Entity, parent entity, joint venture and group in GloBE regime

The Act of 6 November 2024 on Top-up Taxation of Constituent Entities of Multinational and Domestic Groups [GloBE Act] introduces a tax regime of minimum taxation of at least 15% of all group entities in one jurisdiction. Under the GloBE Act, constituent entities of domestic and multinational enterprise [MNE] groups – with consolidated revenues exceeding €750 million in at least 2 of the 4 years preceding the tax year – will be required to calculate the effective tax rate [ETR] and, if applicable, the top-up tax, to report certain data (including the filing of GloBE returns) and to pay the top-up tax (which obligations, in principle, will be performed in the country of residence of the constituent entity).

The GloBE Act implements Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union [Directive] into the Polish legal system. For this reason, both the GloBE Act and the Directive use such terms as ‘entity’ and ‘constituent entity’ – terms such as ‘group’, ‘multinational enterprise group’ or ‘domestic group’ also appear in the GloBE Act and the Directive.

Definition of the terms ‘entity’ and ‘constituent entity’ in the GloBE

As defined in Article 2(1)(11) of the GloBE Act, an ‘entity’ is a legal person and a contractual arrangement, including an unincorporated entity, which is required to prepare separate financial statements or prepares such separate statements. ‘Entity’ will therefore primarily be commercial law companies (such as limited liability companies, simple joint-stock companies and joint-stock companies).

The term ‘constituent entity’ is – in turn – defined in Article 2(1)(20) of the GloBE Act as:

a. an entity, which is part of a MNE group or a domestic group, and
b. a permanent establishment of a main entity that is part of a MNE group.

Thus, the concept of ‘entity’ appears to be crucial in determining which entities will be subject to top-up taxation. Indeed, if an entity is part of a MNE group or a domestic group, and therefore constitutes an entity, it may be subject to top-up taxation (as indicated, for example, by the title of the GloBE Act – o0n the top-up taxation of constituent entities of MNE groups and domestic groups.

Definition of the term ‘group’, ‘multinational enterprise group’ and ‘domestic group’ in the GloBE

The term ‘group’ includes:
two or more entities, between which there is a relationship of ownership or control in accordance with an accepted accounting standard or an approved accounting standard applied by the ultimate parent entity to prepare consolidated financial statements, including entities not included in such financial statements solely because of their small size, immateriality or intended sale (Article 2(1)(6)(a) of the GloBE Act), and
– an entity with one or more permanent establishments if it is not part of another group referred to in subsection a (Article 2(1)(6)(b) of the GloBE Act).

The term ‘permanent establishment’ used in the definition referred to above is defined in Article 2(1)(40) of the GloBE Act. The definition used covers four cases (including, inter alia, the case of a place of business located in a jurisdiction where it is treated as a permanent establishment within the meaning of the relevant double tax treaty). The case in question is a cross-border relationship, i.e. the permanent establishment is located in a jurisdiction other than its main entity – this circumstance was emphasised by the GloBE legislator in the text of the explanatory memorandum to the GloBE Act (p. 33), indicating that: ‘The definition in question is structured in such a way as to distinguish 4 cases in which, on the basis of the GloBE System, a permanent establishment may be said to arise (i.e. a place of business of an entity in another jurisdiction or a place regarded as a place of business (…).

In light of the above, two or more entities that have a certain relationship with each other (there are certain links between them) and an entity that has a foreign permanent establishment (foreign branch) can be considered as a group. Thus, if a company does not have any parent companies or subsidiaries, nor does it operate abroad through a permanent establishment (branch – including a permanent establishment within the meaning of the relevant double tax treaty), such a company may not belong to a group and may not be considered a constituent entity (i.e. an entity forming part of a MNE or domestic group ). In other words, such an entity – regardless of its level of income – may not, in our view, be subject to the GloBE regulations.

However, if an entity is a part of a group, it is necessary to determine whether it is multinational or domestic. MNE group is, in the light of Article 2(1)(9) of the GloBE Act, a group in which at least one entity or permanent establishment is not located in the jurisdiction in which the ultimate parent entity is located. The concept of a domestic group, on the other hand, is defined as a group in which all constituent entities are located in the territory of the Republic of Poland (pursuant to Article 2(1)(8) of the GloBE Act).

Parent entities in the light of the GloBE Act

In the aforementioned definition of the term group, the legislator used one of the most fundamental concepts for GloBE regulation, i.e. the concept of ultimate parent entity. It is defined in Article 2(1)(14) of the GloBE Act as:

– an entity that holds, directly or indirectly, a consolidating interest in another entity and in which the other entity does not hold, directly or indirectly, a consolidating interest (li. a), or

– an entity referred to in Article 2(1)(6)(b) of the GloBE Act, cited above.

However, it should be pointed out that – in addition to the ultimate parent entity [UPE] – the legislator also distinguishes between other types of parent entities, i.e. the intermediate parent entity [IPE] and the partially-owned parent entity [POPE].

It remains crucial to determine which entity of a group has IPE status. This will, among other things, allow it to be determined which entities are part of MNE group and therefore constitute constituent entities of MNE group subject to top-up tax rules. In the case of domestic groups, it remains important to point out that, inter alia, global top-up tax (of which certain parent entities remain taxpayers) is not calculated in relation to them – thus, in the case of a domestic group, all constituent entities (located – in accordance with the above definition – in Poland) are taxpayers of domestic top-up tax.

From our practice, it appears that for Polish constituent entities (which are part of MNE groups), it remains a very important issue to determine whether any of these entities has IPE status. An IPE will be – in the light of Article 2(1)(15) of the GloBE Act – a constituent entity which has, directly or indirectly, an ownership interest in another constituent entity of the same group and which is not the ultimate parent, a partially-owned parent entity, a permanent establishment, an investment entity or an insurance investment entity. The concept of ownership interest is – in turn – defined in Article 2(1)(43) of the GloBE Act) as any equity interest that carries rights to the profits, capital or reserves of an entity or a permanent establishment, whereby ownership interests in a constituent entity attributable to a permanent establishment are deemed to be interests held by the main entity.

Illustrating the above relationship by an example, it should be pointed out that if a Polish constituent entity holds an ownership interest (e.g. 100% of the shares) in a foreign company, e.g. a Slovak company (belonging to the same group and not being an UPE, POPE, permanent establishment, investment entity or insurance investment entity), the Polish company should be considered as an IPE.

However, whether, in the situation presented above, the Polish constituent entity would be a taxpayer of the global top-up tax (generally speaking, the top-up tax provided for settlement for parent entities) will be determined by whether in this Polish entity a consolidating interest, directly or indirectly, is held by another intermediate parent entity which is not an excluded entity, located in the territory of the Republic of Poland or subject to the qualified principle of inclusion of income for taxation in the jurisdiction in which it is located (pursuant to Article 10(2) of the GloBE Act). The legislator has provided (in Article 2(1)(43) of the GloBE Act) that a ‘consolidating interest’ is an ownership interest in an entity whose owner is required to consolidate on a full or proportionate basis or would be required to do so if it prepared consolidated financial statements. Therefore, if it turns out that in the group structure above the Polish company there is an entity which is obliged to consolidate fully or proportionally (or would be obliged to do so if it prepared consolidated financial statements), the Polish company may not act as a taxpayer of global top-up tax in relation to income generated by the Slovak company (as this obligation could fall on the entity higher in the group structure). However, this issue requires careful analysis on a case-by-case basis.

Joint venture under the GloBE Act

Joint ventures and joint venture subsidiaries are a specific type of entity (to which the Directive and subsequently the GloBE Act applies). The concept of a joint venture entity is defined in Article 2(1)(19) of the GloBE Act as an entity whose financial results are included in the consolidated financial statements of the group under the equity method, provided that the ultimate parent entity of the group holds, directly or indirectly, at least 50% of the ownership interest in the entity (subject to the exemptions provided for in this paragraph a-e).

A joint venture entity [JV entity] is to be distinguished from a joint venture subsidiary [JV subsidiaries] – defined in Article 2(1)(21) of the GloBE Act as:

(a) an entity whose assets, liabilities, income, expenses and cash flows are consolidated by the joint venture entity in accordance with an acceptable accounting standard or would be consolidated if the joint venture entity were required to consolidate such assets, liabilities, income, expenses and cash flows in accordance with such standard , or

(b) a permanent establishment whose main entity is either the joint venture entity or an entity referred to in paragraph (a) .

The GloBE Act provides specific rules for the treatment of JV entities and JV subsidiaries. These are described in Article 22 of the GloBE Act. The most important point remains, however, the indication that the joint venture group top-up tax – which is calculated, in principle, like the global top-up tax (i.e. in accordance with the principles expressed in Chapter 1 of the GloBE Act) – is calculated in relation to these entities, with the proviso, however, that:

(1) the JV entity and the subsidiaries of that JV entity shall be treated as if those entities were constituent entities of a separate group and the JV entity was the ultimate parent entity of that group;

(2) a parent entity that has, directly or indirectly, an ownership interest in a JV entity or a subsidiary of a JV entity calculates the allocable share of the top-up tax (on the principles set out in the provision) – taking into account its % share of the individual JV group entities’ global top-up tax (calculated on the principles set out in the provision).

Importantly, as used by the legislature, a joint venture group is defined – in Article 2(1)(7) of the GloBE Act – as a group of two or more entities, one of which is a JV entity and the others are JV subsidiaries.

In our experience, the taxation of JV entities and their subsidiaries is increasingly questionable – therefore, a careful analysis of the data contained in the consolidated financial statements is necessary.

 


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