Finance (No. 2) Act 2023 (c. 30)

Part 3 U.K. Multinational top-up tax

Chapter 4 U.K. Calculation of adjusted profits of members of a multinational group

Dealing with transparency and entities subject to qualifying dividend regime U.K.

168 Underlying profits of transparent and reverse hybrid entities U.K.

(1) This section applies where a member of a multinational group (“M”) is a flow-through entity.

(2) An entity is a flow-through entity if—

(a) it is regarded as tax transparent in the territory in which it is created, and

(b) it is not subject to a covered tax on its profits in another territory [F1 as a result of being tax resident in that territory].

(3) A proportion of the underlying profits of M is to be allocated to each entity [F2 or individual] (“O”) with an ownership interest in M in relation to which condition A or B is met.

(4) The proportion to be allocated to O is equal to the proportional ownership interest O has in M in relation to which condition A or B is met (subject to subsection (7)).

(5) Condition A is that—

(a) O is not regarded as tax transparent in the territory in which O is located,

(b) M is regarded as tax transparent in the territory in which O is located, and

(c) if O’s ownership interest in M is an indirect ownership interest in M—

(i) each entity through which O holds that interest is regarded as tax transparent in the territory in which O is located, and

(ii) this condition is not met in relation to any other entity through which O’s indirect ownership interest in M is held.

(6) Condition B is that—

(a) O is [F3 an entity that is] a reverse hybrid entity,

(b) M is regarded as tax transparent in the territory in which O is located, and

(c) if O’s ownership interest in M is an indirect ownership interest—

(i) each entity through which it is held is regarded as tax transparent in the territory in which O is located, and

(ii) neither condition A nor this condition is met in relation to any other entity through which O’s indirect ownership interest in M is held.

(7) Where—

(a) underlying profits of M are allocated to an entity (“H”) as a result of it meeting condition B, and

(b) underlying profits of M are allocated to an entity (“J”) as a result of it meeting condition A in relation to an ownership interest it holds through H,

the underlying profits to be allocated to H are to be reduced by the profits allocated to J.

(8) Where underlying profits of M are allocated to a member of the group of which M is a member, those profits are to be included in the member’s adjusted profits and excluded from the adjusted profits of M.

[F4 (9) Where underlying profits of M—

(a) are allocated to an individual or an entity that is not a member of the group of which M is a member, or

(b) would be allocated to such an individual or entity if M were regarded as tax transparent in the territory in which the individual or entity is located,

those profits are to be excluded from the adjusted profits of M.]

(10) Any amount of M’s underlying profits not allocated to an entity [F5 or an individual] in accordance with this section is to be included in the adjusted profits of M.

(11) For the purposes of this section, an entity (“R”) is a “reverse hybrid entity” if R is regarded as tax transparent in the territory in which it [F6 was created, R is not tax resident in any territory] and there is a territory—

(a) in which an entity with a direct ownership interest in R is located, and R is regarded in that territory as not being tax transparent, or

(b) in which an entity with an indirect ownership interest in R is located, and—

(i) R is regarded in that territory as not being tax transparent, and

(ii) each entity through which that ownership interest is held is regarded in that territory as tax transparent.

[F7 (12) For the purposes of applying this section in relation to a multinational group whose ultimate parent is a flow-through entity, the ultimate parent is to be treated as if it were not regarded as tax transparent in the territory in which it is located.]

Textual Amendments

F1 Words in s. 168(2)(b) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(2)

F2 Words in s. 168(3) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(3)

F3 Words in s. 168(6)(a) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(4)

F4 S. 168(9) substituted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(5)

F5 Words in s. 168(10) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(6)

F6 Words in s. 168(11) substituted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(7)

F7 S. 168(12) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 14(8)