Multinational Top-up Tax and Domestic Top-up Tax

MTT41470 - Particular entities and adjustments: Tax transparent entities: Reallocation of tax expense

Where a hybrid entity or a flow-through entity (FTE) has profits reallocated under sections 167 and 168 (see MTT41430 and MTT41440), qualifying current tax expense in respect of those profits will also be reallocated.

Tax expense will also be reallocated where profits would have been reallocated had they been included in the member’s underlying profits.

For an entity that is a reverse hybrid, tax expense may be pushed down from an entity with an ownership interest to an FTE.

Where amounts of tax expense to be reallocated relate to certain types of mobile income, they are subject to a cap which may limit their reallocation.

For Domestic Top-up Tax purposes only, amounts of foreign tax will not be reallocated to a hybrid entity.

Exclusion of tax expense

Where an amount of adjusted profits has been excluded, any tax expense on those profits will also be excluded in accordance with section 175(2)(a) of the Act.

Reallocation of tax expense

Where:

• profits have been allocated to or from a member with an ownership interest in a hybrid or transparent entity, and
• the member from whom the profits have been allocated has an amount of qualifying current tax expense in respect of those profits,

The tax expense is to be allocated to the member along with the profits.

Reallocation of tax expense where profits not reallocated

Tax expense will be reallocated to an owner where:

• a member has an amount of qualifying current tax expense,
• that amount is in respect of profits not included in the member’s underlying profits, and
• if those profits had been included in the member’s underlying profits, they would have been allocated to a member under section 167 or 168.

Push-down of tax expense to reverse hybrid entities

Qualifying current tax expense will be reallocated to an FTE where:

• the territory of one of its reference entities does not regard the FTE (or any member of the group through which its interest in the FTE is held) as tax transparent,
• that reference entity (or any member of the group (“X”) with an interest in the reference entity) has an amount of qualifying current tax expense,
• that tax expense is in respect of profits not included in the reference entity’s (or X’s) adjusted profits, and
• had the profits been included in the reference entity’s (or X’s) adjusted profits, a corresponding amount of profits would have been allocated to the FTE under section 167 (ignoring the requirement that the FTE must not be regarded as tax transparent by the territory where it is located) or 168,

Treatment of reallocated tax expense

Section 175(2)(a) of the Act excludes amounts of qualifying current tax expense from a member’s covered tax balance where the income or gains are not included in the adjusted profits.

That subsection is applied to a reallocated tax expense in the hands of an owner under the following assumptions:

• that the reference to the member’s adjusted profits were to the adjusted profits of the member from whom the tax expense was allocated, and
• that the profits allocated from that member to the owner under section 167 or 168 are not excluded from that member’s adjusted profits.

Where the condition is not met, the tax expense is to be excluded from the covered tax balance of the member to which the amount was reallocated.

See MTT25200 for general guidance on amounts to be excluded from the covered tax balance.

Cap on reallocation of tax expense in relation to mobile income

Where some of the qualifying current tax expense to be reallocated relates to mobile income, the amount relating to mobile income that is to be reallocated is capped.

The effect of the cap is that, where such income is reallocated, no more than 15% of the covered taxes will be reallocated, which ensures that the reallocated tax expense cannot shelter other profits in that territory.

To determine the cap amount:

• Step 1 - Find the effective tax rate of the group for the territory of the entity to which the tax expense is being reallocated (ignoring the amount of qualifying current tax expense under consideration).
• Step 2 - Subtract that rate from the minimum rate of 15%.
• Step 3 - Multiply the result of step 2 by the amount of mobile income to which the tax expense relates.

Where the effective tax rate for the relevant territory equals or exceeds 15% for the period, no amount of the tax that relates to mobile income will be reallocated.

For an example of the mobile income cap, see MTT25500 for guidance on CFC entities, for which the same rule applies.

Amount of tax expense relating to mobile income to be reallocated exceeds the cap

Where the amount of tax expense related to mobile income exceeds the cap amount, only the cap amount is to be reallocated. The remainder will continue to be reflected in the covered taxes of the member.

Where:

• an amount of tax expense remains with a member because the cap amount was exceeded, and
• the amount relates to income or gains that are not included in the adjusted profits of the entity to which the expense would have been reallocated (were it not for the mobile income cap)

the amount is to be excluded from the covered tax balance of the member that has retained the tax expense.

This is in keeping with the normal rule that amounts of covered tax are only included in the covered tax balance where the related income is included in the member’s adjusted profits (see MTT25200).

Mobile income

For this purpose, income is ‘mobile income’ if:

• it is a type of mobile income, and
• a member of a group is subject to tax on the income:
  • under a CFC regime (see MTT25500), or
  • as a result of an ownership interest in an entity that is regarded as tax transparent in that member’s territory, but is not regarded as transparent in the territory of the entity.

(Note that the member which is subject to a tax may be a member of any multinational group, whether qualifying or not.)

The types of mobile income are:

• dividends or dividend equivalents,
• interest or interest equivalents,
• rent,
• a royalty,
• an annuity, or
• net gains from property that produces income of a type listed above.

Domestic Top-up Tax

In accordance with section 272(8)(c), qualifying current tax expense imposed by a territory other than the UK is not to be reallocated as a result of the reallocation of profits under section 167, for DTT purposes only.

No amounts of tax expense will be reallocated under the normal rule at section 178(1A), under which tax expense may be reallocated, even though the profits are not reallocated under sections 167 or 168 because they were not reflected in the underlying profits (see “reallocation of tax expense where profits not reallocated” above).

This means that tax imposed by the UK may be excluded from the covered tax balance of a qualifying entity, where it is pushed down to a foreign hybrid, but foreign taxes cannot be pushed down to a qualifying entity that is a hybrid in relation to one of its owners.

Amendment in Finance Act 2025

Section 178 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).