1. At the election of the filing constituent entity, a constituent entity-owner of an investment entity may apply a taxable distribution method with respect to its ownership interest in the investment entity, provided that the constituent entity-owner is not an investment entity and can be reasonably expected to be subject to tax on distributions from the investment entity at a tax rate that equals or exceeds the minimum tax rate.
2. Under a taxable distribution method, distributions and deemed distributions of the qualifying income of an investment entity shall be included in the qualifying income of the constituent entity-owner that received the distribution.
The amount of covered taxes incurred by the investment entity that is creditableagainst the tax liability of the constituent entity-owner arising from the distributionshall be included in the qualifying income and adjusted covered taxes of the constituent entity-owner that received the distribution.
The share of the constituent entity-owner in the undistributed net qualifying income of the investment entity arising in the third year preceding the fiscal year (the “tested year”) shall be treated as qualifying income of that investment entity for the fiscal year. The amount equal to such qualifying income multiplied by the minimum tax rate shall be treated as top-up tax of a low-taxed constituent entity for the fiscal yearfor the purpose of Chapter II.
The qualifying income or loss of an investment entity and the adjusted covered taxes attributable to such income for the fiscal year shall be excluded from the computation of the effective tax rate in accordance with Chapter V and with Articles 39(1) to 39(4), except for the amount of covered taxes as referred to in the second subparagraph.
3. The undistributed net qualifying income of an investment entity for a fiscal year shall be the amount of qualifying income of that investment entity for the tested yearreduced, up to zero, by:
(a) the covered taxes of the investment entity;
(b) distributions and deemed distributions to shareholders that are not investment entities during the period starting from the beginning of the third year preceding the fiscal year and the end of the fiscal year (the “testing period”);
(c) qualifying losses arising during the testing period; and
(d) any residual amount of qualifying losses that has not already reduced the undistributed net qualifying income of that investment entity for a previous tested year (the “investment loss carry-forward”).
The undistributed net qualifying income of an investment entity shall not be reduced by distributions or deemed distributions that already reduced theundistributed net qualifying income of that investment entity for a previous tested year in application of point (b) of the first subparagraph.
The undistributed net qualifying income of an investment entity shall not be reduced by the amount of qualifying losses that already reduced the undistributed net qualifying income of that investment entity for a previous tested year in application of point (c) of the first subparagraph.
4. For the purpose of this article, a deemed distribution shall be deemed to arise when a direct or indirect ownership interest in the investment entity is transferred to an entity that does not belong to the MNE group and which is equal to the share of the undistributed net qualifying income attributable to such ownership interest on the date of such transfer, determined without regard to the deemed distribution.
5. The election shall be made in accordance with Article 43(1).
If the election is revoked, the share of the constituent entity-owner in the undistributed net qualifying income of the investment entity for the tested year preceding the revocation shall be treated as qualifying income of the investment entity for the fiscal year. The amount equal to such qualifying income multiplied by the minimum tax rate shall be treated as top-up tax of a low-taxed constituent entity for the fiscal year for the purpose of Chapter II.
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