘constituent entity’ means: (a) any entity that is part of an MNE group or of a large-scale domestic group; and (b) any permanent establishment of a main entity that is part of an MNE group referred to in point (a); (3) ‘group’ means: (a) a collection of entities which are related through ownership or control as defined by the acceptable financial accounting standard for the preparation of consolidated financial statements by the ultimate parent entity, including any entity that may have been excluded from the consolidated financial statements of the ultimate parent entity solely based on its small size, on materiality grounds or on the grounds that it is held for sale; or (b) an entity that has one or more permanent establishments, provided that it is not part of another group as defined in point (a); (4) ‘MNE group’ means any group that includes at least one entity or permanent establishment which is not located in the jurisdiction of the ultimate parent entity; (5) ‘large-scale domestic group’ means any group of which all constituent entities are located in the same Member State; (6) ‘consolidated financial statements’ means: (a) the financial statements prepared by an entity in accordance with an acceptable financial accounting standard, in which the assets, liabilities, income, expenses and cash flows of that entity and of any entities in which it has a controlling interest are presented as those of a single economic unit; (b) for groups defined in point (3)(b), the financial statements prepared by an entity in accordance with an acceptable financial accounting standard; (c) the financial statements of the ultimate parent entity that are not prepared in accordance with an acceptable financial accounting standard and that have been subsequently adjusted to prevent any material competitive distortions; and (d) where the ultimate parent entity does not prepare financial statements as described in point (a), (b) or (c), the financial statements that would have been prepared if the ultimate parent entity were required to prepare such financial statements in accordance with: (i) an acceptable financial accounting standard; or (ii) another financial accounting standard, and provided such financial statements have been adjusted to prevent any material competitive distortions; (7) ‘fiscal year’ means the accounting period with respect to which the ultimate parent entity of an MNE group or of a large-scale domestic group prepares its consolidated financial statements or, if the ultimate parent entity does not prepare consolidated financial statements, the calendar year; (8) ‘filing constituent entity’ means an entity filing a top-up tax information return in accordance with Article 44; (9) ‘governmental entity’ means an entity that meets all the following criteria: (a) it is part of, or wholly owned by, a government, including any political subdivision or local authority thereof; (b) it does not carry on a trade or business and has the principal purpose of: (i) fulfilling a government function; or (ii) managing or investing that government’s or jurisdiction’s assets through the making and holding of investments, asset management, and related investment activities for that government’s or jurisdiction’s assets; (c) it is accountable to a government on its overall performance, and provides annual information reporting to that government; and (d) its assets vest in a government upon dissolution and, to the extent it distributes net earnings, such net earnings are distributed solely to that government with no portion of its net earnings inuring to the benefit of any private person; (10) ‘international organisation’ means any intergovernmental organisation, including a supranational organisation, or wholly-owned agency or instrumentality thereof that meets all the following criteria: (a) it is comprised primarily of governments; (b) it has in effect a headquarters or substantially similar agreement with the jurisdiction in which it is established, for example arrangements that entitle the organisation’s offices or establishments in that jurisdiction to privileges and immunities; and (c) law or its governing documents prevent its income inuring to the benefit of private persons; (11) ‘non-profit organisation’ means an entity that meets all the following criteria: (a) it is established and operated in its jurisdiction of residence: (i) exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational or other similar purposes; or (ii) as a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civic league or an organisation operated exclusively for the promotion of social welfare; (b) substantially all the income from the activities mentioned in point (a) is exempt from income tax in its jurisdiction of residence; (c) it has no shareholders or members who have a proprietary or beneficial interest in its income or assets; (d) the income or assets of the entity may not be distributed to, or applied for the benefit of, a private person or non-charitable entity other than: (i) pursuant to the conduct of the entity’s charitable activities; (ii) as payment of reasonable compensation for services rendered or for the use of property or capital; or (iii) as payment representing the fair market value of property which the entity has purchased; and (e) upon termination, liquidation or dissolution of the entity, all of its assets are to be distributed to or revert to a non-profit organisation or to the government, including any governmental entity, of the entity’s jurisdiction of residence or any political subdivision thereof; (f) it does not carry on a trade or business that is not directly related to the purposes for which it was established; (12) ‘flow-through entity’ means an entity to the extent it is fiscally transparent with respect to its income, expenditure, profit or loss in the jurisdiction where it was created unless it is tax resident and subject to a covered tax on its income or profit in another jurisdiction; a flow-through entity is deemed to be: (a) a tax-transparent entity with respect to its income, expenditure, profit or loss to the extent that it is fiscally transparent in the jurisdiction in which its owner is located; (b) a reverse hybrid entity with respect to its income, expenditure, profit or loss to the extent that it is not fiscally transparent in the jurisdiction in which its owner is located; for the purposes of this definition, a ‘fiscally transparent entity’ means an entity whose income, expenditure, profit or loss is treated by the laws of a jurisdiction as if it were derived or incurred by the direct owner of that entity in proportion to its interest in that entity; an ownership interest in an entity or a permanent establishment that is a constituent entity shall be treated as held through a tax transparent structure if that ownership interest is held indirectly through a chain of tax transparent entities; a constituent entity that is not tax resident and not subject to a covered tax or a qualified domestic top-up tax based on its place of management, place of creation or similar criteria shall be treated as a flow-through entity and a tax transparent entity in respect of its income, expenditure, profit or loss, to the extent that: (a) its owners are located in a jurisdiction that treats the entity as fiscally transparent; (b) it does not have a place of business in the jurisdiction where it was created; and (c) the income, expenditure, profit or loss is not attributable to a permanent establishment; (13) ‘permanent establishment’ means: (a) a place of business or a deemed place of business located in a jurisdiction where it is treated as a permanent establishment in accordance with an applicable tax treaty, provided that such jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 of the OECD Model Tax Convention on Income and Capital, as amended; (b) if there is no applicable tax treaty, a place of business or a deemed place of business located in a jurisdiction which taxes the income attributable to such place of business on a net basis in a manner similar to which it taxes its own tax residents; (c) if a jurisdiction has no corporate income tax system, a place of business or a deemed place of business located in such jurisdiction that would be treated as a permanent establishment in accordance with the OECD Model Tax Convention on Income and Capital, as amended, provided that such jurisdiction would have had the right to tax the income that would have been attributable to the place of business in accordance with Article 7 of that Convention; or (d) a place of business or a deemed place of business that is not described in points (a) to (c) through which operations are conducted outside the jurisdiction where the entity is located, provided that such jurisdiction exempts the income attributable to such operations; (14) ‘ultimate parent entity’ means: (a) an entity that owns, directly or indirectly, a controlling interest in any other entity and that is not owned, directly or indirectly, by another entity with a controlling interest in it; or (b) the main entity of a group as defined in point (3)(b); (15) ‘minimum tax rate’ means fifteen percent (15 %); (16) ‘top-up tax’ means the top-up tax computed for a jurisdiction or a constituent entity pursuant to Article 27; (17) ‘controlled foreign company tax regime’ means a set of tax rules, other than a qualified IIR, under which a direct or indirect shareholder of a foreign entity, or the main entity of a permanent establishment, is subject to taxation on its share of part or all of the income earned by that foreign constituent entity, irrespective of whether that income is distributed to the shareholder; (18) ‘qualified IIR’ means a set of rules that is implemented in the domestic law of a jurisdiction, provided that such jurisdiction does not provide any benefits that are related to those rules, and that is: (a) equivalent to the rules laid down in this Directive or, as regards third-country jurisdictions, the Tax Challenges Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two) (‘OECD Model Rules’), in accordance with which the parent entity of an MNE group or of a large-scale domestic group computes and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of that group; (b) administered in a way that is consistent with the rules laid down in this Directive or, as regards third-country jurisdictions, with the OECD Model Rules; (19) ‘low-taxed constituent entity’ means: (a) a constituent entity of an MNE group or of a large-scale domestic group that is located in a low-tax jurisdiction; or (b) a stateless constituent entity that, in respect of a fiscal year, has qualifying income and an effective tax rate which is lower than the minimum tax rate; (20) ‘intermediate parent entity’ means a constituent entity that owns, directly or indirectly, an ownership interest in another constituent entity in the same MNE group or large-scale domestic group and that does not qualify as an ultimate parent entity, a partially-owned parent entity, a permanent establishment or an investment entity; (21) ‘controlling interest’ means an ownership interest in an entity whereby the interest holder is required, or would have been required, to consolidate the assets, liabilities, income, expenses and cash flows of the entity on a line-by-line basis, in accordance with an acceptable financial accounting standard; a main entity is deemed to hold the controlling interests in its permanent establishments; (22) ‘partially-owned parent entity’ means a constituent entity that owns, directly or indirectly, an ownership interest in another constituent entity of the same MNE group or large-scale domestic group, and for which more than 20 % of the ownership interest in its profits is held, directly or indirectly, by one or several persons that are not constituent entities of that MNE group or large-scale domestic group and that does not qualify as an ultimate parent entity, a permanent establishment or an investment entity; (23) ‘ownership interest’ means any equity interest that carries rights to the profits, capital or reserves of an entity or of a permanent establishment; (24) ‘parent entity’ means an ultimate parent entity which is not an excluded entity, an intermediate parent entity or a partially-owned parent entity; (25) ‘acceptable financial accounting standard’ means International Financial Reporting Standards (IFRS or IFRS as adopted by the Union pursuant to Regulation (EC) No 1606/2002 of the European Parliament and of the Council) and the generally accepted accounting principles of Australia, Brazil, Canada, the Member States of the European Union, the Member States of the European Economic Area, Hong Kong (China), Japan, Mexico, New Zealand, the People’s Republic of China, the Republic of India, the Republic of Korea, Russia, Singapore, Switzerland, the United Kingdom and the United States of America; (26) ‘authorised financial accounting standard’ means, in respect of an entity, a set of generally acceptable accounting principles permitted by an authorised accounting body in the jurisdiction where that entity is located; for the purposes of this definition, ‘authorised accounting body’ means the body with legal authority in a jurisdiction to prescribe, establish or accept accounting standards for financial reporting purposes; (27) ‘material competitive distortion’ means, in respect of the application of a specific principle or procedure under a set of generally acceptable accounting principles, an application that results in an aggregate variation of income or expense of more than EUR in a fiscal year as compared to the amount that would have been determined by applying the corresponding principle or procedure under International Financial Reporting Standards (IFRS or IFRS as adopted by the Union pursuant to Regulation (EC) No 1606/2002); (28) ‘qualified domestic top-up tax’ means a top-up tax that is implemented in the domestic law of a jurisdiction provided that such jurisdiction does not provide any benefits that are related to those rules, and that: (a) provides for the determination of the excess profits of the constituent entities located in that jurisdiction in accordance with the rules laid down in this Directive or, as regards third-country jurisdictions, the OECD Model Rules and the application of the minimum tax rate to those excess profits for the jurisdiction and the constituent entities in accordance with the rules laid down in this Directive or, as regards third-country jurisdictions, the OECD Model Rules; and (b) is administered in a way that is consistent with the rules laid down in this Directive or, as regards third-country jurisdictions, the OECD Model Rules; (29) ‘net book value of tangible assets’ means the average of the beginning and end values of tangible assets after taking into account accumulated depreciation, depletion and impairment, as recorded in the financial statements; (30) ‘investment entity’ means: (a) an investment fund or a real estate investment vehicle; (b) an entity that is at least 95 % owned directly by an entity referred to in point (a) or through a chain of such entities and that operates exclusively or almost exclusively to hold assets or invest funds for their benefit; or (c) an entity where a minimum of 85 % of the value of the entity is owned by an entity referred to in point (a), provided that substantially all of its income is derived from dividends or equity gains or losses that are excluded from the computation of the qualifying income or loss for the purposes of this Directive; (31) ‘investment fund’ means an entity or arrangement that meets all the following conditions: (a) it is designed to pool financial or non-financial assets from a number of investors, some of which are non-connected; (b) it invests in accordance with a defined investment policy; (c) it allows investors to reduce transaction, research and analytical costs or to spread risk collectively; (d) it is primarily designed to generate investment income or gains, or protection against a particular or general event or outcome; (e) its investors have a right to return from the assets of the fund or income earned on those assets, based on the contribution they made; (f) it, or its management, is subject to the regulatory regime, including appropriate anti-money laundering and investor protection regulation, for investment funds in the jurisdiction in which it is established or managed; and (g) it is managed by investment fund management professionals on behalf of the investors; (32) ‘real estate investment vehicle’ means a widely held entity that holds predominantly immovable property and that is subject to a single level of taxation, either in its hands or in the hands of its interest holders, with at most one year of deferral; (33) ‘pension fund’ means: (a) an entity that is established and operated in a jurisdiction exclusively or almost exclusively to administer or provide retirement benefits and ancillary or incidental benefits to individuals where: (i) that entity is regulated as such by that jurisdiction or one of its political subdivisions or local authorities; or (ii) those benefits are secured or otherwise protected by national regulations and funded by a pool of assets held through a fiduciary arrangement or trustor to secure the fulfilment of the corresponding pension obligations against a case of insolvency of the MNE group and large-scale domestic group; (b) a pension services entity; (34) ‘pension services entity’ means an entity that is established and operated exclusively or almost exclusively to invest funds for the benefit of entities referred to in point (33)(a) or to carry out activities that are ancillary to the regulated activities referred to in point (33)(a), provided that the pension services entity forms part of the same group as the entities carrying out those regulated activities; (35) ‘low-tax jurisdiction’ means, in respect of an MNE group or a large-scale domestic group in any fiscal year, a Member State or a third-country jurisdiction in which the MNE group or the large-scale domestic group has a qualifying income and is subject to an effective tax rate which is lower than the minimum tax rate; (36) ‘qualifying income or loss’ means the financial accounting net income or loss of a constituent entity adjusted in accordance with the rules set out in Chapters III, VI and VII; (37) ‘disqualified refundable imputation tax’ means any tax, other than a qualified imputation tax, accrued or paid by a constituent entity that is: (a) refundable to the beneficial owner of a dividend distributed by such constituent entity in respect of that dividend or creditable by the beneficial owner against a tax liability other than a tax liability in respect of such dividend; or (b) refundable to the distributing company upon distribution of a dividend to a shareholder; for the purposes of this definition, a ‘qualified imputation tax’ means a covered tax accrued or paid by a constituent entity, including a permanent establishment, that is refundable or creditable to the beneficial owner of the dividend distributed by the constituent entity or, in the case of a covered tax accrued or paid by a permanent establishment, a dividend distributed by the main entity, to the extent that the refund is payable or the credit is provided: (a) by a jurisdiction other than the jurisdiction which imposed the covered taxes; (b) to a beneficial owner of the dividend that is subject to tax at a nominal rate that equals or exceeds the minimum tax rate on the dividend received under the domestic law of the jurisdiction which imposed the covered taxes on the constituent entity; (c) to an individual who is the beneficial owner of the dividend and tax resident in the jurisdiction which imposed the covered taxes on the constituent entity and who is subject to tax at a nominal rate that equals or exceeds the standard tax rate applicable to ordinary income; or (d) to a governmental entity, an international organisation, a resident non-profit organisation, a resident pension fund, a resident investment entity that is not part of the MNE group or the large-scale domestic group, or a resident life insurance company to the extent that the dividend is received in connection with resident pension fund activities and is subject to tax in a similar manner as a dividend received by a pension fund; for the purposes of point (d): (i) a non-profit organisation or pension fund is resident in a jurisdiction if it is created and managed in that jurisdiction; (ii) an investment entity is resident in a jurisdiction if it is created and regulated in that jurisdiction; (iii) a life insurance company is resident in the jurisdiction in which it is located; (38) ‘qualified refundable tax credit’ means: (a) a refundable tax credit designed in such a way that it is to be paid as a cash payment or a cash equivalent to a constituent entity within four years from the date when the constituent entity is entitled to receive the refundable tax credit under the laws of the jurisdiction granting the credit; or (b) if the tax credit is refundable in part, the portion of the refundable tax credit that is payable as a cash payment or a cash equivalent to a constituent entity within four years from the date when the constituent entity is entitled to receive the partial refundable tax credit; a qualified refundable tax credit does not include any amount of tax creditable or refundable pursuant to a qualified imputation tax or a disqualified refundable imputation tax; (39) ‘non-qualified refundable tax credit’ means a tax credit that is a not a qualified refundable tax credit but that is refundable in whole or in part; (40) ‘main entity’ means an entity that includes the financial accounting net income or loss of a permanent establishment in its financial statements; (41) ‘constituent entity-owner’ means a constituent entity that owns, directly or indirectly, an ownership interest in another constituent entity of the same MNE group or large-scale domestic group; (42) ‘eligible distribution tax system’ means a corporate income tax system that: (a) imposes income tax on profits only when those profits are distributed or deemed to be distributed to shareholders, or when the company incurs certain non-business expenses; (b) imposes tax at a rate equal to, or in excess of, the minimum tax rate; and (c) was in force on or before 1 July 2021; (43) ‘qualified UTPR’ means a set of rules implemented in the domestic law of a jurisdiction, provided that such jurisdiction does not provide any benefits that are related to those rules, and that: (a) is equivalent to the rules laid down in this Directive or, as regards third-country jurisdictions, the OECD Model Rules, in accordance with which a jurisdiction collects its allocable share of top-up tax of an MNE group that was not charged under the IIR in respect of the low-taxed constituent entities of that MNE group; (b) is administered in a way that is consistent with the rules laid down in this Directive or, as regards third-country jurisdictions, the OECD Model Rules; (44) ‘designated filing entity’ means the constituent entity, other than the ultimate parent entity, that has been appointed by the MNE group or large-scale domestic group to fulfil the filing obligations set out in Article 44 on behalf of the MNE group or the large-scale domestic group.

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4. 004 Article 4

   Article 4 Location of a constituent entity 1. For the purposes of this Directive, an entity other than a flow-through entity shall be determined to be located in the jurisdiction where it is considered to be resident for tax purposes based on its place of management, its place of creation or similar criteria. Where it is not possible to determine the location of an entity other than a flow-through entity based on the first subparagraph, it shall be deemed to be located in the jurisdiction where it was created. 2. A flow-through entity shall be considered to be stateless, unless it is the ultimate parent entity of an MNE group or of a large-scale domestic group or it is required to apply an IIR in accordance with Articles 5, 6, 7 and 8, in which case the flow-through entity shall be deemed to be located in the jurisdiction where it was created. 3. A permanent establishment as defined in Article 3, point (13)(a), shall be determined to be located in the jurisdiction where it is treated as a permanent establishment and is liable to tax under the applicable tax treaty. A permanent establishment as defined in Article 3, point (13)(b), shall be determined to be located in the jurisdiction where it is subject to net basis taxation based on its business presence. A permanent establishment as defined in Article 3, point (13)(c), shall be determined to be located in the jurisdiction where it is situated. A permanent establishment as defined in Article 3, point (13)(d), shall be considered to be stateless. 4. Where a constituent entity is located in two jurisdictions and those jurisdictions have an applicable tax treaty, the constituent entity shall be deemed to be located in the jurisdiction where it is considered to be resident for tax purposes under that tax treaty. Where the applicable tax treaty requires that the competent authorities reach a mutual agreement on the deemed residence for tax purposes of the constituent entity, and no agreement is reached, paragraph 5 shall apply. Where there is no relief for double taxation under the applicable tax treaty due to the fact that a constituent entity is resident for tax purposes in both contracting parties, paragraph 5 shall apply. 5. Where a constituent entity is located in two jurisdictions and those jurisdictions do not have an applicable tax treaty, the constituent entity shall be deemed to be located in the jurisdiction which charged the higher amount of covered taxes for the fiscal year. For the purpose of computing the amount of covered taxes referred to in the first subparagraph, the amount of tax paid in accordance with a controlled foreign company tax regime shall not be taken into consideration. If the amount of covered taxes due in the two jurisdictions is the same or zero, the constituent entity shall be deemed to be located in the jurisdiction where it has the higher amount of substance-based income exclusion computed on an entity basis in accordance with Article 28. If the amount of the substance-based income exclusion in the two jurisdictions is the same or zero, the constituent entity shall be considered to be stateless, unless it is an ultimate parent entity, in which case it shall be deemed to be located in the jurisdiction where it was created. 6. Where, as a result of applying paragraphs 4 and 5, a parent entity is located in a jurisdiction where it is not subject to a qualified IIR, it shall be deemed to be subject to the qualified IIR of the other jurisdiction, unless an applicable tax treaty prohibits the application of such rule. 7. Where a constituent entity changes its location in the course of a fiscal year, it shall be deemed to be located in the jurisdiction where it was deemed to be located under this Article at the beginning of that fiscal year.

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5. 005 Article 5

   Article 5 Ultimate parent entity in the Union 1. Member States shall ensure that an ultimate parent entity that is a constituent entity located in a Member State is subject to the top-up tax (the ‘IIR top-up tax’) for the fiscal year in respect of its low-taxed constituent entities that are located in another jurisdiction or that are stateless. 2. Member States shall ensure that, where a constituent entity that is the ultimate parent entity of an MNE group or of a large-scale domestic group is located in a Member State that is a low-tax jurisdiction, it is subject to the IIR top-up tax in respect of itself and of all low-taxed constituent entities of the group located in the same Member State for the fiscal year.

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6. 006 Article 6

   Article 6 Intermediate parent entity in the Union 1. Member States shall ensure that an intermediate parent entity located in a Member State and held by an ultimate parent entity that is located in a third-country jurisdiction is subject to the IIR top-up tax for the fiscal year in respect of its low-taxed constituent entities that are located in another jurisdiction or that are stateless. 2. Member States shall ensure that, where an intermediate parent entity is located in a Member State that is a low-tax jurisdiction and held by an ultimate parent entity that is located in a third-country jurisdiction, it is subject to the IIR top-up tax in respect of itself and of its low-taxed constituent entities located in the same Member State for the fiscal year. 3. Paragraphs 1 and 2 shall not apply where: (a) the ultimate parent entity is subject to a qualified IIR for that fiscal year; or (b) another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity.

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7. 007 Article 7

   Article 7 Intermediate parent entity located in the Union and held by an excluded ultimate parent entity 1. Member States shall ensure that, where an intermediate parent entity located in a Member State is held by an ultimate parent entity that is an excluded entity, it is subject to the IIR top-up tax for the fiscal year in respect of its low-taxed constituent entities that are located in another jurisdiction or that are stateless. 2. Member States shall ensure that, where an intermediate parent entity located in a Member State that is a low-tax jurisdiction is held by an ultimate parent entity that is an excluded entity, it is subject to the IIR top-up tax in respect of itself and its low-taxed constituent entities that are located in the same Member State for the fiscal year. 3. Paragraphs 1 and 2 shall not apply where another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity referred to in paragraphs 1 and 2.

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8. 008 Article 8

   Article 8 Partially-owned parent entity in the Union 1. Member States shall ensure that a partially-owned parent entity located in a Member State is subject to the IIR top-up tax for the fiscal year in respect of its low-taxed constituent entities that are located in another jurisdiction or that are stateless. 2. Member States shall ensure that, where a partially-owned parent entity is located in a Member State that is a low-tax jurisdiction, it is subject to the IIR top-up tax in respect of itself and of its low-taxed constituent entities located in the same Member State for the fiscal year. 3. Paragraphs 1 and 2 shall not apply where the ownership interests of the partially-owned parent entity are wholly held, directly or indirectly, by another partially-owned parent entity that is subject to a qualified IIR for that fiscal year.

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9. 009 Article 9

   Article 9 Allocation of the top-up tax under the IIR 1. The IIR top-up tax due by a parent entity in respect of a low-taxed constituent entity pursuant to Article 5(1), Article 6(1), Article 7(1) and Article 8(1) shall be equal to the top-up tax of the low-taxed constituent entity, as computed in accordance with Article 27, multiplied by the parent entity’s allocable share in such top-up tax for the fiscal year. 2. A parent entity’s allocable share in the top-up tax with respect to a low-taxed constituent entity shall be the proportion of the parent entity’s ownership interest in the qualifying income of the low-taxed constituent entity. That proportion shall be equal to the qualifying income of the low-taxed constituent entity for the fiscal year, reduced by the amount of such income attributable to ownership interests held by other owners, divided by the qualifying income of the low-taxed constituent entity for the fiscal year. The amount of qualifying income attributable to ownership interests in a low-taxed constituent entity held by other owners shall be the amount that would have been treated as attributable to such owners under the principles of the acceptable financial accounting standard used in the ultimate parent entity’s consolidated financial statements if the low-taxed constituent entity’s net income were equal to its qualifying income and: (a) the parent entity had prepared consolidated financial statements in accordance with that accounting standard (the ‘hypothetical consolidated financial statements’); (b) the parent entity owned a controlling interest in the low-taxed constituent entity such that all of the income and expenses of the low-taxed constituent entity were consolidated on a line-by-line basis with those of the parent entity in the hypothetical consolidated financial statements; (c) all of the low-taxed constituent entity’s qualifying income were attributable to transactions with persons that are not group entities; and (d) all ownership interests not directly or indirectly held by the parent entity were held by persons other than group entities. 3. In addition to the amount allocated to a parent entity in accordance with paragraph 1 of this Article, the IIR top-up tax due by a parent entity pursuant to Article 5(2), Article 6(2), Article 7(2) and Article 8(2) shall include, for the fiscal year, in accordance with Article 27: (a) the full amount of top-up tax computed for that parent entity; and (b) the amount of top-up tax computed for its low-taxed constituent entities located in the same Member State multiplied by the parent entity’s allocable share in such top-up tax for the fiscal year.

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10. 010 Article 10

    Article 10 IIR offset mechanism Where a parent entity located in a Member State holds an ownership interest in a low-taxed constituent entity indirectly through an intermediate parent entity or a partially-owned parent entity that is subject to a qualified IIR for the fiscal year, the top-up tax due pursuant to Articles 5 to 8 shall be reduced by an amount equal to the portion of the first-mentioned parent entity’s allocable share of the top-up tax which is due by the intermediate parent entity or the partially-owned parent entity.

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11. 011 Article 11

    Article 11 Election to apply a qualified domestic top-up tax 1. Member States may elect to apply a qualified domestic top-up tax. If a Member State where constituent entities of an MNE group or of a large-scale domestic group are located elects to apply a qualified domestic top-up tax, all low-taxed constituent entities of the MNE group or the large-scale domestic group in that Member State shall be subject to that domestic top-up tax for the fiscal year. Under a qualified domestic top-up tax, the domestic excess profits of the low-taxed constituent entities may be computed based on an acceptable financial accounting standard or an authorised financial accounting standard permitted by the authorised accounting body and adjusted to prevent any material competitive distortions, rather than the financial accounting standard used in the consolidated financial statements. 2. Where a parent entity of an MNE group or of a large-scale domestic group is located in a Member State, and its directly or indirectly held constituent entities located either in that Member State or in another jurisdiction are subject to a qualified domestic top-up tax for the fiscal year in those jurisdictions, the amount of any top-up tax computed in accordance with Article 27 due by the parent entity pursuant to Articles 5 to 8 shall be reduced, up to zero, by the amount of qualified domestic top-up tax due either by itself or by those constituent entities. Notwithstanding the first subparagraph, if the qualified domestic top-up tax has been computed for a fiscal year in accordance with the ultimate parent entity’s acceptable financial accounting standard or International Financial Reporting Standards (IFRS or IFRS as adopted by the Union pursuant to Regulation (EC) No 1606/2002), no top-up tax shall be computed in accordance with Article 27 for that fiscal year in respect of the constituent entities of that MNE group or large-scale domestic group located in that Member State. This subparagraph is without prejudice to the computation of any additional top-up tax pursuant to Article 29 in the case where a Member State does not apply a qualified domestic top-up tax to collect any additional top-up tax arising under Article 29. 3. Where the amount of qualified domestic top-up tax for a fiscal year has not been paid within the four fiscal years following the fiscal year in which it was due, the amount of qualified domestic top-up tax that was not paid shall be added to the jurisdictional top-up tax computed in accordance with Article 27(3) and shall not be collected by the Member State which made the election pursuant to paragraph 1 of this Article. 4. Member States that elect to apply a qualified domestic top-up tax shall notify the Commission of that election within four months following the adoption of their national laws, regulations and administrative provisions introducing a qualified domestic top-up tax. Such election shall be valid and may not be revoked for a period of three years. At the end of each period of three years, the election shall be renewed automatically, unless the Member State revokes its election. Any revocation of the election shall be notified to the Commission no later than four months before the end of the three-year period.

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12. 012 Article 12

    Article 12 Application of a UTPR across the MNE group 1. Where the ultimate parent entity of an MNE group is located in a third-country jurisdiction that does not apply a qualified IIR, or where the ultimate parent entity of an MNE group is an excluded entity, Member States shall ensure that the constituent entities located in the Union are subject, in the Member State in which they are located, to an adjustment equal to the UTPR top-up tax amount allocated to that Member State for the fiscal year in accordance with Article 14. For that purpose, such adjustment may take the form of either a top-up tax due by those constituent entities or a denial of deduction against the taxable income of those constituent entities resulting in an amount of tax liability necessary to collect the UTPR top-up tax amount allocated to that Member State. 2. Where a Member State applies the adjustment pursuant to paragraph 1 of this Article in the form of a denial of deduction against taxable income, such adjustment shall apply to the extent possible with respect to the taxable year in which the fiscal year for which the UTPR top-up tax amount was computed and allocated to a Member State in accordance with Article 14 ends. Any UTPR top-up tax amount that remains due with respect to a fiscal year as a result of the application of a denial of deduction against taxable income for that fiscal year shall be carried forward to the extent necessary and shall be subject, with respect to each following fiscal year, to the adjustment pursuant to paragraph 1 until the full UTPR top-up tax amount allocated to that Member State for that fiscal year has been paid. 3. Constituent entities that are investment entities shall not be subject to this Article.

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13. 013 Article 13

    Article 13 Application of the UTPR in the jurisdiction of an ultimate parent entity 1. Where the ultimate parent entity of an MNE group is located in a low-tax third country jurisdiction, Member States shall ensure that the constituent entities located in the Union are subject, in the Member State in which they are located, to an adjustment equal to the UTPR top-up tax amount allocated to that Member State for the fiscal year in accordance with Article 14. For that purpose, such adjustment may take the form of either a top-up tax due by those constituent entities or a denial of deduction against the taxable income of those constituent entities resulting in an amount of tax liability necessary to collect the UTPR top-up tax amount allocated to that Member State. The first subparagraph shall not apply where the ultimate parent entity in a low-tax third-country jurisdiction is subject to a qualified IIR in respect of itself and its low-taxed constituent entities located in that jurisdiction. 2. Where a Member State applies the adjustment pursuant to paragraph 1 of this Article in the form of a denial of deduction against taxable income, such adjustment shall apply to the extent possible with respect to the taxable year in which the fiscal year for which the UTPR top-up tax amount was computed and allocated to a Member State in accordance with Article 14 ends. Any UTPR top-up tax amount that remains due with respect to a fiscal year as a result of the application of a denial of deduction against taxable income for that fiscal year shall be carried forward to the extent necessary and shall be subject, with respect to each following fiscal year, to the adjustment pursuant to paragraph 1 until the full UTPR top-up tax amount allocated to that Member State for that fiscal year has been paid. 3. Constituent entities that are investment entities shall not be subject to this Article.

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14. 014 Article 14

    Article 14 Computation and allocation of the UTPR top-up tax amount 1. The UTPR top-up tax amount allocated to a Member State shall be computed by multiplying the total UTPR top-up tax, as determined in accordance with paragraph 2, by the Member State’s UTPR percentage, as determined in accordance with paragraph 5. 2. The total UTPR top-up tax for a fiscal year shall be equal to the sum of the top-up tax computed for each low-taxed constituent entity of the MNE group for that fiscal year in accordance with Article 27, subject to the adjustments set out in paragraphs 3 and 4 of this Article. 3. The UTPR top-up tax of a low-taxed constituent entity shall be equal to zero where, for the fiscal year, all of the ultimate parent entity’s ownership interests in such low-taxed constituent entity are held directly or indirectly by one or more parent entities that are required to apply a qualified IIR in respect of that low-taxed constituent entity for that fiscal year. 4. Where paragraph 3 does not apply, the UTPR top-up tax of a low-taxed constituent entity shall be reduced by a parent entity’s allocable share of the top-up tax of that low-taxed constituent entity that is brought into charge under qualified IIR. 5. A Member State’s UTPR percentage shall be computed, for each fiscal year and for each MNE group, according to the following formula: 50%xnumber of employees in the Member Statenumber of employees in all UTPR jurisdictions50%xthe total value of tangible assets in the Member Statethe total value of tangible assests in all UTPR jurisdictions where: (a) the number of employees in the Member State is the total number of employees of all the constituent entities of the MNE group located in that Member State; (b) the number of employees in all UTPR jurisdictions is the total number of employees of all the constituent entities of the MNE group located in a jurisdiction that has a qualified UTPR in force for the fiscal year; (c) the total value of tangible assets in the Member State is the sum of the net book value of tangible assets of all the constituent entities of the MNE group located in that Member State; (d) the total value of tangible assets in all UTPR jurisdictions is the sum of the net book value of tangible assets of all the constituent entities of the MNE group located in a jurisdiction that has a qualified UTPR in force for the fiscal year. 6. The number of employees shall be the number of employees on a full-time equivalent basis of all constituent entities located in the relevant jurisdiction, including independent contractors provided that they participate in the ordinary operating activities of the constituent entity. The tangible assets shall include the tangible assets of all constituent entities located in the relevant jurisdiction but shall not include cash or cash equivalent, intangible or financial assets. 7. The employees whose payroll costs are included in the separate financial accounts of a permanent establishment as determined by Article 18(1) and adjusted in accordance with Article 18(2) shall be allocated to the jurisdiction in which the permanent establishment is located. Tangible assets included in the separate financial accounts of a permanent establishment as determined by Article 18(1) and adjusted in accordance with Article 18(2) shall be allocated to the jurisdiction in which the permanent establishment is located. The number of employees and the tangible assets allocated to the jurisdiction of a permanent establishment shall not be taken into account for the number of employees and the tangible assets of the jurisdiction of the main entity. The number of employees and the net book value of tangible assets held by an investment entity shall be excluded from the elements of the formula set out in paragraph 5. The number of employees and the net book value of tangible assets of a flow-through entity shall be excluded from the elements of the formula set out in paragraph 5, unless they are allocated to a permanent establishment or, in the absence of a permanent establishment, to the constituent entities that are located in the jurisdiction where the flow-through entity was created. 8. By way of derogation from paragraph 5, a jurisdiction’s UTPR percentage for an MNE group shall be deemed to be zero for a fiscal year as long as the UTPR top-up tax amount allocated to that jurisdiction in a prior fiscal year has not resulted in the constituent entities of that MNE group located in that jurisdiction having an additional cash tax expense equal, in total, to the UTPR top-up tax amount for that prior fiscal year allocated to that jurisdiction. The number of employees and the net book value of tangible assets of the constituent entities of an MNE group which is located in a jurisdiction with a UTPR percentage of zero for a fiscal year shall be excluded from the elements of the formula for allocating the total UTPR top-up tax to the MNE group for that fiscal year. 9. Paragraph 8 shall not apply for a fiscal year if all jurisdictions with a qualified UTPR in force for the fiscal year have a UTPR percentage of zero for the MNE group for that fiscal year.

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15. 015 Article 15

    Article 15 Determination of the qualifying income or loss 1. The qualifying income or loss of a constituent entity shall be computed by making the adjustments set out in Articles 16 to 19 to the financial accounting net income or loss of the constituent entity for the fiscal year before any consolidation adjustments for eliminating intra-group transactions, as determined under the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity. 2. Where it is not reasonably practicable to determine the financial accounting net income or loss of a constituent entity based on the acceptable financial accounting standard or authorised financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, the financial accounting net income or loss of the constituent entity for the fiscal year may be determined using another acceptable financial accounting standard or an authorised financial accounting standard provided that: (a) the financial accounts of the constituent entity are maintained based on that accounting standard; (b) the information contained in the financial accounts is reliable; and (c) permanent differences in excess of EUR that arise from the application of a particular principle or standard to items of income or expense or transactions, where that principle or standard differs from the financial standard used in the preparation of the consolidated financial statements of the ultimate parent entity, are adjusted to conform to the treatment required for that item under the accounting standard used in the preparation of the consolidated financial statements. 3. Where an ultimate parent entity has not prepared its consolidated financial statements in accordance with an acceptable financial accounting standard as referred to in Article 3, point (6)(c), the consolidated financial statements of the ultimate parent entity shall be adjusted to prevent any material competitive distortion. 4. Where an ultimate parent entity does not prepare consolidated financial statements as referred to in Article 3, points (6)(a), (b) and (c), the consolidated financial statements of the ultimate parent entity referred to in Article 3, point (6)(d), shall be those that would have been prepared if the ultimate parent entity were required to prepare such consolidated financial statements in accordance with: (a) an acceptable financial accounting standard; or (b) an authorised financial accounting standard, provided that such consolidated financial statements are adjusted to prevent any material competitive distortion. 5. Where a qualified domestic top-up tax is applied by a Member State or a third-country jurisdiction, the financial accounting net income or loss of the constituent entities located in that Member State or third-country jurisdiction may be determined in accordance with an acceptable financial accounting standard or an authorised financial accounting standard that is different from the financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, provided that such financial accounting net income or loss is adjusted to prevent any material competitive distortion. 6. Where the application of a specific principle or procedure under a set of generally accepted accounting principles results in a material competitive distortion, the accounting treatment of any item or transaction subject to that principle or procedure shall be adjusted to conform to the treatment required for the item or transaction under International Financial Reporting Standards (IFRS or IFRS as adopted by the Union pursuant to Regulation (EC) No 1606/2002).

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16. 016 Article 16

    Article 16 Adjustments to determine the qualifying income or loss 1. For the purposes of this Article, the following definitions apply: (a) ‘net taxes expense’ means the net amount of the following items: (i) covered taxes accrued as an expense and any current and deferred covered taxes included in the income tax expense, including covered taxes on income that is excluded from the qualifying income or loss computation; (ii) deferred tax assets attributable to a loss for the fiscal year; (iii) qualified domestic top-up taxes accrued as an expense; (iv) taxes arising pursuant to the rules of this Directive or, as regards third-country jurisdictions, the OECD Model Rules, accrued as an expense; and (v) disqualified refundable imputation taxes accrued as an expense; (b) ‘excluded dividend’ means a dividend or other distribution received or accrued in respect of an ownership interest, except a dividend or other distribution received or accrued in respect of: (i) an ownership interest: held by the group in an entity, that carries rights to less than 10 % of the profits, capital or reserves, or voting rights of that entity at the date of the distribution or disposition (a ‘portfolio shareholding’); and that is economically owned by the constituent entity that receives or accrues the dividend or other distribution for less than one year at the date of the distribution; (ii) an ownership interest in an investment entity that is subject to an election pursuant to Article 43; (c) ‘excluded equity gain or loss’ means a gain, profit or loss, included in the financial accounting net income or loss of the constituent entity, arising from: (i) gains and losses arising from changes in the fair value of an ownership interest, except for a portfolio shareholding; (ii) profits or losses in respect of an ownership interest that is included under the equity method of accounting; and (iii) gains and losses from the disposal of an ownership interest, except for the disposal of a portfolio shareholding; (d) ‘included revaluation method gain or loss’ means a net gain or loss, increased or decreased by any associated covered taxes for the fiscal year, arising from the application of an accounting method or practice that, in respect of all property, plant and equipment: (i) periodically adjusts the carrying value of such property, plant and equipment to its fair value; (ii) records the changes in value in other comprehensive income; and (iii) does not subsequently report the gain or loss accrued in other comprehensive income through profit and loss; (e) ‘asymmetric foreign currency gain or loss’ means a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is: (i) included in the computation of the taxable income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity; (ii) included in the computation of the financial accounting net income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity; (iii) included in the computation of the financial accounting net income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity; and (iv) attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether such third foreign currency gain or loss is included in the taxable income; the tax functional currency is the functional currency used to determine the constituent entity’s taxable income or loss for a covered tax in the jurisdiction in which it is located; the accounting functional currency is the functional currency used to determine the constituent entity’s financial accounting net income or loss; a third foreign currency is a currency that is not the constituent entity’s tax functional currency or accounting functional currency; (f) ‘policy disallowed expense’ means: (i) an expense accrued by the constituent entity for illegal payments, including bribes and kickbacks; and (ii) an expense accrued by the constituent entity for fines and penalties that equal or exceed EUR or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is computed; (g) ‘prior period errors and changes in accounting principles’ means a change in the opening equity of a constituent entity at the beginning of a fiscal year that is attributable to: (i) a correction of an error in the determination of the financial accounting net income or loss in a previous fiscal year that affected the income or expenses able to be included in the computation of the qualifying income or loss in that previous fiscal year, except to the extent such correction of an error resulted in a material decrease of a liability for covered taxes subject to Article 25; and (ii) a change in accounting principles or policy that affected the income or expenses included in the computation of the qualifying income or loss; (h) ‘accrued pension expense’ means the difference between the amount of pension liability expense included in the financial accounting net income or loss and the amount contributed to a pension fund for the fiscal year. 2. The financial accounting net income or loss of a constituent entity shall be adjusted by the amount of the following items to determine its qualifying income or loss: (a) net taxes expenses; (b) excluded dividends; (c) excluded equity gains or losses; (d) included revaluation method gains or losses; (e) gains or losses from the disposal of assets and liabilities excluded pursuant to Article 35; (f) asymmetric foreign currency gains or losses; (g) policy disallowed expenses; (h) prior period errors and changes in accounting principles; and (i) accrued pension expenses. 3. At the election of the filing constituent entity, a constituent entity may substitute the amount allowed as a deduction for the computation of its taxable income in its location for the amount expensed in its financial accounts for a cost or expense of such constituent entity that was paid with stock-based compensation. Where the option to use the stock-options has not been exercised, the amount of stock-based compensation cost or expense that has been deducted from the financial accounting net income or loss of the constituent entity for the computation of its qualifying income or loss for all previous fiscal years shall be included in the fiscal year in which that option has expired. Where part of the amount of stock-based compensation cost or expense has been recorded in the financial accounts of the constituent entity in fiscal years prior to the fiscal year in which the election is made, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted for the computation of its qualifying income or loss in those previous fiscal years and the total amount of stock-based compensation cost or expense that would have been deducted for the computation of its qualifying income or loss in those previous fiscal years if the election had been made in such fiscal years shall be included in the computation of the qualifying income or loss of the constituent entity for that fiscal year. The election shall be made in accordance with Article 45(1) and shall apply consistently to all constituent entities located in the same jurisdiction for the year in which the election is made and all subsequent fiscal years. In the fiscal year in which the election is revoked, the amount of unpaid stock-based compensation cost or expense deducted pursuant to the election that exceeds the financial accounting expense accrued shall be included in the computation of the qualifying income or loss of the constituent entity. 4. Any transaction between constituent entities located in different jurisdictions that is not recorded in the same amount in the financial accounts of both constituent entities or that is not consistent with the arm’s length principle shall be adjusted so as to be in the same amount and consistent with the arm’s length principle. A loss from a sale or other transfer of an asset between two constituent entities located in the same jurisdiction that is not recorded consistently with the arm’s length principle shall be adjusted based on the arm’s length principle if that loss is included in the computation of the qualifying income or loss. For the purposes of this paragraph, ‘arm’s length principle’ means the principle under which transactions between constituent entities are to be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances. 5. Qualified refundable tax credits referred to in Article 3, point (38), shall be treated as income for the computation of the qualifying income or loss of a constituent entity. Non-qualified refundable tax credits shall not be treated as income for the computation of the qualifying income or loss of a constituent entity. 6. At the election of the filing constituent entity, gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting in the consolidated financial statements for a fiscal year may be determined on the basis of the realisation principle for the computation of the qualifying income or loss. Gains or losses which result from applying fair value or impairment accounting in respect of an asset or a liability shall be excluded from the computation of the qualifying income or loss of a constituent entity under the first subparagraph. The carrying value of an asset or a liability for the purpose of determining a gain or a loss under the first subparagraph shall be the carrying value at the time the asset was acquired or the liability was incurred, or on the first day of the fiscal year in which the election is made, whichever date is the latest. The election shall be made in accordance with Article 45(1) and shall apply to all constituent entities located in the jurisdiction to which the election is made, unless the filing constituent entity chooses to limit the election to the tangible assets of the constituent entities or to investment entities. In the fiscal year in which the election is revoked, an amount equal to the difference between the fair value of the asset or liability and the carrying value of the asset or liability on the first day of the fiscal year in which the revocation is made, determined pursuant to the election, shall be included, if the fair value exceeds the carrying value, or deducted, if the carrying value exceeds the fair value, for the computation of the qualifying income or loss of the constituent entities. 7. At the election of the filing constituent entity, the qualifying income or loss of a constituent entity located in a jurisdiction arising from the disposal of local tangible assets located in that jurisdiction by such constituent entity to third parties, other than a member of the group, for a fiscal year may be adjusted as set out in this paragraph. For the purposes of this paragraph, the local tangible assets are immovable property located in the same jurisdiction as the constituent entity. The net gain arising from the disposal of local tangible assets as referred to in the first subparagraph in the fiscal year in which the election is made shall be offset against any net loss of a constituent entity located in that jurisdiction arising from the disposal of local tangible assets as referred to in the first subparagraph in the fiscal year in which the election is made and in the four fiscal years prior to that fiscal year (the ‘five-year period’). The net gain shall be offset first against the net loss, if any, that has arisen in the earliest fiscal year of the five-year period. Any residual amount of net gain shall be carried forward and offset against any net losses that have arisen in subsequent fiscal years of the five-year period. Any residual amount of net gain that remains after applying the second subparagraph shall be spread evenly over the five-year period for the computation of the qualifying income or loss of each constituent entity located in that jurisdiction that has made a net gain from the disposal of local tangible assets as referred to in the first subparagraph in the fiscal year in which the election is made. The residual amount of net gain allocated to a constituent entity shall be proportionate to the net gain of that constituent entity divided by the net gain of all constituent entities. Where no constituent entity in a jurisdiction has made a net gain from the disposal of local tangible assets as referred to in the first subparagraph in the fiscal year in which the election is made, the residual amount of net gain as referred to in the third subparagraph shall be allocated equally to each constituent entity in that jurisdiction and spread evenly over the five-year period for the computation of the qualifying income or loss of each of those constituent entities. Any adjustment under this paragraph for the fiscal years preceding the fiscal year in which the election is made shall be subject to adjustments in accordance with Article 29(1). The election shall be made annually in accordance with Article 45(2). 8. Any expense related to a financing arrangement whereby one or more constituent entities provides credit to or otherwise makes an investment in one or more other constituent entities of the same group (the ‘intra-group financing arrangement’) shall not be taken into consideration in the computation of the qualifying income or loss of a constituent entity if the following conditions are met: (a) the constituent entity is located in a low-tax jurisdiction or in a jurisdiction that would have been low-taxed if the expense had not been accrued by the constituent entity; (b) it can reasonably be anticipated that, over the expected duration of the intra-group financing arrangement, the intra-group financing arrangement will increase the amount of expenses taken into account for the computation of the qualifying income or loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit (the ‘counterparty’); (c) the counterparty is located in a jurisdiction that is not a low-tax jurisdiction or in a jurisdiction that would not have been low-taxed if the income related to the expense had not been accrued by the counterparty. 9. An ultimate parent entity may elect to apply its consolidated accounting treatment to eliminate income, expense, gains and losses from transactions between constituent entities that are located in the same jurisdiction and included in a tax consolidation group for the purpose of computing the net qualifying income or loss of those constituent entities. The election shall be made in accordance with Article 45(1). In the fiscal year in which the election is made or revoked, appropriate adjustments shall be made so that items of qualifying income or loss are not taken into consideration more than once or omitted as a result of such election or revocation. 10. An insurance company shall exclude from the computation of its qualifying income or loss any amount charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders. An insurance company shall include in the computation of its qualifying income or loss any returns to policyholders that are not reflected in its financial accounting net income or loss to the extent that the corresponding increase or decrease in liability to the policyholders is reflected in its financial accounting net income or loss. 11. Any amount that is recognised as a decrease in the equity of a constituent entity and is the result of distributions made or due in respect of an instrument issued by that constituent entity pursuant to prudential regulatory requirements (the ‘additional tier one capital’) shall be treated as an expense in the computation of its qualifying income or loss. Any amount that is recognised as an increase in the equity of a constituent entity and is the result of distributions received or due to be received in respect of an additional tier one capital held by the constituent entity shall be included in the computation of its qualifying income or loss.

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17. 017 Article 17

    Article 17 International shipping income exclusion 1. For the purposes of this Article, the following definitions apply: (a) ‘international shipping income’ means net income obtained by a constituent entity from the following activities, provided that the transportation is not carried out via inland waterways within the same jurisdiction: (i) transportation of passengers or cargo by ship in international traffic, whether the ship is owned, leased or otherwise at the disposal of the constituent entity; (ii) transportation of passengers or cargo by ship in international traffic under slot-chartering arrangements; (iii) leasing of a ship to be used for the transportation of passengers or cargo in international traffic on charter fully equipped, crewed and supplied; (iv) leasing of a ship used for the transportation of passengers or cargo in international traffic, on a bareboat charter basis, to another constituent entity; (v) participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ship in international traffic; and (vi) sale of a ship used for the transportation of passengers or cargo in international traffic, provided that the ship has been held for use by the constituent entity for a minimum of one year; (b) ‘qualified ancillary international shipping income’ means net income obtained by a constituent entity from the following activities, provided that such activities are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic: (i) leasing of a ship, on a bareboat charter basis, to another shipping enterprise that is not a constituent entity, provided that the duration of the charter does not exceed three years; (ii) sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage; (iii) leasing and short-term storage of containers or detention charges for the late return of containers; (iv) provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff and customer services personnel; and (v) investment income, where the investment that generates the income is made as an integral part of the carrying on of the business of operating ships in international traffic. 2. The international shipping income and the qualified ancillary international shipping income of a constituent entity shall be excluded from the computation of its qualifying income or loss, provided that the constituent entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located. 3. Where the computation of a constituent entity’s international shipping income and qualified ancillary international shipping income results in a loss, such loss shall be excluded from the computation of the constituent entity’s qualifying income or loss. 4. The aggregated qualified ancillary international shipping income of all constituent entities located in a jurisdiction shall not exceed 50 % of those constituent entities’ international shipping income. 5. The costs incurred by a constituent entity that are directly attributable to its international shipping activities listed in paragraph 1, point (a), and qualified ancillary international shipping activities listed in paragraph 1, point (b), shall be allocated to such activities for the purpose of computing the net international shipping income and the net qualified ancillary international shipping income of the constituent entity. The costs incurred by a constituent entity that indirectly result from its international shipping activities and qualified ancillary international shipping activities shall be deducted from the constituent entity’s revenues from such activities to compute the international shipping income and qualified ancillary international shipping income of the constituent entity on the basis of its revenues from such activities in proportion to its total revenues. 6. All direct and indirect costs attributed to a constituent entity’s international shipping income and qualified ancillary international shipping income in accordance with paragraph 5 shall be excluded from the computation of its qualifying income or loss.

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18. 018 Article 18

    Article 18 Allocation of the qualifying income or loss between a main entity and a permanent establishment 1. Where a constituent entity is a permanent establishment as defined in Article 3, point (13)(a), (b) or (c), its financial accounting net income or loss shall be the net income or loss reflected in the separate financial accounts of that permanent establishment. Where a permanent establishment does not have separate financial accounts, its financial accounting net income or loss shall be the amount that would have been reflected in its separate financial accounts if they had been prepared on a standalone basis and in accordance with the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity. 2. Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(a) or (b), its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with the applicable tax treaty or domestic law of the jurisdiction where it is located, regardless of the amount of income subject to tax and the amount of deductible expenses in that jurisdiction. Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(c), its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that would have been attributable to it in accordance with Article 7 of the OECD Model Tax Convention on Income and Capital, as amended. 3. Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(d), its financial accounting net income or loss shall be computed based on the amounts and items of income that are exempt in the jurisdiction where the main entity is located and attributable to the operations conducted outside of that jurisdiction and the amounts and items of expense that are not deducted for tax purposes in the jurisdiction where the main entity is located and that are attributable to such operations. 4. The financial accounting net income or loss of a permanent establishment shall not be taken into account in determining the qualifying income or loss of the main entity, except as provided in paragraph 5. 5. A qualifying loss of a permanent establishment shall be treated as an expense of the main entity for the computation of its qualifying income or loss to the extent that the loss of the permanent establishment is treated as an expense in the computation of domestic taxable income of such main entity and is not set off against an item of the domestic taxable income that is subject to tax under the laws of both the jurisdiction of the main entity and the jurisdiction of the permanent establishment. Qualifying income that is subsequently earned by the permanent establishment shall be treated as qualifying income of the main entity up to the amount of the qualifying loss that was previously treated as an expense of the main entity under the first subparagraph.

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19. 019 Article 19

    Article 19 Allocation of the qualifying income or loss of a flow-through entity 1. The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the amount allocable to its owners that are not group entities and that hold their ownership interest in such flow-through entity directly or through a chain of tax transparent entities, unless: (a) the flow-through entity is an ultimate parent entity; or (b) the flow-through entity is held, directly or through a chain of tax transparent entities, by an ultimate parent entity referred to in point (a). 2. The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the financial accounting net income or loss that is allocated to another constituent entity. 3. Where a flow-through entity wholly or partially carries out business through a permanent establishment, its financial accounting net income or loss which remains after applying paragraph 1 of this Article shall be allocated to that permanent establishment in accordance with Article 18. 4. Where a tax transparent entity is not the ultimate parent entity, the financial accounting net income or loss of the flow-through entity which remains after applying paragraphs 1 and 3 shall be allocated to its constituent entity-owners in accordance with their ownership interests in the flow-through entity. 5. Where a flow-through entity is a tax transparent entity that is the ultimate parent entity or a reverse hybrid entity, any financial accounting net income or loss of the flow-through entity which remains after applying paragraphs 1 and 3 shall be allocated to the ultimate parent entity or the reverse hybrid entity. 6. Paragraphs 3, 4 and 5 shall be applied separately with respect to each ownership interest in the flow-through entity.

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20. 020 Article 20

    Article 20 Covered taxes 1. The covered taxes of a constituent entity shall include: (a) taxes recorded in the financial accounts of a constituent entity with respect to its income or profits, or its share of the income or profits of a constituent entity in which it owns an ownership interest; (b) taxes on distributed profits, deemed profit distributions, and non-business expenses imposed under an eligible distribution tax system; (c) taxes imposed in lieu of a generally applicable corporate income tax; and (d) taxes levied by reference to retained earnings and corporate equity, including taxes on multiple components based on income and equity. 2. The covered taxes of a constituent entity shall not include: (a) the top-up tax accrued by a parent entity under a qualified IIR; (b) the top-up tax accrued by a constituent entity under a qualified domestic top-up tax; (c) taxes attributable to an adjustment made by a constituent entity as a result of the application of a qualified UTPR; (d) disqualified refundable imputation tax; and (e) taxes paid by an insurance company in respect of returns to policyholders. 3. Covered taxes in respect of any net gain or loss arising from the disposal of local tangible assets as referred to in Article 16(7), first subparagraph, in the fiscal year in which the election referred to in that subparagraph is made shall be excluded from the computation of the covered taxes.

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21. 021 Article 21

    Article 21 Adjusted covered taxes 1. The adjusted covered taxes of a constituent entity for a fiscal year shall be determined by adjusting the sum of the current tax expense accrued in its financial accounting net income or loss with respect to covered taxes for the fiscal year, by: (a) the net amount of its additions and reductions to covered taxes for the fiscal year as set out in paragraphs 2 and 3; (b) the total deferred tax adjustment amount as set out in Article 22; and (c) any increase or decrease in covered taxes recorded in equity or other comprehensive income relating to amounts included in the computation of qualifying income or loss that will be subject to tax under local tax rules. 2. The additions to the covered taxes of a constituent entity for the fiscal year shall include: (a) any amount of covered taxes accrued as an expense in the profit before taxation in the financial accounts; (b) any amount of qualifying loss deferred tax asset that has been used pursuant to Article 23(2); (c) any amount of covered taxes relating to an uncertain tax position previously excluded under paragraph 3, point (d), that is paid in the fiscal year; and (d) any amount of credit or refund in respect of a qualified refundable tax credit that was accrued as a reduction to the current tax expense. 3. The reductions to the covered taxes of a constituent entity for the fiscal year shall include: (a) the amount of current tax expense with respect to income excluded from the computation of qualifying income or loss under Chapter III; (b) any amount of credit or refund in respect of a non-qualified refundable tax credit that was not recorded as a reduction to the current tax expense; (c) any amount of covered taxes refunded or credited to a constituent entity that was not treated as an adjustment to current tax expense in the financial accounts, unless it relates to a qualified refundable tax credit; (d) the amount of current tax expense that relates to an uncertain tax position; and (e) any amount of current tax expense that is not expected to be paid within three years after the end of the fiscal year. 4. For the purpose of computing adjusted covered taxes, where an amount of covered tax is described in more than one point in paragraphs 1, 2 and 3, it shall only be taken into account once. 5. Where, for a fiscal year, there is no net qualifying income in a jurisdiction and the amount of adjusted covered taxes for that jurisdiction is negative and less than an amount equal to the net qualifying loss multiplied by the minimum tax rate (the ‘expected adjusted covered taxes’), the amount equal to the difference between the amount of adjusted covered taxes and the amount of expected adjusted covered taxes shall be treated as an additional top-up tax for that fiscal year. The amount of additional top-up tax shall be allocated to each constituent entity in the jurisdiction in accordance with Article 29(3).

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22. 022 Article 22

    Article 22 Total deferred tax adjustment amount 1. For the purposes of this Article, the following definitions apply: (a) ‘disallowed accrual’ means: (i) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position; and (ii) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to distributions from a constituent entity; (b) ‘unclaimed accrual’ means any increase in a deferred tax liability recorded in the financial accounts of a constituent entity for a fiscal year that is not expected to be paid within the time period set out in paragraph 7 of this Article and which the filing constituent entity annually elects, in accordance with Article 45(2), not to include in the total deferred tax adjustment amount for such fiscal year. 2. Where the tax rate applied for the purpose of computing the deferred tax expense is equal or below the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to Article 21(1), point (b), shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes, subject to the adjustments under paragraphs 3 to 6 of this Article. Where the tax rate applied for the purpose of computing the deferred tax expense is above the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to Article 21(1), point (b), shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes recast at the minimum tax rate, subject to the adjustments under paragraphs 3 to 6 of this Article. 3. The total deferred tax adjustment amount shall be increased by: (a) any amount of disallowed accrual or unclaimed accrual paid during the fiscal year; and (b) any amount of recaptured deferred tax liability determined in a preceding fiscal year that has been paid during the fiscal year. 4. Where, for a fiscal year, a loss deferred tax asset is not recognised in the financial accounts because the recognition criteria are not met, the total deferred tax adjustment amount shall be reduced by the amount that would have reduced the total deferred tax adjustment amount if a loss deferred tax asset for the fiscal year had been accrued. 5. The total deferred tax adjustment amount shall not include: (a) the amount of deferred tax expense with respect to items excluded from the computation of qualifying income or loss under Chapter III; (b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals; (c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset; (d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate; and (e) the amount of deferred tax expense with respect to the generation and use of tax credits. 6. Where a deferred tax asset that is attributable to a qualifying loss of a constituent entity has been recorded for a fiscal year at a rate lower than the minimum tax rate, it may be recast at the minimum tax rate in the same fiscal year, provided that the taxpayer is able to demonstrate that the deferred tax asset is attributable to a qualifying loss. Where a deferred tax asset is increased pursuant to the first subparagraph, the total deferred tax adjustment amount shall be reduced accordingly. 7. A deferred tax liability that is not reversed and whose amount is not paid within the five subsequent fiscal years shall be recaptured to the extent it was taken into account in the total deferred tax adjustment amount of a constituent entity. The amount of the recaptured deferred tax liability determined for the current fiscal year shall be treated as a reduction to the covered taxes in the fifth fiscal year preceding the current fiscal year, and the effective tax rate and top-up tax of that fiscal year shall be recomputed in accordance with Article 29(1). The recaptured deferred tax liability for the current fiscal year shall be the amount of the increase in the category of deferred tax liability that was included in the total deferred tax adjustment amount in the fifth fiscal year preceding the current fiscal year that has not reversed by the end of the last day of the current fiscal year. 8. By way of derogation from paragraph 7, where a deferred tax liability is a recapture exception accrual, it shall not be recaptured even if it is not reversed or paid within the five subsequent years. A recapture exception accrual shall be the amount of tax expense accrued that is attributable to changes in associated deferred tax liabilities, in respect of the following items: (a) cost recovery allowances on tangible assets; (b) cost of a licence or similar arrangement from a government for the use of immovable property or exploitation of natural resources which entails significant investment in tangible assets; (c) research and development expenses; (d) de-commissioning and remediation expenses; (e) fair value accounting on unrealised net gains; (f) foreign currency exchange net gains; (g) insurance reserves and insurance policy deferred acquisition costs; (h) gains from the sale of tangible property located in the same jurisdiction as the constituent entity that are reinvested in tangible property in the same jurisdiction; and (i) additional amounts accrued as a result of accounting principle changes with respect to items listed in points (a) to (h).

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23. 023 Article 23

    Article 23 Qualifying loss election 1. By way of derogation from Article 22, a filing constituent entity may make a qualifying loss election for a jurisdiction according to which a qualifying loss deferred tax asset shall be determined for each fiscal year in which there is a net qualifying loss in that jurisdiction. For that purpose, the qualifying loss deferred tax asset shall be equal to the net qualifying loss for a fiscal year for the jurisdiction multiplied by the minimum tax rate. A qualifying loss election shall not be made for a jurisdiction with an eligible distribution tax system under Article 40. 2. The qualifying loss deferred tax asset determined pursuant to paragraph 1 shall be used in any subsequent fiscal year in which there is net qualifying income for the jurisdiction in an amount equal to the net qualifying income multiplied by the minimum tax rate or, if lower, the amount of qualifying loss deferred tax asset that is available. 3. The qualifying loss deferred tax asset determined pursuant to paragraph 1 shall be reduced by the amount that is used for a fiscal year and the balance shall be carried forward to subsequent fiscal years. 4. Where a qualifying loss election is revoked, any remaining qualifying loss deferred tax asset determined pursuant to paragraph 1 shall be reduced to zero as of the first day of the first fiscal year in which the qualifying loss election is no longer applicable. 5. The qualifying loss election shall be filed with the first top-up tax information return referred to in Article 44 of the MNE group or large-scale domestic group that includes the jurisdiction for which the election is made. 6. Where a flow-through entity which is the ultimate parent entity of an MNE group or of a large-scale domestic group makes a qualifying loss election under this Article, the qualifying loss deferred tax asset shall be computed by reference to the qualifying loss of the flow-through entity after reduction pursuant to Article 38(3).

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24. 024 Article 24

    Article 24 Specific allocation of covered taxes incurred by certain types of constituent entities 1. A permanent establishment shall be allocated the amount of any covered taxes that are included in the financial accounts of a constituent entity and that relate to qualifying income or loss of that permanent establishment. 2. A constituent entity-owner shall be allocated the amount of any covered taxes that are included in the financial accounts of a tax transparent entity and that relate to qualifying income or loss allocated to that constituent entity-owner in accordance with Article 19(4). 3. A constituent entity shall be allocated the amount of any covered taxes included in the financial accounts of its direct or indirect constituent entity-owners under a controlled foreign company tax regime, on their share of the controlled foreign company’s income. 4. A constituent entity that is a hybrid entity shall be allocated the amount of any covered taxes included in the financial accounts of its constituent entity-owner and which relate to qualifying income of the hybrid entity. A ‘hybrid entity’ means an entity treated as a separate person for income tax purposes in the jurisdiction where it is located but as fiscally transparent in the jurisdiction in which its owner is located. 5. A constituent entity that made a distribution during the fiscal year shall be allocated the amount of any covered taxes accrued in the financial accounts of its direct constituent entity-owners on such distribution. 6. A constituent entity that was allocated covered taxes pursuant to paragraphs 3 and 4 in respect of passive income shall include such covered taxes in its adjusted covered taxes in an amount equal to the covered taxes allocated in respect of such passive income. By way of derogation from the first subparagraph, the constituent entity referred to in the first subparagraph shall include in its adjusted covered taxes the amount resulting from the multiplication of the top-up tax percentage for the jurisdiction by the amount of the constituent entity’s passive income that is included under a controlled foreign company tax regime or a fiscal transparency rule where the result is lower than the amount determined under the first subparagraph. For the purposes of this subparagraph, the top-up tax percentage for the jurisdiction shall be determined without regard to covered taxes incurred with respect to such passive income by the constituent entity-owner. Any covered taxes of the constituent entity-owner incurred with respect to such passive income that remains after the application of this paragraph shall not be allocated under paragraphs 3 and 4. For the purposes of this paragraph, ‘passive income’ means the following items of income included in qualifying income to the extent a constituent entity-owner has been subject to tax under a controlled foreign company tax regime or as a result of an ownership interest in a hybrid entity: (a) a dividend or dividend equivalents; (b) interest or interest equivalents; (c) rent; (d) royalty; (e) annuity; or (f) net gains from property of a type that produces income described in points (a) to (e). 7. Where the qualifying income of a permanent establishment is treated as qualifying income of the main entity in accordance with Article 18(5), any covered taxes arising in the jurisdiction where the permanent establishment is located and associated with such income shall be treated as covered taxes of the main entity for an amount not exceeding such income multiplied by the highest tax rate on ordinary income in the jurisdiction where the main entity is located.

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