Legalize / United Kingdom / Public General Act

Finance (No. 2) Act 2023

Type Public General Act

Publication 2023-07-11

Last updated 2025-05-01

State In force

Department Statute Law Database

Source legislation.gov.uk

articles Not indexed

Reform history JSON API

(b) it is a pension services entity.

(2) An entity is a “pension services entity” if it is an entity established and operated exclusively or almost exclusively—

(a) to invest funds for the benefit of an entity falling with the description in subsection (1)(a), or

(b) to carry out activities that are ancillary to the regulated activities carried out by an entity falling with that description, provided that the entities are members of the same group.

Investment funds and investment entities

236

(1) An “investment fund” is an entity that meets all of the following conditions—

(a) it is designed to pool assets (which may be financial and non-financial) from a number of investors, at least some of which are not connected;

(b) it invests in accordance with a defined investment policy;

(c) it operates with a view to allowing its investors to reduce transaction, research, and analytical costs, or to spread risk collectively;

(d) it is primarily designed to generate investment income or gains, or protection against a particular or general event or outcome;

(e) investors have rights to the assets of the fund, or to income earned on those assets, based on the contributions made by those investors;

(f) the entity, or its management, is subject to a regulatory regime, that includes anti-money laundering and investor protection regulation, of—

(i) the territory in which the entity is established or managed, or

(ii) in the case of a permanent establishment, the territory in which the main entity is established or managed;

(g) it is managed by an investment management professional on behalf of the investors.

(2) An “insurance investment entity” is an entity that meets all of the following conditions—

(a) the entity is not an investment fund under subsection (1), but would be an investment fund if it were designed to pool assets from more than one investor or those investors were required not to be connected;

(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the income or gains the entity is designed to generate are intended to offset liabilities under insurance or annuity contracts;

(d) no person other than members of the group has ownership interests in the entity;

(e) regulated entities hold 100% of the ownership interests in it (see section 244 for how to calculate this).

(2A) An entity is a regulated entity if—

(a) the entity is subject to a regulatory regime in the territory in which it is established or managed, and

(b) that regime is specific to persons engaged in the business of entering into insurance or annuity contracts or of performing activities ancillary to such business.

(3) An entity is an investment entity if it is—

(a) an investment fund,

(b) a UK REIT or an overseas REIT equivalent,

(i) that is 95% owned by one or more entities falling within paragraph (a) or (b), and

(ii) whose activities consist, wholly or almost wholly, of the holding of assets or the investment of funds for the benefit of those owners,

(d) an entity—

(i) that is 85% owned by one or more entities falling within paragraph (a) or (b), and

(ii) whose income is wholly or almost wholly excluded dividends or excluded equity gains (or a mixture of both), or

(e) an insurance investment entity.

(4) For the purposes of subsection (3) references to an entity being 95% or 85% owned by one or entities falling within paragraph (a) or (b) of that subsection is to those entities together having at least that percentage of the ownership interests in that entity.

Intermediate and partially-owned parent members

237

(1) A member of a multinational group is a partially-owned parent member of that group if—

(a) it is not a permanent establishment, investment entity or the ultimate parent,

(b) it has (directly or indirectly) an ownership interest in another member of the group, and

(c) more than 20% of the ownership interests that represent an entitlement to a share of the profits of the member are held by persons that are not members of the group.

(2) A member of a multinational group is an intermediate parent member of the group if—

(a) it is not a permanent establishment, investment entity, a partially-owned parent member or the ultimate parent, and

(b) it has (directly or indirectly) an ownership interest in another member of the group.

Tax transparency of entities

238

An entity is regarded as tax transparent in a territory to the extent that the territory treats the income, expenditure, profits or losses of the entity, for the purposes of covered taxes, as the income, expenditure, profits or losses of the direct owner of the entity in proportion to its interest in the entity.

Provision relating to location of entities

Location of entities

239

(1) The normal rule for determining, for the purposes of this Part, the territory in which an entity is located is that—

(a) if it is tax resident in a territory based on its place of management or place of creation, or based on similar criteria, it is located in that territory, or

(b) if it is not tax resident in any territory based on such criteria, it is located in the territory in which it was created.

(2) But subsection (1) does not apply to a flow-through entity or a permanent establishment (as to which, see section 240).

(3) Where, in an accounting period, an entity is tax resident based on its place of management, place of creation or similar criteria in more than one territory and—

(a) all of those territories are party to a tax treaty, and

(b) for the purposes of the treaty the entity is deemed resident in one of those territories,

the entity is treated as located in that territory for that period.

(4) Otherwise, where an entity is tax resident in an accounting period based on its place of management, place of creation or similar criteria in more than one territory—

(a) if the entity has accrued more covered taxes in an accounting period in one of those territories than in the others, ignoring any taxes accrued in accordance with a controlled foreign company tax regime, it is to be treated as located in that territory for that period,

(b) if paragraph (a) does not apply and the entity has a greater qualifying substance based income exclusion amount in one of those territories than in the others, it is to be treated as located in that territory for that period, or

(i) if the entity is the ultimate parent of a multinational group, it is to be treated as being located in the place where it was created for that period, or

(ii) otherwise, the entity is a stateless entity for that period.

(5) For the purposes of subsection (4)(b) “the qualifying substance based income exclusion amount” for an entity for a period in a territory is—

(a) if the substance based income exclusion is calculated for that period for that territory, the sum of the payroll carve-out amount and the tangible asset carve-out amount as would be determined under section 195 (1) for the entity for that period if the entity were located in that territory, and

(b) if the substance based income exclusion is not calculated for that period for that territory, nil.

(6) Where—

(a) an entity is not (ignoring this subsection) subject to Pillar Two IIR tax within the meaning of section 128,

(b) it is tax resident based on its place of management, place of creation or similar criteria in the United Kingdom,

(d) if it were located in the United Kingdom, it would be a responsible member of a multinational group,

the entity is instead to be treated as located in the United Kingdom for the purposes of sections 122 , 128 and 129 of this Part (but not otherwise).

(7) For the purposes of this Part—

(a) a “stateless entity” is to be treated as not being located in any territory;

(b) where an entity’s location changes during an accounting period, it is to be treated as being located in the territory it was located, or was treated as being located, at the start of that period.

Location of flow-through entities and permanent establishments

240

(1) Where a flow-through entity is the ultimate parent of a multinational group, or would be a responsible member of a multinational group if the entity were located in the territory in which it is created, the entity is treated as located in the territory in which it is created.

(2) Any other flow-through entity is a stateless entity.

(3) A permanent establishment that is a permanent establishment falling within paragraph (a) of section 232 (2) (entity treated as permanent establishment in accordance with tax treaty) is located in the territory where it is treated as a permanent establishment in accordance with the tax treaty in accordance with which it is treated as a permanent establishment.

(4) A permanent establishment that is a permanent establishment falling within paragraph (b) of section 232 (2) (permanent establishment taxed on similar basis to residents in absence of tax treaty) is located in the territory where it is subject to net basis taxation based on its business presence.

(5) A permanent establishment that is a a permanent establishment falling within paragraph (c) of section 232 (2) (permanent establishment located in territory without corporate income tax) is located in the territory in which it is situated.

(6) A permanent establishment that is a permanent establishment falling within paragraph (d) of section 232 (2) (other permanent establishments) is a stateless entity.

Pillar Two territories

241

(1) In this Part “Pillar Two territory” means the United Kingdom and every other territory specified as such in , or in accordance with, regulations made by the Treasury.

(1A) Regulations may provide for the specification of a territory to be made by notice published by the Commissioners for His Majesty’s Revenue and Customs in accordance with the regulations.

(2) Regulations , or a notice, may only specify a territory as a Pillar Two territory if the appropriate authority considers that provisions which implement the provisions of the Pillar Two rules relating to top-up tax under the IIR (within the meaning of those rules)—

(a) have effect under the law of that territory, or

(b) will have effect under the law of that territory on or before the specification has effect.

(2A) The “appropriate authority” means—

(a) in relation to the specification of a territory in regulations, the Treasury, or

(b) in relation to the specification of a territory made by notice, the Commissioners for His Majesty’s Revenue and Customs.

(3) Regulations under this section may provide for the specification of a territory ... to have effect from a time before the territory was specified (but may not provide for the specification of a territory to cease to have effect in relation to accounting periods commencing before the regulations are made).

(4) A territory outside the United Kingdom is to be treated as a Pillar Two territory for the purposes of any accounting period that concluded before the first regulations under this section have been made, if it is a territory in which a tax applies for that accounting period—

(a) that is a Qualified IIR for the purposes of the Pillar Two rules, or

(b) that it is reasonable to conclude is likely to be a Qualified IIR for the purposes of those rules.

Ownership of entities

Ownership interests and controlling interests

242

(1) In this Part “ownership interest” means a direct ownership interest or an indirect ownership interest.

(2) An entity or an individual (“A”) has a direct ownership interest in an entity (“B”) if—

(a) A has an interest (whether by way of shares, other security or otherwise) that gives rise to a share of the profits, capital or reserves of B or of a permanent establishment of B (whether on the making of a distribution of profits, winding up or otherwise), and

(b) that interest would, ignoring any requirement to consolidate the assets, liabilities, income, expenses and cash flows of B in the consolidated financial statements of A, be accounted for as equity in those statements.

(3) An entity or an individual (“C”) has an indirect ownership interest in an entity (“D”) if C has a direct ownership interest in—

(a) an entity that has a direct ownership interest in D, or

(b) an entity that has (as a result of the single or repeated application of this subsection) an indirect ownership interest in D.

(4) An entity (“R”) has a controlling interest in another entity (“S”) if condition A or B is met.

(5) Condition A is that as a result of an ownership interest R has in S—

(a) R is required to consolidate the assets, liabilities, income, expenses and cash flows of S on a line-by-line basis in accordance with an acceptable ... accounting standard, or

(b) R would have been required to do so if R had prepared consolidated financial statements.

(6) Condition B is that S is a permanent establishment of R.

Calculating percentage ownership interests of a specific entity or individual

243

(1) For the purpose of determining the percentage ownership interests in an entity (“A”) held by a specific entity or individual (“B”)—

(a) ignore any indirect ownership interest not held by B, and

(b) where B has an indirect ownership interest in A, reduce the direct ownership interest from which it is derived by the amount of that indirect ownership interest.

(2) But this section does not apply for the purpose of any provision that requires the calculation of direct ownership interests only.

Calculating percentage ownership interests of a class

244

(1) For the purpose of determining the percentage of ownership interests in an entity (“A”) held by a class of entities (“B”)—

(a) ignore any indirect ownership interest required to be ignored as described in subsection (2), and

(b) reduce any percentage direct ownership interest required to be reduced in accordance with subsection (3).

(2) An indirect ownership interest is to be ignored if—

(a) it is an indirect ownership interest held by an individual or by an entity that is not a member of B, or

(b) it is an indirect ownership interest held by a member of B through another entity that is a member of B.

(3) Where a member of B holds an indirect ownership interest in A solely through an entity, or entities, that are not members of B, the direct ownership interest from which it is derived is to be reduced by the amount of that indirect ownership interest.

(4) This section does not apply—

(a) for the purpose of any provision that requires the calculation of direct ownership interests only, or

(b) for the purposes of section 127 (6)(a) and (7)(a) (whether an entity is 95% or 85% owned by qualifying excluded entities).

Calculating percentage ownership interests: excluded entities

245

(1) For the purpose of determining, under section 127 (6)(a) and (7)(a), the percentage of ownership interests in an entity (“A”) held by qualifying excluded entities—

(a) ignore any indirect ownership interest apart from ownership interests held solely through one or more qualifying service entities or qualifying exempt income entities, and

(b) ignore any direct or indirect ownership interest required to be ignored as described in subsection (2).

(2) Where an individual or an entity holds an indirect ownership interest in A solely through an entity, or entities, that are qualifying service entities or qualifying exempt income entities, each direct and indirect ownership interest from which it is derived is to be ignored.

Calculating percentage direct and indirect ownership interests

246

(1) To determine the percentage of direct ownership interest an entity or individual (“E”) has in an entity (“F”)—

(a) add together the proportional entitlement of E to the following types of interest that are relevant—

(i) an interest that gives rise to a share of profits of F,

(ii) an interest that gives rise to a share of the capital of F, and

(iii) an interest that gives rise to a share of the reserves of F, and

(b) if—

(i) F issues all of those types of interest and all of those types are relevant, divide the result of paragraph (a) by 3, or

(ii) F only issues 2 of the relevant types of interest or there are only 2 types of interest that are relevant and F issues both of them, divide the result of paragraph (a) by 2.

(2) For the purposes of subsection (1)—

(a) where a provision under which a percentage of ownership interests is to be determined refers to types of interest mentioned in those sub-paragraphs, the types referred to are “relevant”, and

(b) where such a provision does not refer to types of interest mentioned in sub-paragraphs (i) to (iii) of subsection (1)(a), all of those types of interest are “relevant”.

(3) To determine the percentage indirect ownership interest an entity or individual (“G”) has in an entity (“H”)—

(a) determine the percentage indirect ownership interest arising as a result of each stack through which it has an indirect ownership interest in H, and

(b) add those percentage indirect ownership interests for those stacks together.

(4) For the purposes of subsection (3) a “stack” means a chain of entities through which G has an indirect ownership interest in H which is comprised of an entity (“J”) which has a direct ownership interest in H and—

(a) where G has a direct ownership interest in J, G, or

(b) where G does not have a direct ownership interest in J—

(i) G,

(ii) an entity (“K”) which has a direct ownership interest in J and that G has a direct or indirect ownership interest in, and

(iii) where G does not have a direct ownership interest in K, an entity which has a direct ownership interest in K and that G has a direct or indirect ownership interest in, and so on until an entity is reached that G has a direct ownership interest in.

(5) To determine G’s percentage indirect ownership interest in H arising as a result of a stack—

(a) determine, in accordance with subsection (1)—

(i) J’s percentage direct ownership interest in H, and

(ii) the percentage direct ownership interest each other member of the stack has in the member of the stack it has a direct ownership interest in, and

(b) multiply together the percentage direct ownership interests determined under paragraph (a).

Timing of transfers of interests

247

(1) Where ownership interests in an entity are transferred from one entity or individual to another entity or individual, that transfer is to be treated as effective at the earlier of—

(a) the time when the obligations of the parties to the transfer necessary to effect the transfer have been met, and

(b) the time when any of the substantive consideration for the transfer has been provided,

(instead of at any earlier time when the transfer is effective).

(2) In subsection (1)(b) the reference to “substantive consideration” means any amount of the consideration for the transfer other than any amount provided before the transfer which would not be refundable if the transfer did not take place as a result of the transferee not meeting its obligations under the arrangements to make the transfer.

Exclusion of indirect interests held through ultimate parent

248

For the purposes of determining whether an entity or individual has an indirect ownership interest in a member of a multinational group (other than the ultimate parent), ignore any indirect interests arising only as a result of an ownership interest in the ultimate parent.

Financial statements and accounting period

Consolidated financial statements

249

(1) The consolidated financial statements of an entity are—

(a) where the entity is not the ultimate parent of a consolidated group whose only members are that entity and its permanent establishments, the financial statements prepared by the entity in accordance with acceptable accounting standards in which the assets, liabilities, income, expenses and cash flows of that entity and the entities it has a controlling interest in are presented as those of a single economic unit,

(b) where the entity is the ultimate parent of a consolidated group whose only members are that entity and its permanent establishments, the financial accounts of that entity that are prepared in accordance with an acceptable accounting standard,

(c) where the entity has prepared statements that would fall within paragraph (a) or (b) but they were not prepared in accordance with an acceptable accounting standard, those statements but adjusted to prevent material competitive distortions, or

(d) where no statements were prepared falling within paragraphs (a) to (c), the statements that would have been prepared (whether or not the entity was required to prepare such statements) in accordance with an authorised accounting standard that is either—

(i) an acceptable accounting standard, or

(ii) a financial accounting standard whose application is adjusted to prevent material competitive distortions.

(2) But subsection (1)(d) is not to be taken as imposing a requirement to consolidate entities where that is not required, or is not permitted, by the authorised accounting standard that is used as the basis for the statements that would have been prepared.

(3) “Authorised accounting standard” in relation to an entity means a set of generally acceptable accounting principles permitted by the body responsible for prescribing, establishing or accepting accounting standards for financial reporting purposes in the territory the entity is located in.

(4) There are “competitive distortions” in accounts not prepared in accordance with an acceptable accounting standard if the result of the application of one or more specific principles or procedures under the standard under which it was prepared results in differences between—

(a) the treatment of items in those accounts, and

(b) the treatment of those items in accounts prepared in accordance with the corresponding principles or procedures under international financial reporting standards.

(5) Competitive distortions are “material” if the sum of the differences between the treatment of items in the accounts referred to in subsection (4) exceeds 75 million euros.

Acceptable accounting standards

250

(1) In this Part “acceptable accounting standards” means—

(a) UK GAAP,

(b) acceptable overseas GAAP, or

(2) “UK GAAP”—

(a) means generally accepted accounting practice in relation to accounts of UK companies (other than accounts prepared in accordance with international accounting standards or international financial reporting standards) that are intended to give a true and fair view, and

(b) has the same meaning in relation to entities other than companies, and companies that are not UK companies, as it has in relation to UK companies.

(3) “Acceptable overseas GAAP” means the generally accepted accounting practice and principles of any of the following—

Australia;

Brazil;

Canada;

an EEA state;

the Hong Kong Special Administrative Region of the People‘s Republic of China;

Japan;

Mexico;

New Zealand;

the People’s Republic of China;

the Republic of India;

the Republic of Korea;

Singapore;

Switzerland;

the United States of America.

(4) The Treasury may by regulations amend subsection (3) to add or remove territories.

(5) In this section “UK companies” means companies incorporated or formed under the law of a part of the United Kingdom.

Accounting periods

251

(1) The general rule is that reference to an accounting period in relation to a multinational group, or any member of that group, is to an accounting period for which the ultimate parent prepares its consolidated financial statements.

(2) Where the ultimate parent does not prepare consolidated financial statements, references to accounting periods are to the period of a year commencing on 1 January.

(3) But—

(a) where an accounting period (“the default period”) has started as a result of the rule in subsection (2), but the ultimate parent prepares consolidated financial statements during the default period for a period commencing with a date after the start of the default period, the default period is to end immediately before that date, and

(b) where the ultimate parent had previously prepared consolidated financial statements for accounting periods, the accounting period that follows the last period for which it had prepared consolidated financial statements begins immediately after that last period and ends immediately before 1 January in the following year.

Miscellaneous

Application to sovereign wealth funds

252

(1) A sovereign wealth fund that would, ignoring this subsection, be the ultimate parent of a multinational group is not to be regarded as the ultimate parent of that group and is to be ignored for the purposes of this Part.

(2) Accordingly, an entity (“A”) in which such a sovereign wealth fund has a controlling interest as a result of direct ownership interests is to be regarded as the ultimate parent of a consolidated group consisting of—

(a) itself, and

(b) the entities that A has a controlling interest in.

(3) For the purposes of this section “sovereign wealth fund” means an entity which is a governmental entity for the purposes of this Part as a result of meeting the condition in section 234 (1)(b)(ii).

Disqualified and qualified refundable imputation taxes

253

(1) An amount of tax payable by a member of a multinational group is “disqualified refundable imputation tax” if—

(a) it is—

(i) as a result of a dividend made by the member, refundable to the beneficial owner of the dividend,

(ii) creditable by the beneficial owner of such a dividend against a tax liability other than a tax liability in respect of that dividend, or

(iii) refundable to an entity upon the distribution of a dividend, and

(b) it is not qualified refundable imputation tax.

(2) An amount of tax payable by a member of a multinational group is “qualified refundable imputation tax” to the extent—

(a) it is refundable or creditable to the beneficial owner of a dividend distributed by—

(i) the member, or

(ii) where the member is a permanent establishment, the main entity, and

(b) the refund is payable, or the credit is provided—

(i) under a foreign tax credit regime by a territory other than the territory that imposed the tax on the member,

(ii) to a beneficial owner of the dividend subject to tax in the territory imposing the tax payable by the member, provided the nominal rate of that tax that is at least 15%,

(iii) to a beneficial owner of the dividend who is an individual who is tax resident in that territory and who is subject to tax on the dividends as ordinary income,

(iv) to a governmental entity or an international organisation,

(v) to a resident non-profit organisation or a resident pension fund ...

(va) a resident investment entity that is not a member of the group, or

(vi) to a resident life insurance company to the extent the dividends are received in connection with a pension fund business and subject to tax in a similar manner as a dividend received by a pension fund.

(3) For the purposes of sub-paragraphs (v) and (vi) of subsection (2)(b), an entity is a resident entity if it is resident in the territory that imposed the tax, and for those purposes—

(a) a non-profit organisation or pension fund is resident in a territory if it is created and managed in that territory;

(b) an investment entity is resident in a territory if it is created and regulated in that territory;

Use of currency

254

(1) Calculations under this Part in relation to a multinational group, or any member of such a group, are to be carried out in the currency of the consolidated financial statements of the ultimate parent (“the CFS currency”).

(2) Where it is necessary to convert an amount into the CFS currency, that conversion is to be made in accordance with the authorised accounting standard—

(a) that was used in preparing the consolidated financial statements of the ultimate parent, or

(b) where no such statements were prepared, that is used as the basis for the statements that would have been prepared.

(3) For the purpose of comparing an amount to a figure expressed in this Part in euros, the amount is to be converted to euros for that purpose (from the CFS currency) by reference to the average exchange rate for the month of December that preceded the beginning of the accounting period to which the amount relates.

(4) Where the European Central Bank publishes exchange rates for the CFS currency, use those rates for the purposes of the conversion under subsection (3) and any conversion under subsection (3) of section 123 (amount charged by reference to top-up amounts).

(5) Otherwise—

(a) where the Bank of England publishes exchange rates for the CFS currency, use those rates for the purposes of that conversion, or

(b) where the Bank of England does not publish exchange rates for that currency, use such a rate as appears, on a just and reasonable basis, to reflect the average exchange rate for the period in question.

Pillar Two rules

255

(1) In this Part references to the “Pillar Two rules” are to the Pillar Two model rules as interpreted in accordance with, and supplemented by—

(a) the Pillar Two commentary, and

(b) any further commentaries or guidance published from time to time by the OECD that are relevant to the implementation of the Pillar Two model rules.

(2) In subsection (1)—

“Pillar Two model rules” means the model rules published by the Organisation for Economic Co-operation and Development as “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS”;

“Pillar Two commentary” means the following—the commentary on the Pillar Two model rules published by the Organisation for Economic Co-operation and Development as “Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two)”, andthe examples illustrating the application of the Pillar Two model rules published by the Organisation for Economic Co-operation and Development as “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) Examples”.

(2A) Pillar Two rules apply to a member of a multinational group (“the relevant member”) in an accounting period if conditions A, B and C are met.

(3) Condition A is met if—

(a) the group is a qualifying multinational group for the accounting period, or

(b) the group would be a qualifying multinational group for the accounting period but is not only as a result of Condition B in section 129 (3) (requirement that at least one member located in the United Kingdom).

(4) Condition B is that—

(a) the ultimate parent is subject to Pillar Two IIR tax for the accounting period and is not located in the same territory as the relevant member,

(b) an intermediate parent member of the group is subject to Pillar Two IIR tax for the accounting period, is not located in the same territory as the relevant member and has an ownership interest in—

(i) the relevant member, or

(ii) a member of the group located in the same territory as the relevant member, or

(c) any member of the group is located in a territory in which a qualifying undertaxed profits tax is in force for the accounting period.

(5) Condition C is that no transitional safe harbour election applies to the relevant member for that period.

(6) For the purposes of this Part “transitional safe harbour election” means—

(a) an election under paragraph 3 of Schedule 16 (transitional safe harbour), or

(b) an election corresponding to that election for the purposes of a tax imposed by a Pillar Two territory that is equivalent to multinational top-up tax so far as it relates to top-up tax under the IIR (within the meaning of the Pillar Two rules).

Qualifying domestic top-up tax

256

(1) For the purposes of this Part a tax is a “qualifying domestic top-up tax” if it is—

(a) domestic top-up tax (see Part 4), or

(b) specified in , or in accordance with, regulations made by the Treasury.

(1A) Regulations may provide for the specification of a tax to be made by notice published by the Commissioners for His Majesty’s Revenue and Customs in accordance with the regulations.

(2) A tax may only be specified in regulations , or a notice, if the appropriate authority considers that it is equivalent in substance to domestic top-up tax (see Part 4).

(2A) The “appropriate authority” means—

(a) in relation to the specification of a tax in regulations, the Treasury, or

(b) in relation to the specification of a tax made by notice, the Commissioners for His Majesty’s Revenue and Customs.

(3) A tax may be considered equivalent to domestic top-up tax despite being not being calculated in accordance with the financial accounting standard used in the consolidated financial statements of the ultimate parent if calculated in accordance with an authorised accounting standard that is either—

(a) an acceptable accounting standard, or

(b) another financial accounting standard that is adjusted to prevent material competitive distortions.

(4) Regulations under this section may provide for the specification of a tax ... to have effect from a time before the tax was specified (but may not provide for the specification of a tax to cease to have effect in relation to accounting periods commencing before the regulations are made).

(5) A tax (other than domestic top-up tax which is always a qualifying domestic top-up tax) is to be treated as a qualifying domestic top-up tax for the purposes of any accounting period that concluded before the first regulations under this section have been made if—

(a) it is a Qualified Domestic Minimum Top-up Tax for that accounting period for the purposes of the Pillar Two rules, or

(b) it is reasonable to conclude that it is likely to be a Qualified Domestic Minimum Top-up Tax for that accounting period for the purposes of those rules.

Qualifying undertaxed profits tax

257

(1) For the purposes of this Part a tax is a “qualifying undertaxed profits tax” if it is —

(a) multinational top-up tax (see, in particular, Chapter 9A), or

(b) specified in regulations made by the Treasury.

(2) A tax may only be specified in regulations if the Treasury consider that the tax is an appropriate means of implementing the UTPR (within the meaning of the Pillar Two rules).

(3) Regulations under this section may provide that the specification of a tax is to have effect from a time before the regulations are made (but may not provide that the specification of a tax previously specified ceases to have effect before the regulations are made).

Meaning of “connected”

258

For the purposes of this Part, a person or entity is “connected” with an entity if they are “closely related” within the meaning of Article 5(8) of the OECD tax model.

Other definitions

259

(1) In this Part—

“company” means a body corporate;

“deemed distribution” has the meaning given by section 215(4)(c);

“for accounting purposes” means for the purposes of accounts drawn up in accordance with acceptable accounting standards;

“held for sale” has the meaning given by international accounting standards;

“HMRC” means His Majesty’s Revenue and Customs;

“international financial reporting standards” or “international accounting standards” means those standards as issued or adopted, from time to time, by the International Accounting Standards Board;

“OECD tax model” means the Model Tax Convention on Income and on Capital published (from time to time) by the Organisation for Economic Co-operation and Development;

“overseas REIT equivalent” means an entity resident in a territory outside the United Kingdom that is the equivalent of a UK REIT;

“partnership” does not include anything that is a body corporate;

“tax treaty” means an international agreement for, or provision of an international agreement concerned with, the avoidance of double taxation with respect to taxes on income and on capital;

“UK REIT” means—a company UK REIT within the meaning of Part 12 of CTA 2010 (see section 524 of that Act), ora company that is a member of a group UK REIT within the meaning of that Part (see sections 523 and 606 of that Act);

an “uncertain tax position”, in relation to an amount of covered taxes, exists where the amount as reflected in the underlying profits accounts is different to how it is, or will be, reflected in a tax return because of uncertainty over whether the tax authority in question will accept the basis on which it is reflected in that return.

(2) For the purposes of this Part, an individual is “tax resident” in a territory if—

(a) in the case of the United Kingdom, the individual is resident for income tax purposes, and

(b) in any other territory, the individual is resident for the purposes of a tax on income imposed under the law of that territory.

(3) Where a term in this Part has a meaning for accounting purposes, unless the context otherwise requires, it has that meaning in this Part.

(4) Examples of such terms include—

carrying value;

current tax;

deferred tax;

deferred tax expense;

deferred tax asset;

deferred tax liability;

fair value;

impairment;

tax expense.

Chapter 11 — General and miscellaneous provision

Transitional provision

260

(1) Schedule 16 contains transitional provision and provision about a general transitional safe harbour.

(2) Schedule 16A contains provision about other safe harbours.

Index of defined expressions

261

Schedule 17 contains a table that lists terms defined for this Part and the provisions that define or explain them.

Power to amend to ensure consistency with Pillar Two

262

(1) Where the Treasury consider it necessary for the purpose of ensuring consistency with the Pillar Two rules, the Treasury may by regulations—

(a) make further provision about the application of provisions of this Part , Part 4 or any of Schedules 14 to 16A and 18, or

(b) amend this Part , Part 4 or any of Schedules 14 to 18.

(1A) The provision that may be made by regulations under subsection (1) includes provision designed to secure the effective implementation of the Pillar Two rules including—

(a) provision to ensure consistency with commentaries or guidance published by the OECD that has effect from a time before the commentary or guidance was published;

(b) provision that the Treasury consider necessary to secure the effective operation of multinational top-up tax or domestic top-up tax (see Part 4) where—

(i) the provision does not, at the time of making it, reflect the Pillar Two rules, but

(ii) it is reasonable for the Treasury to believe that changes will be made to the rules that are consistent with, or are similar to, the provision.

(1B) Provision made by regulations under subsection (1) may not have effect—

(a) in the case of provision falling within subsection (1A)(a), in relation to accounting periods ending before the commentary or guidance was published, or

(b) in the case of any other provision, in relation to accounting periods ending before the regulations are made.

(1C) Provision that has effect in relation to accounting periods that begin before the regulations are made may only be made if the Treasury consider that the provision is generally beneficial to—

(a) persons affected by the implementation of the Pillar Two rules, or

(b) persons affected by the provision.

(1D) The reference in subsection (1C) to provision being generally beneficial includes the provision being beneficial by reference to it—

(a) simplifying, or reducing the costs of, compliance with—

(i) multinational top-up tax or domestic top-up tax, or

(ii) taxes imposed under the law of a territory outside the United Kingdom that correspond to multinational top-up tax or domestic top-up tax;

(b) generally (but not necessarily in every case) resulting in a reduction or elimination of a liability to—

(i) multinational top-up tax or domestic top-up tax, or

(ii) taxes imposed under the law of a territory outside the United Kingdom that correspond to multinational top-up tax or domestic top-up tax.

(2) The power in this section may not be exercised after 31 December 2026.

Regulations

263

(1) A power to make regulations under this Part includes a power to make consequential, supplementary, incidental, transitional or saving provision.

(2) Regulations under this Part are to be made by statutory instrument.

(3) A statutory instrument containing (whether alone or with other provision) regulations made under section 262 (1)(b) is subject to the made affirmative procedure.

(4) Otherwise, a statutory instrument containing regulations under this Part is subject to annulment in pursuance of a resolution of the House of Commons.

(5) Where a statutory instrument is subject to “the made affirmative procedure”—

(a) it must be laid before the House of Commons after being made, and

(b) it ceases to have effect at the end of the period of 28 sitting days beginning with the day on which the instrument is made, unless within that period the instrument is approved by a resolution of the House of Commons.

(6) Where regulations cease to have effect as a result of subsection (5), that does not—

(a) affect anything previously done under the regulations, or

(b) prevent the making of new regulations.

(7) In this section, “sitting day” means a day on which the House of Commons is sitting (and a day is only a day on which the House of Commons is sitting if the House begins to sit on that day).

Multinational top-up tax to apply from 31 December 2023

264

This Part has effect in relation to accounting periods commencing on or after 31 December 2023.

Part 4 — Domestic top-up tax

Chapter 1 — Introduction

Introduction to domestic top-up tax

265

(1) The purpose of this Part is to make provision for a qualified domestic minimum top-up tax within the meaning of the Pillar Two rules.

(2) For that purpose, this Part makes provision for a tax payable in respect of qualifying entities (that will be located in the United Kingdom) whose rate of tax (as determined in accordance with this Part) is less than 15%.

(3) The tax is to be known as “domestic top-up tax”.

(4) This Part applies (with modifications) many of the provisions of Part 3 (multinational top-up tax) for the purposes of—

(a) determining liability to domestic top-up tax, and

(b) administering domestic top-up tax.

(5) Except where the contrary appears, expressions used in this Part and in Part 3 (multinational top-up tax) have the same meaning in this Part as they have in Part 3.

Qualifying entities

266

(1) An entity which is not a member of a joint venture group is qualifying for an accounting period if it is not a DTT excluded entity ..., it meets condition A for that period and—

(a) if it is not a member of a group, it meets condition B for that period, or

(b) if it is a member of a group, it meets condition C for that period.

(1A) A member of a joint venture group is a qualifying entity for an accounting period if—

(a) the member is not a DTT excluded entity,

(b) the member meets condition A for that period, and

(1B) For the purposes of subsection (1A) the “revenue condition” is met in relation to a joint venture group for an accounting period if—

(a) a single entity which directly or indirectly holds at least 50% of the ownership interests in the joint venture parent meets Condition A and Condition B for that period, or

(b) the members of a group (the “relevant group”) whose ultimate parent directly or indirectly holds at least 50% of the ownership interests in the joint venture parent meet Condition C for that period and—

(i) all of those members are located in the United Kingdom, or

(ii) the relevant group is a multinational group (see section 126 in Part 3), and at least one of the members is located in a Pillar Two territory.

(2) Condition A is met by an entity for an accounting period if it is located in the United Kingdom in that period (see section 239 in Part 3).

(3) Condition B is met by an entity for an accounting period if the entity has revenue that exceeds the threshold set out in subsection (6) in at least 2 previous accounting periods of the previous 4 accounting periods.

(4) For the purposes of condition B, the revenue of an entity that is not a member of a group is to be determined by reference to its qualifying financial statements.

(5) Condition C is met by a member of a group for an accounting period if the members of the group have revenue that exceeds the threshold set out in subsection (6) in at least 2 previous accounting periods of the previous 4 accounting periods.

(6) The threshold for an accounting period is the amount given by multiplying 750 million euros by the amount given by dividing the number of days in the accounting period by 365.

(7) For the purposes of condition C, the revenue of the members of a group for a period is to be determined by reference to the consolidated financial statements of the ultimate parent for that period (see sections 126 (2) and 249 in Part 3).

(8) Sections 130 and 131 in Part 3 (change in composition of multinational groups) apply for the purpose of Condition C as if—

(a) references to “multinational group” were to “group”,

(b) in section 130—

(i) in subsection (1), for “condition A in section 129 (2)” there were substituted “condition C in section 266 (5)”,

(ii) in subsection (4), for “section 129 (4)” there were substituted “section 266 (6)”,

(i) for “section 129” there were substituted “section 266”,

(ii) for “subsection (2)” there were substituted “subsection (5)”,

(iii) for “condition A” there were substituted “condition C”, and

(iv) for “section 129 (4)” there were substituted “section 266 (6), and

(d) in section 131 (2), for “condition A in section 129 (2)” there were substituted “condition C in section 266 (5)”

(9) References in this Part to a “group” (other than in the expression “multinational group”) means a consolidated group (see section 126 (2) in Part 3).

(10) For the purposes of this Part “qualifying financial statements” in relation to an entity means—

(a) financial statements of the entity prepared in accordance with acceptable accounting standards, or

(b) where no such accounts were prepared, the statements that would have been prepared (whether or not the entity was required to prepare such statements) in accordance with an authorised accounting standard that is either—

(i) an acceptable accounting standard, or

(ii) a financial accounting standard whose application is adjusted to prevent material competitive distortions (see section 249 (4)).

DTT excluded entities

267

(1) An entity is a DTT excluded entity if—

(a) it falls within subsection (3) of section 127 in Part 3 (excluded entities),

(b) it is a member of a multinational group and falls within subsection (4) of that section, or

(c) it is a member of a group that is not a multinational group, but would fall within that subsection if that group were a multinational group.

(2) A DTT excluded entity falling within subsection (1) or (3B)(b) (as well as not being a qualifying entity) is, for the purposes of the provisions of this Part other than section 266 and this section, to be treated as not being a member of any group.

(3) A qualifying transformer vehicle that is not a member of a multinational group is also a DTT excluded entity.

(3ZA) A company is a DTT excluded entity if—

(a) it is a qualifying asset holding company for the purposes of Schedule 2 to FA 2022, and

(b) is not a member of a multinational group.

(3A) A securitisation company that is not a member of a group for the purposes of domestic top-up tax is a DTT excluded entity (and see section 267A).

(3B) An investment entity is a DTT excluded entity if—

(a) it is not a member of a group, or

(b) it is a member of group that is comprised only of members located in the United Kingdom.

(3C) An investment entity that is a member of a group that is not comprised only of members located in the United Kingdom—

(a) is not to be regarded as a qualifying entity, but

(b) top-up amounts of that entity are to be determined under sections 220 to 224 (see also section 272(8)(e) which has the effect of attributing those amounts to standard members of the group that are qualifying entities and are located in the same territory as the investment entity).

(3D) An investment entity that falls within subsection (3C) is not to be regarded as a member of any group for any purpose other than for the purposes of—

(a) determining the top-up amounts of that entity under those sections,

(b) applying Condition C in section 266 in relation to other members of the group (revenue threshold for group), and

(4) In this section

“qualifying transformer vehicle” means— a qualifying transformer vehicle within the meaning of the Risk Transformation (Tax) Regulations 2017 (S.I. 2017/1271), ora part of a protected cell company that is a qualifying transformer vehicle within the meaning of those Regulations;

“securitisation company” has the meaning it has in the Taxation of Securitisation Companies Regulations 2006 (see regulation 4).

Permanent establishments

268

Section 232 (3) (permanent establishment treated as distinct from entity it is a permanent establishment of) applies for the purposes of this Part as it applies for the purposes of Part 3.

Chapter 2 — Charge to domestic top-up tax

Chargeable persons

269

(1) A person is chargeable to domestic top-up tax for an accounting period if—

(a) the person is a qualifying entity for that period and is a body corporate or a partnership ..., or

(b) the person is chargeable to tax in respect of an entity—

(i) that is a qualifying entity for that period, and

(ii) that is not a body corporate or a partnership ....

(2) A person is chargeable to tax in respect of an entity if the profits of that entity would, on the relevant assumptions, be the profits of the person for the purposes of income tax or corporation tax.

(3) The relevant assumptions are that—

(a) the entity has profits that are chargeable to income tax or corporation tax, and

(b) the person is resident in the United Kingdom for the purposes of that tax.

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7) Where more than one person is chargeable to tax in relation to the same qualifying entity as a result of the application of subsection (2), each of those persons is jointly and severally liable to domestic top-up tax.

Amount charged

270

(A1) Where a person is chargeable to domestic top-up tax for an accounting period as, or in respect of, a qualifying entity which is a member of a group, the amount (if any) the person must pay is determined as follows—

Step 1Determine (in accordance with section 272)—whether the entity has a top-up amount for that period, andthe extent of any such amount.

Step 2If the result of Step 1 is not expressed in sterling, convert the result of that Step to sterling.

(1) Where a person is chargeable to domestic top-up tax for an accounting period as or in respect of a qualifying entity which is not a member of a group, the amount (if any) the person must pay is determined as follows—

Step 1Determine (in accordance with section 273) whether the entity has any top-up amounts or additional top-up amounts for that period and the extent of those amounts.

Step 2Determine the sum of those amounts.

Step 3If the result of Step 3 is not expressed in sterling, convert the result of that Step to sterling.

(2) Generally, a qualifying entity will have a top-up amount for an accounting period if it has profits for a period and its effective tax rate (or, where it is a member of a group, that of its group) is less than 15%.

(3) Chapter 3 of this Part makes provision, principally by applying (with modifications) provisions in Part 3, for determining—

(a) the effective tax rate of a qualifying entity by reference—

(i) in the case of an entity that is a member of a group, to the profits of, and the taxes payable by, members of the group that are located in the United Kingdom, or

(ii) in the case of an entity that is not a member of a group, to its profits and to the taxes payable by that entity.

(b) those profits,

(d) top-up amounts, and

(e) additional top-up amounts.

Election to make one member of a group liable for amounts charged

271

(1) Where multiple members of a group are chargeable to domestic top-up tax in an accounting period, the filing member of the group may elect that only one member of the group specified in the election (the “elected member”) is to be liable to pay domestic top-up tax in that period.

(2) Where an election under this section is made—

(a) no member of the group other than the elected member is required to pay any amount by way of domestic top-up tax, and

(b) the elected member must pay any amount by way of domestic top-up tax any other member of the group would have been required to pay if the election had not been made.

(3) Subsection (2) does not apply if the elected member has not consented to the election.

(4) Paragraph 2 of Schedule 15 (annual elections) applies to an election under this section, and has effect for that purpose as if references to an information return or overseas return notification were to a self-assessment return or below-threshold notification.

Chapter 3 — Application of multinational top-up tax provisions

Determining top-up amounts of entity that is a member of a group

272

(1) Subject as follows, Chapters 3 to 6, 8 and 9 of Part 3 apply for the purposes (“domestic purposes”) of determining whether a qualifying entity that is a member of a group has top-up amounts or additional top-up amounts, and the extent of those amounts, as they apply for the purpose of determining the same for the purposes of multinational top-up tax.

(2) Where the group is not a multinational group, that Part has effect for domestic purposes as if any reference to a multinational group were to a group.

(3) Part 3 has effect for those purposes as if the following provisions (which provide for reductions of top-up amounts where a qualifying domestic top-up tax is payable) were omitted—

(a) in section 194, subsections (2) to (7);

(b) in section 203, subsections (3) to (7);

(3A) Part 3 has effect for those purposes as if the following sections were substituted for section 193—

(193) (1) Subsection (2) sets out (for the purposes of Step 1 of section 270(A1)) how to determine in relation to an accounting period— (a) whether an entity which is a standard member of a group has a top-up amount, and (b) if so, what the amount is. (2) Take the following Steps— - Step 1Determine for the period (in accordance with section 272) the sum of any top-up amounts and additional top-up amounts of standard members of the group (the “total top-up amount”). - Step 2Determine for each such member—the adjusted profits (if any);the covered tax balance. - Step 3For each standard member of the group in relation to which a positive amount of adjusted profits is determined under Step 2, determine the “effective tax rate” by dividing the amount found under Step 2(b) (covered tax balance) by the amount found under Step 2(a) (adjusted profits). - Step 4For any standard member of the group whose effective tax rate (see Step 3) is less than 15%—determine that member’s “top-up tax percentage” by subtracting the member’s effective tax rate from 15%, andproceed to Step 5. - Step 5Calculate for the member an amount (an “allocation key amount”) by multiplying—the member’s top-up tax percentage (see Step 4(a)), bythe member’s adjusted profits. - Step 6Determine the sum (the “group allocation key amount”) of all the allocation key amounts calculated under Step 5 for members of the group. - Step 7Determine the “allocation key ratio” for each standard member of the group whose effective tax rate (see Step 3) is less than 15%, by dividing—the member’s allocation key amount (see Step 5), bythe group allocation key amount (see Step 6). - Step 8Determine each such member’s top-up amount by multiplying—the sum of any top-up amounts and additional top-up amounts of standard members of the group for the period (see Step 1), bythe member’s allocation key ratio (see Step 7). - Step 9If none of the standard members falls within Step 3, or none of them has an effective tax rate of less than 15%, each standard member has a top-up amount equal to—the total top-up amount, divided bythe number of the standard members. (193A) (1) Section 193 and subsection (2) of this section apply to joint venture groups and their members as they apply to groups and their members. (2) Section 193 has effect in relation to a qualifying entity that is a standard member of a group as if the total top-up amount referred to in that section included any top-up amounts or additional top-up amounts of qualifying investment entities determined under sections 220 to 224. (3) See also subsections (9) to (11) of section 272, which— (a) define “qualifying investment entity” in relation to a qualifying entity, and (b) make further provision about top-up amounts (for the purposes of domestic top-up tax).

(4) The following provisions of Part 3 are of no practical application for domestic purposes and accordingly that Part has effect for those purposes as if they were omitted—

(a) section 173 (1)(b) and sections 189 to 192 (eligible distribution tax systems);

(b) section 225 (attribution of top-up amounts of investment entities).

(5) Where—

(a) an election is made under Part 3 in relation to a member of a multinational group (whether or not a qualifying entity) for the purposes of multinational top-up tax, and

(b) if the election had effect for domestic purposes, it would affect the calculation of top-up amounts or additional top-up amounts,

that election has effect for domestic purposes.

(6) For the purposes of subsection (5), a foreign IIR election is to be treated as an election made under Part 3.

(7) A “foreign IIR election” means an election—

(a) made in respect of a group in connection with a tax equivalent to multinational top-up tax in another Pillar Two territory;

(b) contained in an information return—

(i) submitted to a qualifying authority in that territory, and

(ii) in relation to which information in the return about the election has been shared with HMRC.

(8) For domestic purposes—

(a) section 134 (underlying profits as determined for statements of ultimate parent) has effect as if, after subsection (3), there were inserted—

(3A) The conditions in subsection (3) are not required to be met if— (a) the alternative accounting standard is UK GAAP, (b) all members of the group are located in the United Kingdom, and (c) the filing member of the group has made an election in a self-assessment return that the underlying profits of all members of the group are to be determined on the basis of UK GAAP. (3B) Paragraph 1 of Schedule 15 (long term elections) applies to an election under subsection (3A), and has effect for that purpose as if references to an information return or overseas return notification were to a self-assessment return or below-threshold notification.

;

(b) section 176 (amounts to be reflected in covered tax balance) has effect as if, for subsection (2)(i) (amounts allocated from another member of the group), there were substituted—

(i) any amount allocated to the member from another member of the group under section 178 (1) (reallocation of tax expense).

;

(i) for subsection (1A) there were substituted—

(1A) But qualifying tax expense in respect of tax imposed by a territory other than the United Kingdom is not to be allocated to O as a result of the allocation of profits under section 167 (hybrids).

;

(ii) subsection (2) (restriction on allocation of tax expense in respect of mobile income) were omitted;

(d) section 179 (controlled foreign companies) has effect as if subsection (2) (restriction on allocation to CFC) were omitted;

(da) in section 182(2)(e), after “credits”, in the first place it occurs, there were inserted “other than qualifying refundable tax credits”;

(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9) An investment entity is a qualifying investment entity in relation to a qualifying entity if it is

(a) a member of the same group as the qualifying entity, and

(b) located in United Kingdom.

(10) Subsection (11) applies to qualifying entities that are standard members of a group for an accounting period where—

(a) the total top-up amount referred to in section 193 for that period is greater than nil as a result of the modification of that section set out in subsection (8)(e), and

(b) none of those members have made a profit for that period (and accordingly will not, ignoring subsection (11), have top-up amounts).

(11) Where this subsection applies, each of those members has a top-up amount (for the purposes of domestic top-up tax) equal to the total top-up amount divided by the number of qualifying entities that are standard members of the group.

Determining top-up amounts of entity that is not a member of a group

273

(1) Chapters 3 to 6, 8 and 9 of Part 3 apply for the purposes (“domestic entity purposes”) of determining whether a qualifying entity that is not a member of a group has top-up amounts or additional top-up amounts, and the extent of those amounts, as they apply for the purpose of determining the same for the purposes of multinational top-up tax.

(2) Chapter 3 of that Part has effect for domestic entity purposes as if for section 132 there were substituted—

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