GLOBAL MINIMUM TAX SERIES – Rules on Corporate Restructurings and Holding Structures

[Amit Jalan]

Friends According to the OECD website, Pillar Two will represent “a radical shift in the tax landscape”. Strategic tax planning is already too complicated and for multinational companies, with the challenges that BEPS Pillar 1 and Pillar 2 pose in the coming year, it is about to get even more complex. In our previous four editions on the Global Minimum Tax series, we discussed on transition rules that applies in the first year that an MNE Group implements GloBE Rules, assessing the threshold requirements for applicability of Pillar 2, mechanisms to determine applicability of GloBE Rules to an MNE Group where the Group or its constituent entities prepare financials in currencies other than Euro or where the Group or its constituent entities are not required to or do not prepare consolidated financial statements. In this edition and in the next few ones to come, we will discuss in detail on special rules that deal with corporate restructurings (including mergers, acquisitions, and demergers) as well as Articles that address the application of the GloBE Rules to certain holding structures such as JV investments and Multi-Parented MNE Groups. We hope this bulletin adds Value in your professional Sphere. Chapter 6 contains rules relating to acquisitions, disposals and Joint Ventures, summarised as below:

• Article 6.1 supplements Article 1.1 by providing further rules to assess the consolidated revenue threshold for determining the applicability of the GloBE Rules to an MNE Group and its constituent entities in case of merger and demerger transactions that took place in the prior four-year period.
• Article 6.2 provides special rules for the application of the GloBE Rules that apply when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year.
• Article 6.3 provides special rules for the treatment of transfers of assets and liabilities including as part of a reorganisation.
• Article 6.4 brings certain Joint Ventures within the scope of the GloBE Rules.
• Article 6.5 provides special rules for Multi-Parented MNE Groups. We have covered below in detail, Article 6.1 which provides rules to assess revenue thresholds for determining the applicability of the GloBE Rules to an MNE Group and its constituent entities in case of mergers, acquisitions and demergers. As set out in Article 1.1 (that we covered in our 4th edition of this series), the GloBE Rules apply to MNE Groups with consolidated revenue of EUR 750 million or more in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year. Article 6.1 complements this four-year revenue test in three scenarios:

a) Where two or more Groups merge to form a single Group in any of the four Fiscal Years prior to the tested Fiscal Year. In this case, the consolidated revenue threshold of the MNE Group for any Fiscal Year prior to the merger is deemed to be met for that year if the sum of the revenue included in each of their Consolidated Financial Statements for that year is equal to or greater than EUR 750 million. It is clarified that the Group’s pre-merger revenues are not adjusted for transactions that occurred between the Groups in the preceding years, although after the merger, the transactions between Entities will be eliminated in consolidation. For instance, assume that Group-A and Group-B each separately reported consolidated revenues of €400m, €300m, €300m and €400m for years 1 to 4 respectively. Group-A and Group-B merge in year 5 into the AB MNE Group. Under these facts, the AB MNE Group is subject to the GloBE Rules in year 5 because in two of the four preceding Fiscal Years the sum of their consolidated revenue included in each of their Consolidated Financial Statements was €750m or more (i.e. in year 1, the combined revenue was of €800m and in year 4, the combined revenue was of €800m).

b) where a single Entity that is not a member of any Group (target) acquires another Entity or a Group (acquirer), or vice versa. In this case, the consolidated revenue threshold of the MNE Group is deemed to be met for that year if the sum of the revenue included in each of their Financial Statements or Consolidated Financial Statements for that year is equal to or greater than EUR 750 million. It is worth to note that this para addresses the following scenarios by the use of two parenthetical labels – target and acquirer – that are intended solely to facilitate the drafting of a complex sentence:

i. where two single Entities that are not part of a Group are brought together to form a Group and, prior to this merger, only individual (i.e. not consolidated) financial statements were prepared by these entities; and

ii. where a single Entity that does not prepare consolidated financial statements becomes part of a Group.

iii. As part of the same arrangement as above, two or more Groups merge with one Entity; one Group merges with two or more Entities; and two or more Groups merge with two or more Entities. The application of consolidated revenue threshold in all of the above cases is by aggregating the combined revenue of the Entity(ies) and Group(s) of a given year for purposes of the four year revenue test. In the case of two single Entities that come together to form a Group, the revenue of each Entity (as reflected in the financial statements of each of the Entities for the prior Fiscal Years) is aggregated for the purposes of applying the consolidated revenue threshold. In the case of an Entity that joins a Group, the revenue included in that Entity’s financial statements for a given year must be added to the consolidated revenue of the Group for the same year. If the previous fiscal periods of the target and acquirer do not align, the revenues of the Fiscal Years should be aggregated by taking the revenues of fiscal periods that end with or within the fiscal period that the Group uses after the Entities come together. For example, an MNE Group that uses a calendar year as its Fiscal Year acquires, on 1 January 2023, an Entity that uses a fiscal period that ends on 30 September as its Fiscal Year. The MNE Group continues to use the calendar year as its Fiscal Year after the acquisition. In this scenario, the revenues of the acquired Entity for the Fiscal Years ending 30 September 2022, 2021, 2020, and 2019 are combined with the revenues of the MNE Group for the four preceding Fiscal Years ending 31 December 2022, 2021, 2020, and 2019. The Entity’s revenues for the period between 1 October 2022 and 31 December 2022 (which would have been included in the financial statements of that Entity in the following year if it was not acquired) are not included in the computation of the MNE Group’s revenue for the calendar years 2022 or 2023 c) where an MNE Group within the scope of the GloBE Rules demerges into two or more Groups (each a demerged Group). In this case, the consolidated revenue threshold is deemed to be met by a demerged Group:

i. with respect to the first tested Fiscal Year ending after the demerger, if the demerged Group has annual revenues of EUR 750 million or more in that year;

ii. with respect to the second to fourth tested Fiscal Years ending after the demerger, if the demerged Group has annual revenues of EUR 750 million or more in at least two of the Fiscal Years following the year of the demerger This para applies where the MNE Group is within the scope of the GloBE Rules in the Fiscal Year that the demerger takes place. The rule (i) in this para is intended to ensure that each Group resulting from the demerger of the in-scope MNE Group, that meet the revenue threshold in the first tested fiscal year after the demerger, continue to remain subject to the GloBE Rules. This means that instead of applying a test that considers previous four fiscal years, this rule is triggered for each demerged MNE Group that has annual revenues of EUR 750 million or more in the first Fiscal Year tested after the demerger. For example, Group-A’s Fiscal Year is the same as the calendar year. The UPE of Group-A demerged subgroup-B on 30 June of Year-1 resulting in the creation of GroupB. The Fiscal Year of Group-A ends on the 31 December of Year-1. In this case, rule (i) of this para tests Group-A’s consolidated revenue for Year-1 because it is the first tested Fiscal Year that ends after the demerger. If Group-B adopts or retains the calendar year as its Fiscal Year, then its first tested Fiscal Year that ends after the demerger will be 31 December of Year-1. However, because Group-B’s first tested Fiscal Year is composed of a period other than 12 months, the EUR 750 million threshold has to be adjusted proportionately consistent with Article 1.1.2. The rule (ii) of this para provides the rule for the second to fourth tested Fiscal Years after a demerger. It states that the consolidated revenue threshold set out in Article 1.1 is deemed to be met by a demerged Group if it has annual revenues of EUR 750 million or more in at least two Fiscal Years following the demerger. For example, a demerged Group meets the test in the second Fiscal Year (i.e. the tested Fiscal Year), if it has consolidated revenues of EUR 750 million or more in Fiscal Year 1 (as per rule (i) of this para explained above) and Year 2 following the demerger. For the purposes of the GloBE Rules, a merger is any arrangement where:

a) all or substantially all of the Group Entities of two or more separate Groups are brought under common control such that they constitute Group Entities of a combined Group; or

b) an Entity that is not a member of any Group is brought under common control with another Entity or Group such that they constitute Group Entities of a combined Group. For the purposes of the GloBE Rules, a demerger is any arrangement where the Group Entities of a single Group are separated into two or more Groups that are no longer consolidated by the same Ultimate Parent Entity.