Unpacking the second pillar: trust issues

The application of the new global minimum tax will create additional complexity for groups whose ownership structure includes unincorporated entities such as trusts.

The problem

The starting point of the GloBE rules is the definition of a multinational group. This is established by reference to accounting principles: in its simplest form, the group will be composed of entities that the ultimate parent entity (UPE) includes in its consolidated financial statements. Hence, the identity of the UPE becomes crucial, as it is the relationship between it and the entities it controls (directly or indirectly) that determines the scope of the multinational group.

Potential PSUs are broadly defined, including both entities with legal personality and other “arrangements” such as partnerships or trusts. While in many cases it should be straightforward to identify a group’s PSU by looking at the highest entity that prepares the group’s accounts, complexities are likely to arise due to a broad definition “consolidated financial statements” in the rules.

This concept extends beyond the financial statements that a parent entity actually prepares; under member (d) of the definition of consolidated financial statements (included at the end of the model rules), there is a deeming rule that requires parent entities that do not ordinarily prepare consolidated financial statements to treat the financial statements as if they had been prepared in accordance with an Acceptable Financial Accounting Standard (AFAS).

Requiring assumptions on a set of financial statements is not a straightforward starting point for a new tax regime and is likely to trap some. While the logic of the policy is to provide for situations where the parent company is not (and in fact is not) required to prepare accounts under its local company law, or where it prepares accounts other than under an AFAS, this creates a host of complications.

The point is particularly relevant when dealing with trusts. This is due to the fact:

  • trusts are “entities” under the rules (and therefore may be PSUs); and
  • although trustees are often required to produce trust accounts, they are unlikely to be required to prepare consolidated financial statements under IFRS or local GAAP.

It will be important to explore this as part of any GloBE scoping exercise, as it may mean that an entity that is not generally considered the “mother” of a group may nevertheless be the PSU for the purposes of GloBE – although it does not actually prepare consolidated accounts. As a result, where a trust holds what might normally be considered the parent entity of an MNE group within the scope, the group must consider whether that trust can itself be the PSU rather than the underlying parent company.

why is it important

The consequences for a group in which a trust is treated as the PSU will depend on the specific facts and circumstances but could be significant.

Consequences for the group

Consider the situation where a trust has a substantial stake in a business enterprise and a separate family office with a portfolio of investments (designed to diversify risk away from the business group).

Ignoring the trust, the position of the company and the portfolio according to the GloBE rules should be independent; neither should take the other into account when determining whether it is in scope or calculating any potential liability for the additional tax. However, the interposition of the trust as a common PSU could mean that the “two groups” are treated as a single multinational enterprise group whose complementary tax position will be calculated by reference to all entities of both.

The need to calculate jurisdictional ETRs on this mixed basis might come as a surprise to two distinct groups originally structured not only to build a diversified portfolio, but also to protect against the risk of cross-contamination between the trading group and the investments. The way the GloBE rules work will make that independence much more difficult.

Consequences for trusts holding groups

Under the GloBE rules, the burden of paying the top-up fee will generally fall on the group’s PSU. A trust that is a PSU may find this somewhat of a (bad) surprise.

One obvious reason is that it will likely represent a new tax burden for the trust, the genesis of which may be linked to the operations and arrangements of entities located in remote jurisdictions over which the trustees have little control and with which the beneficiaries feel little related.

A trust that largely holds illiquid assets may also face cash flow difficulties when seeking to pay such additional tax that becomes due under the IIT. There may also be tax or planning sensitivities around the way funds are brought into the trust, which makes mitigating these cash flow difficulties a complex task.

Finally, there may be challenges to overcome regarding the interplay of powers and duties of trustees and this new tax liability. For example, do the trustees have the necessary powers to obtain the required funds and take the necessary steps to ensure that the new tax is paid? And will maintaining interest in this particular group remain in the best interest of the beneficiaries?

Additional Complications

Leaving aside the uncertainty surrounding the AFAS that a trust should adopt for its hypothetical financial statements, regardless of the applicable AFAS, it is difficult to apply accounting standards that are arguably not designed for trusts.

For example, the concept of “control” under IFRS 10 determines whether a given investor should consolidate with an investee. An investor “controls” an investee when the investor is exposed to variable returns from the investee and has the ability to influence those returns by exercising power over the investee. This test is not easily applicable to the relationship of a trust with a group in which it holds an interest.

If the trust has more than a passive interest in the investee, it is likely to demonstrate power over it, but for the right to be substantive, the trust must have the practical ability to exercise it. In this respect, it should be examined whether there are any obstacles to the exercise of these rights (including whether the agreement of several parties is necessary for the rights to be exercised) and then whether the parties who hold the rights would benefit from the exercise of these rights. Where trusts are involved, the answers to these questions can vary significantly depending on the relationship between trustees, beneficiaries and (if applicable) protectors in a particular set of circumstances.

Trusts may seek eventual comfort in the application of the “Investment Entity” exclusion in IFRS 10, but again, its application to the regulations is unlikely to be straightforward and will depend on a number of factors, including the number of investments it holds and the purpose. for which he holds them.


The GloBE presumption rule that must be considered by trust-owned groups reinforces the importance of identifying the group’s PSU at an early stage. These groups should address this issue as early as possible and ensure a clear understanding of the facts and circumstances that may determine the identity of a group’s UPR.

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