Multinational Top-up Tax and Domestic Top-up Tax

MTT45190 - Particular entities and adjustments: Investment entities: Attributing top-up amounts to responsible members

In MTT, top-up amounts are determined on an entity-by-entity basis, and then attributed to a responsible member which is charged to MTT.

Where an investment entity has a top-up amount (including an additional top-up amount), the amount is attributed to responsible members using broadly the ordinary method (see MTT61050). However, the inclusion ratio (see MTT61060) is determined using a slightly different method.

These differences are set out in section 225 of Finance (No.2) Act 2023.

See MTT61000+ for general guidance on chargeability in MTT, including responsible members.

See MTT45120 for guidance on determining the top-up amount of an investment entity.

Domestic Top-up Tax

Chargeability works differently for investment entities in DTT, and specific rules apply for investment entities. See MTT45210 for further guidance.

Adjusted profits to reflect further adjustments required

The adjusted profits of investment entities are subject to further adjustments (see MTT45130) to which standard members are not subject.

When determining the inclusion ratio for the top-up amounts of an investment entity, these further adjustments should be reflected in the investment entity’s adjusted profits.

Adjusted profits to include undistributed income amounts

Where the taxable distribution method applies to an investment entity, the entity may have an undistributed income amount, which is to be included in its adjusted profits.

When determining the inclusion ratio for the top-up amounts of an investment entity, any undistributed income amount should be included in the investment entity’s adjusted profits.

None of the adjusted profits to be regarded as attributable to ownership interests held outside of the group

The inclusion ratio is determined in reference to the ownership interest held by the responsible member, as a proportion of all ownership interests held in the member with the top-up amount.

Where the member with the top-up amount is an investment entity, only the ownership interests held by members of the same group are to be considered when determining the inclusion ratio. Entities that are not members of the group are to be ignored.

The effect of this is that the aggregate inclusion ratio of the responsible members of an investment entity will be 1, ensuring that the entire top-up amount calculated for an investment entity is attributed to a responsible member.

This alteration is needed because the external holding adjustment (made as part of the further adjustments in MTT45130) ensures that the top-up amount of an investment entity will not include any amounts attributable to non-members of the group. It is therefore not necessary for any of the top-up amount to be attributed to non-members of the group as part of the inclusion ratio.

Example

Investment Ltd is an investment entity. It has a top-up amount of 10 that must be attributed to the responsible member or members.

The total adjusted profits of Investment Ltd, after further adjustments have been made, is 100. There is no undistributed income amount.

Investment Ltd is 80% owned by its parent, A Ltd, which is a member of the same group. A Ltd is the only responsible member of Investment Ltd.

The remaining 20% of the ownership interests in Investment Ltd are held by Z Ltd, which is not a member of the group.

Because Investment Ltd is an investment entity, the ownership interests of Z Ltd are to be ignored when determining the inclusion ratio.

The inclusion ratio of Investment Ltd is determined as follows:

Step 1 – The total adjusted profits of Investment Ltd, after further adjustments have been made, is 100.

Step 2 – None of those profits are to be attributed to ownership interests held outside the group.

Step 3 – The product of Step 1, less the product of Step 2: 100 – 0 = 100.

Step 4 – The inclusion ratio is the product of Step 3 divided by the product of Step 1: 100 / 100 = 1.

The inclusion ratio of A Ltd in respect of Investment Ltd is 1.

The top-up amount attributed to A Ltd is the top-up amount of Investment Ltd multiplied by the inclusion ratio: 100 * 1 = 100.