MTT18020 - Scope: Determining location of entities: Entity resident in more than one territory

If an entity is tax resident in more than one territory for an accounting period, and both or all of those territories are party to a tax treaty that deems it to be resident in one of the territories, the entity will be treated as located in that territory for that period.

This is set out in section 239 of Finance (No.2) Act 2023.

No determinative tax treaty

Where there is no such tax treaty, the following tie-breakers work to locate the entity in a single territory for the accounting period. These tie-breakers are to be completed in order.

Tie-breaker 1:

The entity is treated as located in the territory in which it accrued more covered taxes in the period (excluding taxes arising from a CFC regime).

Tie-breaker 2:

The entity is treated as located in the territory in which it had a greater qualifying substance based income exclusion (SBIE) amount.

Tie-breaker 3:

If it is the ultimate parent of a multinational group, the entity is treated as located in the territory in which it is created.

Otherwise, it is treated as a stateless entity.

Qualifying substance based income exclusion amount

If the SBIE is calculated for the territory for the relevant period, the “qualifying SBIE amount” is the sum of the payroll carve-out amount and the tangible asset carve-out amount that would be calculated under section 60(1), if the entity were solely located in that territory.

If the SBIE is not calculated for the territory for that period, the qualifying SBIE amount is nil.

Exception for entities treated as not located in the UK as a result of a non-treaty tie-breaker

An exception to a tie-breaker applies where the outcome of a tie-breaker would result in a group ceasing to become subject to any Income Inclusion Rule, even though it has a UK tax resident member.

For the purposes of chargeability, an entity will be treated as located in the UK if it:

  • is not subject to MTT or any equivalent Income Inclusion Rule in a foreign territory,
  • is tax resident in the UK based on its place of management, place of creation or similar criteria,
  • is treated as not located in the UK for MTT purposes, due to a non-treaty tie-breaker, and
  • would be treated as a responsible member of a multinational group if it were located in the UK.

When these criteria are met:

  • the entity will be treated as located in the UK when determining whether it is a chargeable person,
  • the entity will be treated as located in the UK (and therefore subject to an Income Inclusion Rule) when determining the responsible members of the group, and
  • the entity will be treated as located in the UK for the purpose of determining whether it is a qualifying multinational group.

However, the entity will continue to be treated as being located in the territory determined by non-treaty tie-breaker for the purpose of determining whether the group is a multinational group. Therefore, if every member of the group is located in the same territory prior to the application of the exception, the group will not be a multinational group as a result of the exception, and cannot be a qualifying multinational group.

Note that this exception is not relevant for Domestic Top-up Tax purposes as a different set of rules apply for determining the chargeability of Domestic Top-up Tax.

See MTT61020 for guidance on chargeability.

Example

Group ABC consists of:

  • A Ltd, the ultimate parent, which is tax resident in Territory A.
  • B Ltd, a subsidiary of A Ltd, which is dual resident in both the UK and Territory B.
  • C Ltd, a subsidiary of B Ltd, which is tax resident in Territory C.

Territories A, B and C do not enforce any Pillar 2 rules.

There is no applicable tax treaty in force between the UK and Territory B.

B Ltd accrued more covered taxes (excluding CFC taxes) in Territory B in the period. Consequently, it will be treated as being located in Territory B for MTT purposes.

No member of Group ABC is located in a Pillar 2 territory, so B Ltd will not be subject to any Income Inclusion Rule.

The exception will apply to B Ltd because:

  • B Ltd is not subject to MTT or an equivalent Income Inclusion Rule of a foreign territory,
  • B Ltd is tax resident in the UK based on place of management, creation, or similar criteria,
  • B Ltd is treated as not being located in the UK based on a non-treaty tie-breaker,
  • B Ltd belongs to a multinational group, and
  • B Ltd would be a responsible member of its group if it were located in the UK.

B Ltd will therefore be treated as located in the UK for the purpose of determining chargeable persons, responsible members, and whether the group is qualifying for MTT purposes.

For other purposes, such as calculating the effective tax rate of Territory B, B Ltd will continue to be treated as being located in Territory B.