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Income Inclusion Rule (IIR) — Income Inclusion Rule (IIR) is the primary charging mechanism under the OECD Pillar Two GloBE Rules.
Income Inclusion Rule (IIR) is the primary charging mechanism under the OECD Pillar Two GloBE Rules. It requires a parent entity to pay its allocable share of the top-up tax computed for any low-taxed constituent entity in which it holds an ownership interest.
IIR operates on a "top-down" basis: the ultimate parent entity (or the highest intermediate parent entity in a jurisdiction with IIR) is responsible for the top-up tax liability. This ensures the tax is collected at the parent level. IIR applies to in-scope MNE Groups meeting the €750 million revenue threshold.
The IIR is defined in Articles 2.1 through 2.3 of the GloBE Model Rules (20 December 2021).
Key provisions:
Implementation timing varies by jurisdiction—see the implementation table below.
How IIR Works:
Top-Down Application:
| Scenario | Which Parent Applies IIR |
|---|---|
| UPE in IIR jurisdiction | UPE is liable for full top-up tax |
| UPE not in IIR jurisdiction, but intermediate parent is | Intermediate parent is liable |
| Multiple intermediate parents in IIR jurisdictions | Highest-tier parent applies IIR first |
Allocable Share:
The parent entity's IIR liability is based on its ownership percentage in the low-taxed entity, taking into account the ownership chain. Article 2.3 provides an offset mechanism so that top-up tax brought into charge by an intermediate parent in an IIR jurisdiction is not double-counted.
Minority Interests: If the parent owns less than 100% of the low-taxed entity, IIR only captures the parent's proportionate share. The remainder may be subject to UTPR if not otherwise collected.
Scenario: US Parent → UK Holding (100%) → Ireland Sub (100%)
Facts:
Calculation:
Who applies IIR?
Result: The €5 million top-up tax is collected by UK (not Ireland, not US).
(Note: This example is simplified and ignores SBIE, de minimis exclusion, and entity-level allocation of jurisdictional top-up tax.)
IIR has similarities to Controlled Foreign Corporation (CFC) rules but operates differently:
| Aspect | IIR | Traditional CFC Rules |
|---|---|---|
| Threshold | 15% ETR (jurisdictional) | Varies by jurisdiction |
| Base | Net GloBE Income (accounting-based) | Typically taxable income |
| Scope | All low-taxed jurisdictions | Often passive income focus |
| Coordination | QDMTT takes priority | May overlap with other rules |
| Mechanism | Top-up tax liability | Income inclusion |
Double Counting Risk: Jurisdictions implementing IIR must consider interaction with existing CFC rules to avoid double taxation. The GloBE rules include coordination mechanisms, but domestic implementation varies.
| Jurisdiction | IIR Effective Date | Notes |
|---|---|---|
| EU Member States | FY beginning from 31 Dec 2023 | Article 50 deferral election may apply |
| UK | FY beginning from 31 Dec 2023 | Multinational Top-up Tax |
| Japan | FY beginning from 1 Apr 2024 | QDMTT/UTPR from 1 Apr 2026 |
| South Korea | FY beginning from 1 Jan 2024 | UTPR delayed to 2025 |
| Switzerland | FY beginning from 1 Jan 2025 | QDMTT from 1 Jan 2024; UTPR delayed |
| Canada | FY beginning from 31 Dec 2023 | Global Minimum Tax Act |
| Australia | FY beginning from 1 Jan 2024 |
IIR is the primary rule—it collects top-up tax through the parent ownership chain. UTPR is the backstop—it only applies when IIR doesn't collect the full amount, allocating remaining top-up tax based on substance (employees and assets) rather than ownership.
No. IIR only applies if the parent entity is located in a jurisdiction that has implemented IIR legislation. If the ultimate parent's jurisdiction hasn't implemented IIR, the next-highest parent in an IIR jurisdiction applies the rule.
A Qualified QDMTT takes priority over IIR. If the low-tax jurisdiction has a qualified domestic minimum top-up tax that collects the full amount, IIR has nothing to collect. IIR only applies to the residual top-up tax after QDMTT is credited.
The parent is only liable for its proportionate share of top-up tax based on its ownership percentage. Any uncollected portion (attributable to minority interests not in the IIR chain) may be subject to UTPR in jurisdictions where other group members have substance.
IIR imposes a top-up tax liability on the parent entity. The parent includes the top-up tax amount in its own tax computation. It's not collected from the subsidiary directly.
Jurisdictions typically require MNEs to file a GloBE Information Return that includes the ETR calculations, top-up tax computations, and IIR amounts. The parent entity reports the IIR amount in its domestic tax return.
The GloBE rules include mechanisms to prevent double taxation, including:
However, complex ownership structures may require careful analysis.