Top-up tax & SBIE

The top-up tax concept

Top-up tax is the additional tax imposed when a jurisdiction's GloBE effective tax rate (ETR) falls below 15%. Its purpose is to bring the effective rate up to the minimum. The computation follows a logical sequence: determine the shortfall rate, identify the income on which it applies (after carve-outs), and calculate the resulting tax.

The top-up tax is not a flat charge on all income in a low-taxed jurisdiction. It is levied only on "excess profit," the portion of GloBE income that exceeds the substance-based income exclusion (SBIE). The SBIE is a critical part of the framework: it ensures that a return on genuine economic substance (tangible assets and payroll) is not subject to top-up tax, even in a low-tax jurisdiction.

Step-by-step computation

Step 1: Determine the top-up tax percentage

The top-up tax percentage is simply the difference between the 15% minimum rate and the jurisdictional ETR:

Top-up Tax Percentage = 15% - Jurisdictional ETR

For example, if a jurisdiction has an ETR of 10%, the top-up tax percentage is 5%. If the ETR is 3%, the top-up tax percentage is 12%. If the ETR is zero (for example, in a zero-tax jurisdiction), the top-up tax percentage is 15%.

Step 2: Calculate the substance-based income exclusion (SBIE)

The SBIE removes from the top-up tax base a return attributable to real economic activity in the jurisdiction. It has two components:

• Payroll carve-out: A percentage of eligible payroll costs for eligible employees performing activities in the jurisdiction.
• Tangible asset carve-out: A percentage of the net book value of eligible tangible assets located in the jurisdiction.

SBIE = (Payroll carve-out rate x Eligible payroll costs) + (Tangible asset carve-out rate x Net book value of eligible tangible assets)

Eligible payroll costs

Eligible payroll costs include wages, salaries, employee benefits (including pension contributions, health insurance, and similar items), payroll taxes borne by the employer, and stock-based compensation expense. The costs must relate to employees who perform activities for the constituent entities in the jurisdiction. Costs of independent contractors are excluded.

Eligible tangible assets

Eligible tangible assets include property, plant, and equipment; natural resources; lessee right-of-use assets; and licences or similar rights granted by a government for the use of immovable property or natural resources. Importantly, intangible assets (IP, goodwill, software) and financial assets are excluded. This is by design: the SBIE is intended to carve out a return on physical substance, not on mobile assets like intellectual property.

The net book value is measured as the average of the opening and closing balances for the fiscal year, as reported in the financial statements (or consolidation packages).

Transitional carve-out rates

The SBIE carve-out rates are set at higher levels during a ten-year transition period and gradually decline to their long-term levels. This reflects the view that groups need time to adjust to the new framework and that higher initial carve-outs soften the impact during the early years.

The declining rates mean that, over time, a larger share of GloBE income will be subject to potential top-up tax, making the SBIE less generous in later years. Groups with significant tangible substance in low-tax jurisdictions benefit the most from the SBIE, particularly during the transition period.

Step 3: Calculate excess profit

Excess profit is the Net GloBE Income for the jurisdiction minus the SBIE:

Excess Profit = Net GloBE Income - SBIE

If the SBIE exceeds the Net GloBE Income, the excess profit is zero and no top-up tax arises, even if the ETR is below 15%. This is an important safeguard for jurisdictions where the group has heavy tangible investment relative to profits.

Step 4: Calculate the top-up tax

The top-up tax for the jurisdiction is:

Jurisdictional Top-up Tax = Top-up Tax Percentage x Excess Profit

To this, any additional current top-up tax (for example, from the recapture of deferred tax liabilities) is added to arrive at the total top-up tax for the jurisdiction.

The de minimis exclusion

The GloBE rules include a de minimis exclusion that can eliminate top-up tax for jurisdictions where the group has trivial operations. A jurisdiction qualifies for the de minimis exclusion if both of the following conditions are met:

• The average GloBE revenue of all constituent entities in the jurisdiction is less than EUR 10 million (averaged over the current year and the two preceding fiscal years).
• The average Net GloBE Income of all constituent entities in the jurisdiction is less than EUR 1 million (or is a loss), averaged over the same three-year period.

If both conditions are satisfied, the top-up tax for the jurisdiction is deemed to be zero, regardless of the actual ETR. This exclusion is an annual election; the group must affirmatively elect to apply it each year, and the election applies on a jurisdiction-by-jurisdiction basis.

Additional top-up tax

In certain circumstances, additional top-up tax can arise beyond the standard computation described above:

Recapture of deferred tax liabilities

As described in Chapter 6, if a deferred tax liability was included in covered taxes but does not reverse within five years, it is recaptured. This recapture increases the top-up tax in the recapture year; effectively, the group pays back the covered tax credit it received in the earlier year.

Post-filing adjustments

If a material change to the covered taxes or GloBE income of a prior year is identified after the GloBE Information Return has been filed, the ETR for the prior year may need to be recomputed. Any resulting increase in top-up tax is imposed as additional top-up tax in the current year.

Allocation of top-up tax to constituent entities

Once the jurisdictional top-up tax has been computed, it must be allocated to individual constituent entities within the jurisdiction. This allocation is necessary because the collection mechanisms (QDMTT, IIR, UTPR) operate at the entity level, and different entities may have different ownership structures.

The allocation is based on each entity's share of the "top-up tax" computed at the jurisdictional level. Specifically, the top-up tax is allocated to each entity in proportion to its share of the jurisdiction's excess profit. Entities with a GloBE loss or whose income is less than or equal to their entity-level SBIE are allocated zero top-up tax.

Interaction with QDMTT

Where a jurisdiction has implemented a Qualified Domestic Minimum Top-up Tax (QDMTT), the domestic top-up tax collected under the QDMTT is credited against the GloBE top-up tax computed under the IIR or UTPR. If the QDMTT fully offsets the GloBE top-up tax, no additional tax is collected under the IIR or UTPR for that jurisdiction.

The QDMTT computation may use the same or a different methodology from the GloBE computation. Where the QDMTT produces a different result from the GloBE top-up tax, the difference is generally resolved in favour of the QDMTT amount; the IIR and UTPR give credit for the QDMTT actually paid.

Practical implications

The top-up tax and SBIE computation has several important practical implications for groups:

• Data requirements: Computing the SBIE requires entity-level payroll data and tangible asset book values for every constituent entity. This data may not be readily available in the group's consolidation system and may need to be collected from local finance teams.
• Restructuring incentives: The SBIE creates an incentive to maintain tangible substance in low-tax jurisdictions. Moving employees or tangible assets out of a jurisdiction reduces the SBIE and increases exposure to top-up tax.
• IP-holding structures: Structures that concentrate IP income in low-tax jurisdictions with minimal tangible substance are particularly exposed, as the SBIE will provide little or no relief. This is one of the key behavioural effects the GloBE rules are designed to create.
• Election management: The de minimis exclusion is an annual election that must be actively managed. Groups should track the three-year average for every jurisdiction to determine whether the election is available and beneficial.