GLOBAL MINIMUM TAX SERIES – PART 19 Stateless Entities under GloBE Rules

[Amit Jalan]

Friends

At the recently concluded G20 summit earlier this month in India, the OECD in its report to G20 finance ministers and Central Bank Governors stated that “the implementation of the Global Minimum Tax continues to gather speed and we estimate that by 2025 almost 90 per cent of MNEs with revenues above EUR 750 million will be subject to a minimum effective tax rate of 15 per cent in every jurisdiction where they operate”.

To date almost 50 jurisdictions around the world have taken steps to implement the global minimum tax and this includes all of the member states of the European Union.

In this edition of our Global Minimum Tax series we have covered in detail another important aspect, viz. Stateless Entities. We hope this bulletin adds Value in your professional Sphere.

In simply terms, a stateless entity is a constituent entity within the MNE Group that is not considered as a tax resident in any jurisdiction. These entities typically arise in situations where there is a mismatch between the tax laws of different jurisdictions, leading to the entity not being subject to tax in any jurisdiction, i.e. not considered a tax resident and not subject to a covered tax or a qualified domestic minimum top-up tax based on its place of incorporation, place of management, or similar criteria.

Under the GloBE Rules, a Stateless Constituent Entity can be identified in two situations, i.e. under Articles 10.3.2(b) and 10.1(d):

i) Where the Constituent Entity is a Flow-through Entity identified in Article 10.3.2(b) of the GloBE Rules, i.e. neither the jurisdiction where the entity is created nor the jurisdiction where the owners are located recognizes the income as income of a resident taxpayer. For example, a special purpose entity (SPE) created in a tax haven jurisdiction if the SPE is not considered a tax resident in the tax haven jurisdiction and also the owners' home countries do not recognize the SPE's income as income of a resident taxpayer. This can result in the income not being taxed in any jurisdiction, leading to tax avoidance.

ii) Where the Constituent Entity is a Permanent Establishment (“PE”) as per the definition of PE contained in Article 10.1(d) of the GloBE Rules, i.e. a place of business (or a deemed place of business) that is not already described in paragraphs (a) to (c) of the definition of PE in Article 10.1, through which operations are conducted outside the jurisdiction/location of the entity, provided that such jurisdiction exempts the income attributable to such operations (i.e. exempts income generated through foreign operations).

For example, A Co is located in jurisdiction A and conducts activities in jurisdiction B through a person that habitually concludes contracts in the name of A Co. Jurisdiction A exempts the income earned by A Co through the PE. Jurisdiction B does not treat an agent that habitually concludes contracts in the name of its principal as giving rise to a PE under local law and therefore does not tax the PE or the agent. Jurisdictions A and B do not have a Tax Treaty. In this case, paragraph (d) to the definition of PE in Article 10.1 of the GloBE Rules is triggered because jurisdiction A exempts the income attributable to the operations carried out through the PE and Jurisdiction B does not consider it as a PE. Thus, the PE would be a stateless entity for the purposes of the GloBE Rules, meaning that the income of the PE would be subject to the GloBE Rules on a standalone basis without the ability to blend its income with other Constituent Entities located in jurisdiction B. If, however, Jurisdiction B had adopted the definition of a PE of Article 5 of the OECD Model Tax Convention into its domestic law and taxed the income attributable to it, paragraph (b) of Article 10.1 to the definition of PE under the GloBE Rules would have been triggered because a PE exists in jurisdiction B, and in that case the PE would have been a tax resident of Jurisdiction B under the Treaty definition.

Further, paragraph (d) of Article 10.1 to the definition of PE, refers to a place of business (or a deemed place of business) through which operations are conducted outside the jurisdiction where the entity is located and the income attributable to those operations is exempt from tax. This language is intended to ensure that this paragraph only applies where exemption is attributable to the fact that the operations are treated as conducted by the Constituent Entity outside the jurisdiction. For example, if a shareholder of a foreign subsidiary benefits from a foreign dividend exemption (e.g., participation exemption), paragraph (d) of Article 10.1 would not be triggered because the income is not exempted on the grounds that the shareholder is carrying out operations in the other jurisdictions related to the dividend.

Therefore, in the case of stateless PEs, the income and taxes allocated to the PE in accordance with Article 3.4.3 of the GloBE Rules will be treated as stateless income and subject to a separate jurisdictional blending calculation. In this case, the residence jurisdiction is exempting the income on the grounds that the income is attributable to a foreign PE that is not recognised under the laws of another jurisdiction. Therefore, the income becomes “stateless income” under the GloBE Rules because it does not belong to a resident taxpayer or a PE.

Allocation of GloBE Income and Covered Taxes to Stateless Entities

A Stateless Entity is treated as not being located in any territory. The GloBE Rules therefore provides special treatment for Stateless Entities.

Article 5.1 treats the income and taxes allocated to a Stateless Constituent Entity as subject to a stand-alone top-up tax calculation. This is because the income generated by these entities is generally considered "stateless income," meaning it is not treated under the laws of any jurisdiction as income of a resident taxpayer or a permanent establishment (PE). 

For the purpose of calculating the ETR under GloBE Rules, each stateless constituent entity is treated as a single constituent entity located in a separate jurisdiction. This approach ensures that stateless income is subject to a separate jurisdictional blending calculation, addressing concerns related to base erosion and profit shifting (BEPS).

In the case of Stateless PEs, the income and taxes allocated to the PE in accordance with Article 3.4.3 of the GloBE Rules will be treated as stateless income and subject to a separate jurisdictional blending calculation.

Article 5.1.1 of the GloBE Rules specifically provides that each Stateless Constituent Entity shall be treated as a single Constituent Entity located in a separate jurisdiction. It therefore follows that each stateless entity is located in its own separate notional territory and that there is no jurisdictional blending “between stateless entities” and each entity will perform a separate calculation to determine the top-up tax charge.

Stateless entities are also subject to a number of other specific rules e.g. they cannot make a de minimis exclusion election, they are excluded from the Transitional CbCR Safe Harbour, etc.