Finance (No. 2) Act 2023

168 Underlying profits of transparent and reverse hybrid entities

(1) This section applies where a member of a multinational group (“M”) is a flow-through entity.

(2) An entity is a flow-through entity if—

(a) it is regarded as tax transparent in the territory in which it is created, and

(b) it is not subject to a covered tax on its profits in another territory.

(3) A proportion of the underlying profits of M is to be allocated to each entity (“O”) with an ownership interest in M in relation to which condition A or B is met.

(4) The proportion to be allocated to O is equal to the proportional ownership interest O has in M in relation to which condition A or B is met (subject to subsection (7)).

(5) Condition A is that—

(a) O is not regarded as tax transparent in the territory in which O is located,

(b) M is regarded as tax transparent in the territory in which O is located, and

(c) if O’s ownership interest in M is an indirect ownership interest in M—

(i) each entity through which O holds that interest is regarded as tax transparent in the territory in which O is located, and

(ii) this condition is not met in relation to any other entity through which O’s indirect ownership interest in M is held.

(6) Condition B is that—

(a) O is a reverse hybrid entity,

(b) M is regarded as tax transparent in the territory in which O is located, and

(c) if O’s ownership interest in M is an indirect ownership interest—

(i) each entity through which it is held is regarded as tax transparent in the territory in which O is located, and

(ii) neither condition A nor this condition is met in relation to any other entity through which O’s indirect ownership interest in M is held.

(7) Where—

(a) underlying profits of M are allocated to an entity (“H”) as a result of it meeting condition B, and

(b) underlying profits of M are allocated to an entity (“J”) as a result of it meeting condition A in relation to an ownership interest it holds through H,

the underlying profits to be allocated to H are to be reduced by the profits allocated to J.

(8) Where underlying profits of M are allocated to a member of the group of which M is a member, those profits are to be included in the member’s adjusted profits and excluded from the adjusted profits of M.

(9) Where underlying profits of M are allocated to an entity which is not a member of the group of which M is a member, those profits are to be excluded from the adjusted profits of M.

(10) Any amount of M’s underlying profits not allocated to an entity in accordance with this section is to be included in the adjusted profits of M.

(11) For the purposes of this section, an entity (“R”) is a “reverse hybrid entity” if R is regarded as tax transparent in the territory in which it is located and there is a territory—

(a) in which an entity with a direct ownership interest in R is located, and R is regarded in that territory as not being tax transparent, or

(b) in which an entity with an indirect ownership interest in R is located, and—

(i) R is regarded in that territory as not being tax transparent, and

(ii) each entity through which that ownership interest is held is regarded in that territory as tax transparent.