1.  A permanent establishment shall be allocated the amount of any covered taxes that are included in the financial accounts of a constituent entity and that relate to qualifying income or loss of the permanent establishment.

2.  A constituent entity-owner shall be allocated the amount of any covered taxes that are included in the financial accounts of a tax transparent entity and that relate to qualifying income or loss allocated to a constituent entity-owner in accordance with Article 18, Paragraph 4.

3.  A constituent entity shall be allocated the amount of any covered taxes included in the financial accounts of its direct or indirect constituent entity-owners under a controlled foreign company tax regime, to the extent that those covered taxes relate to qualifying income or loss of the constituent entity.

4.  A constituent entity that is a hybrid entity shall be allocated the amount of any covered taxes included in the financial accounts of its constituent entity-owner and which relates to qualifying income of the hybrid entity.

A hybrid entity means an entity treated as a separate person for income tax purposes in the jurisdiction where it is located but as fiscally transparent in the jurisdiction in which its owner is located;

5.  A constituent entity that made a distribution during the fiscal year shall be allocated the amount of any covered taxes accrued in the financial accounts of its direct constituent entity-owners on such distributions.

6.  A constituent entity, which was allocated covered taxes pursuant to paragraphs 3 and 4 in respect of passive income, shall include such covered taxes in an amount equal to the covered taxes allocated in respect of such passive income.

By way of derogation from the first subparagraph, the constituent entity shall include the amount resulting from the multiplication of the top-up tax percentage for the jurisdiction by the amount of the constituent entity’s passive income that is included under a controlled foreign company tax regime or a fiscal transparency rule where the result is lower than the amount determined under the first subparagraph. For the purpose of this subparagraph, the top-up tax percentage for the jurisdiction shall be determined without regard to covered taxes incurred with respect to such passive income by the constituent entity-owner.

Any covered taxes of the constituent entity-owner incurred with respect to such passive income that remains after the application of this paragraph shall not be allocated under paragraph 3 and 4.

For the purpose of this paragraph, passive income means the following items of income to the extent that they have been subject to tax under a controlled foreign company tax regime or because the entity paying such income is treated as a hybrid entity:

(a)   a dividend or dividend equivalents;

(b)   interest or interest equivalents;

(c)   rent;

(d)   royalty;

(e)   annuity; or

(f)    net gains from property of a type that produces income described in points (a) to (e).

7.  Where the qualifying income of a permanent establishment is treated as qualifying income of the main entity in accordance with Article 17, Paragraph 5, any covered taxes arising in the jurisdiction where the permanent establishment is located and associated with such income shall be treated as covered taxes of the main entity for an amount not exceeding such income multiplied by the highest domestic tax rate on ordinary income in the jurisdiction where the main entity is located.

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