Pillar Two: Impact Side-by-Side Safe Harbour On Joint Ventures – New York Office Snippet

This Snippet provides an overview of the impact of the Side-by-Side Safe Harbour for Pillar Two on joint ventures for US-parented multinational groups.

Side-by-Side Safe Harbour

Under the Side-by-Side Safe Harbour (SbS SH), where the Ultimate Parent Entity (UPE) of an MNE is located in a jurisdiction with a Qualified SbS Regime (i.e., the U.S.), Top‑up Tax under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR)is deemed to be zero. Qualified Domestic Minimum Top-up Taxes (QDMTTs) remain applicable and therefore US-parented multinational groups (US MNEs) may still be faced with Top-up Tax .

Consolidated joint ventures

Where a joint venture is consolidated on a line‑by‑line basis, it forms part of the Pillar Two group of the consolidating majority investor (a consolidated joint venture). Such structures could give rise to complex IIR and UTPR outcomes, where ownership percentages determine at what level Top-up Tax is levied, which impact both the majority and minority investors.

For US MNEs that consolidate their interest in joint ventures, these IIR and UTPR considerations are removed under the SbS SH. The SbS SH results in Top-up Tax under the IIR and UTPR in respect of all group companies to be zero, including Top-up Tax in relation to a consolidated joint venture.

Since QDMTTs remain applicable under the SbS SH, a consolidated joint venture located in a QDMTT jurisdiction may still be subject to Top-up Tax at local level. 

In addition, US minority investors in a joint venture that is consolidated by a non-US majority investor may still economically be impacted by Top-up Tax levied at the joint venture level under the IIR and UTPR.

Non-consolidated joint ventures

Where a joint venture is not consolidated but accounted for under the equity method, it is in principle not part of the Pillar Two group of the joint venture partners. Under the specific joint venture rules, equity accounted joint ventures held for at least 50% by an in scope MNEs may be treated as a separate joint venture group (a non-consolidated joint venture).

If the 50% shareholder of the non-consolidated joint venture is a US MNE, the SbS SH prevents Top-up Tax under the IIR or UTPR in relation to the joint venture group for that US investor. If the remaining interest in the joint venture is held by a non-US, that shareholder can still be subject to the IIR and UTPR in relation to its own 50% share in the non-consolidated joint venture.

Non-consolidated joint ventures may also still be subject to QDMTTs, meaning similar considerations as for consolidated joint ventures remain relevant.

Takeaways

For US MNEs, the SbS SH significantly reduces Pillar Two exposure in a joint venture context by eliminating IIR and UTPR concerns for both consolidated and non-consolidated joint ventures. However, as both types of joint ventures may still be subject to QDMTTs, indemnities for Top-up Tax at joint venture level remain relevant for joint venture partners.

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.