Our New York office regularly posts 'Snippets' on a range of EU tax and legal topics. This Snippet describes the treatment of joint ventures ('JV') that are not consolidated under Pillar Two ('P2').
P2 applies to MNE groups with annual revenues of at least € 750M (the 'Revenue Threshold'). An MNE group consists of entities that the ultimate parent entity ('UPE') includes in its consolidated financial statements on a line-by-line basis ('Consolidated'). In respect of JVs, P2 distinguishes two situations: (i) a JV that is Consolidated and (ii) a JV that is not Consolidated ('NC JV'). In this Snippet, we solely discuss NC JVs.
The results of JVs that are not controlled exclusively by one person are usually not Consolidated but rather accounted for under the equity method. Under that method, the initial investment in the JV is recorded at cost price and then adjusted on the basis of its actual performance.
Absent a special rule, NC JVs would be fully excluded from the scope of P2 as they are not Consolidated. P2 contains a specific rule (the 'JV Rule') to prevent that NC JVs fall outside the scope of P2. The definition of a JV under the P2 rules is broader than the general definition of a JV for accounting purposes. The JV Rule applies if the following three cumulative requirements are met:
- JV results are reported under the equity method;
- The UPE's (in)direct ownership interest in JV represents at least 50% ; and
- JV is not the UPE of an MNE in scope of P2 (i.e., JV and its (in)direct in-scope subsidiaries do not meet the Revenue Threshold)
If the above requirements are met, the effective tax rate ('ETR') is computed as if the NC JV is the UPE of a separate MNE group. The ETR of the NC JV and its subsidiaries ('JV Subs'), together 'JV Group', is determined separate from other in-scope entities of the MNE group in the same jurisdiction. In the absence of a domestic top-up tax at the level of the JV Group, top-up tax ('TT') is still collected from the UPE of the main MNE group under the regular P2 charging mechanism (i.e., either the income inclusion rule ('IIR') or the undertaxed profits rule) as illustrated in the next example.
Assume that A and B both (i) hold a 50% interest in an NC JV, (ii) apply the equity method and (iii) are located in a P2 country. NC JV holds a 90% interest in a low-taxed JV Sub with 100 of profits and an ETR of 5%. JV Sub is not located in a P2 country. As a first step, the TT will be calculated at the level of NC JV. This TT is equal to 90 [(15%-5%) x 100 x 90%]. As a next step, the TT due is allocated to A and B under the IIR in line with their ownership percentage (i.e., 45 of TT will be allocated to both A and B).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.