The Substance-based income exclusion is calculated in accordance with the provisions laid down in Article 27 of the proposed Directive.

 

Unless a filing entity of an MNE group elects not to apply the substance-based income exclusion, the net qualifying income for a jurisdiction shall be reduced, for the purpose of calculating the top-up tax, by an amount equal to the sum of the payroll carve-out and the tangible asset carve-out for each constituent entity located in the jurisdiction

 

The substance based income exclusion = the payroll carve-out for each constituent entity located in the jurisdiction + the tangible asset carve-out for each constituent entity located in the jurisdiction

 

The payroll carve-out of a constituent entity located in a jurisdiction

The payroll carve-out of a constituent entity located in a jurisdiction shall be equal to 5%¹ of its eligible payroll costs of eligible employees who perform activities for the MNE group in such jurisdiction, with the exception of eligible payroll costs that are:

(a)   capitalised and included in the eligible tangible asset carve-out base; and

(b)   attributable to income that is excluded in accordance with Article 16 of the proposed Directive (The international shipping income exclusion).

 

Eligible employees shall be deemed to be located in the jurisdiction where they perform activities for the MNE group.

 

¹ With respect to the 5% it should be noted that the proposed Directive contains transitional rules. Based heron the 5% is replaced by the following percentages:

 

 

Constituent entities joining and leaving an MNE group

In the acquisition year, the computation of the eligible payroll costs of the target shall take into account the costs that are reflected in the consolidated financial statements of the ultimate parent entity.

The tangible asset carve-out of a constituent entity

The tangible asset carve-out of a constituent entity located in a jurisdiction shall be equal to 5% of the carrying value of the eligible tangible assets located in the jurisdiction, with the exception of:

(a)   the carrying value of property, including land and buildings, that is held for sale, for lease or for investment;

(b)   the carrying value of tangible assets used to derive income that is excluded in accordance with Article 16 of the proposed Directive (The international shipping income exclusion).

 

The carrying value of eligible tangible assets shall be the average of the carrying value of eligible tangible assets at the beginning and ending of the fiscal year, as accrued in the financial statements of the ultimate parent entity, reduced by any accumulated depreciation, amortisation and depletion and increased by any amount attributable to the capitalisation of payroll expenses.

 

¹ With respect to the 5% it should be noted that the proposed Directive contains transitional rules. Based heron the 5% is replaced by the following percentages:

 

 

Constituent entities joining and leaving an MNE group

The computation of the carrying value of the eligible tangible assets of the target shall be adjusted, where applicable, in proportion to the period of time in which the target was a member of the MNE group during the acquisition year.

 

Permanent establishment

The eligible payroll costs and eligible tangible assets of a constituent entity which is a permanent establishment shall be those that are included in its separate financial accounts in accordance with Article 17, Paragraph 1 and 17, Paragraph 2 provided that they are located in the same jurisdiction as the permanent establishment (See Step 3).

 

The eligible payroll costs and eligible tangible assets of a permanent establishment shall not be taken into account by the main entity.

 

Where the income of a permanent establishment was excluded pursuant to Article 18, Paragraph 1 (“Allocation and computation of the qualifying income or loss of a flow-through entity”, See Step 3) and Article 36, Paragraph 5 (“Ultimate parent entity that is a flow-through entity”) the eligible payroll costs and eligible tangible assets of such permanent establishment shall be excluded in the same proportion from the computation under this Article for the MNE group.

 

Flow-through entity

Eligible payroll costs of eligible employees paid by, and eligible tangible assets owned by, a flow-through entity that are not allocated to a permanent establishment shall be allocated to:

(a)   the constituent owners of the flow-through entity, in proportion to the amount allocated to them pursuant to Article 18, Paragraph 4 (“Allocation and computation of the qualifying income or loss of a flow-through entity”, See Step 3), provided that the eligible employees and eligible tangible assets are located in the jurisdiction of the constituent entity-owners; and

(b)   the flow-through entity if it is the ultimate parent entity, reduced in proportion to the income excluded from the computation of the qualifying income of the flow-through entity pursuant to Article 36, Paragraph 1 and 36, Paragraph 2 (“Ultimate parent entity that is a flow-through entity”), provided that the eligible employees and eligible tangible assets are located in the jurisdiction of the flow-through entity.

 

All other eligible payroll costs and eligible tangible assets of the flow-through entity shall be excluded from the substance-based income exclusion computations of the MNE Group.

 

Stateless constituent entities

The substance-based income exclusion of the stateless constituent entities located in a jurisdiction shall be computed, for each fiscal year, separately from the substance-based income exclusion of all other constituent entities located in the same jurisdiction.

 

Investment entities

The substance-based income exclusion shall not include the payroll carve-out and the tangible asset carve-out of investment entities.

 

The jurisidictional substance-based income exclusion

The jurisdictional substance-based income exclusion is the sum the substance-based income exclusions of all of the constituent entities in a jurisdiction as you computed them in the steps above.

 

 

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