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Article 5.6. Minority-Owned Constituent Entities
Special rules are included in Article 5.6 for computing the ETR and Top-up Tax of Minority-Owned Constituent Entities. A Minority-Owned Constituent Entity is a Constituent Entity of the MNE Group where the UPE holds directly or indirectly 30% or less of its Ownership Interests. The Entities are Constituent Entities because the UPE holds their Controlling Interests, despite the small ownership percentage. Special rules are needed for Minority–Owned Constituent Entities because a UPE may have several Minority-Owned Constituent Entities with operations in the same jurisdiction but with different groups of owners that are not Group Entities. If the income and taxes of these different Constituent Entities were blended in the jurisdictional ETR computations, low-tax outcomes in one Entity could result in a Top-up Tax for the jurisdiction, some of which would be borne by non-Group Entity owners of a different Constituent Entity. While this can occur to some extent under the normal jurisdictional blending rules, the magnitude of the effect in the context of Minority-Owned Constituent Entities and the potential detrimental impact on these investment structures justifies a different rule.
The special rules in Article 5.6 can also apply to Permanent Establishments if the Main Entity and the Permanent Establishment meet the definition of a Minority-Owned Constituent Entity.
Article 5.6.1 applies with respect to members of a Minority-Owned Subgroup, which is a subgroup within the MNE Group comprised of a Minority-Owned Parent Entity and its Minority-Owned Subsidiaries. Article 5.6.2 covers the case where a Minority-Owned Constituent Entity is not part of a Minority-Owned Subgroup. The terms Minority-Owned Constituent Entity, Minority-Owned Subgroup, Minority-Owned Parent Entity and Minority-Owned Subsidiary are defined in Article 10.1 and discussed below.
A Minority-Owned Parent Entity is a Minority-Owned Constituent Entity that holds directly or indirectly the Controlling Interests of another Minority-Owned Constituent Entity. If there are two or more Parent Entities that meet the definition of Minority-Owned Constituent Entity in the same ownership chain, only the Entity that is in the highest level in the ownership chain is considered to be the Minority-Owned Parent Entity.
A Minority-Owned Subsidiary is defined as a Minority-Owned Constituent Entity whose Controlling Interests are held, directly or indirectly, by a Minority-Owned Parent Entity. The Minority-Owned Parent Entity and its Minority-Owned Subsidiaries comprise a Minority-Owned Subgroup.
Not all Constituent Entities whose Controlling Interests are held by a Minority-Owned Parent Entity are considered Minority-Owned Subsidiaries and members of a Minority-Owned Subgroup. They must also meet with the definition of a Minority-Owned Constituent Entity. For instance, assume that UPE holds 60% of the Ownership Interests of B Co, but the Controlling Interests of B Co are held through A Co, a Constituent Entity that is the Minority-Owned Parent Entity of a Minority-Owned Subgroup. In this case, B Co does not meet the requirements to be a Minority-Owned Constituent Entity because the UPE holds more than 30% of its Ownership Interests. The fact that its Controlling Interests are held through a MinorityOwned Parent Entity does not make it a Minority-Owned Subsidiary and member of the Minority-Owned Subgroup.
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