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 750 000 000 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.
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 ( 8 ) ) 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 75 000 000 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.
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.
