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Substance-Based Income Exclusion (SBIE) — Substance Based Income Exclusion (SBIE) is a carve out under the OECD Pillar Two GloBE Rules that reduces the amount of income subject to top up tax based on the payroll costs and tangible assets located in a jurisdiction.
Substance-Based Income Exclusion (SBIE) is a carve-out under the OECD Pillar Two GloBE Rules that reduces the amount of income subject to top-up tax based on the payroll costs and tangible assets located in a jurisdiction. SBIE protects profits attributable to genuine economic substance from minimum taxation.
The exclusion is calculated as a percentage of eligible payroll costs plus a percentage of the carrying value of eligible tangible assets. Only "Excess Profit" (Net GloBE Income minus SBIE) is subject to top-up tax. SBIE is optional—taxpayers may make an annual election not to apply SBIE for a jurisdiction.
SBIE is defined in Article 5.3 of the GloBE Model Rules (20 December 2021).
Key provisions:
The transitional rates (higher initial percentages declining to 5% each by 2033) are specified in Article 9.2, which modifies the rates in Articles 5.3.3 and 5.3.4.
SBIE Calculation:
Eligible Components:
| Component | What's Included | What's Excluded |
|---|---|---|
| Eligible Payroll | Wages, salaries, benefits, bonuses, stock-based compensation for Eligible Employees performing work in the jurisdiction | Payroll costs capitalised into the carrying value of Eligible Tangible Assets |
| Eligible Employees | Employees AND independent contractors participating in ordinary operating activities under the direction and control of the MNE Group | Contractors operating independently outside MNE direction |
| Eligible Tangible Assets | PP&E, natural resources, lessee's right-of-use assets, certain government licences tied to significant tangible investment | Cash, intangibles, financial assets, inventory, property held for sale/lease/investment |
Key Clarifications: Per OECD Commentary, (1) stock-based compensation is included in Eligible Payroll Costs, (2) independent contractors under MNE direction and control can qualify as Eligible Employees, and (3) payroll capitalised to inventory is included (only amounts capitalised to Eligible Tangible Assets are excluded to avoid double-counting).
Averaging for Tangible Assets: Eligible tangible assets are calculated as the average of opening and closing carrying values for the fiscal year, based on financial accounting.
The SBIE rates start higher and decline over a 10-year transition period (Article 9.2):
| Fiscal Year Beginning | Payroll Rate | Tangible Asset Rate |
|---|---|---|
| 2023 | 10.0% | 8.0% |
| 2024 | 9.8% | 7.8% |
| 2025 | 9.6% | 7.6% |
| 2026 | 9.4% | 7.4% |
| 2027 | 9.2% | 7.2% |
| 2028 | 9.0% | 7.0% |
| 2029 | 8.2% | 6.6% |
| 2030 | 7.4% | 6.2% |
| 2031 | 6.6% | 5.8% |
| 2032 | 5.8% | 5.4% |
| 2033+ | 5.0% | 5.0% |
Declining Protection: As rates decline, more profit becomes "Excess Profit" subject to top-up tax. An MNE that avoids top-up tax today due to high SBIE may face exposure as rates fall.
Facts (Jurisdiction M, Fiscal Year beginning 2025):
SBIE Calculation (2025 rates: 9.6% payroll, 7.6% assets):
Top-Up Tax Calculation:
(Note: This example ignores Additional Current Top-up Tax and QDMTT adjustments.)
Without SBIE: Top-Up Tax would be 7.5% × €80M = €6 million
SBIE Benefit: Reduces top-up tax by €0.93 million (from €6M to €5.07M)
One of the Transitional CbCR Safe Harbours allows MNEs to treat a jurisdiction as having zero top-up tax if:
This "Routine Profits Test" recognizes that jurisdictions where all profit is substance-backed shouldn't trigger top-up tax.
| Factor | Impact on SBIE |
|---|---|
| Hiring employees | Increases payroll carve-out |
| Investing in PP&E | Increases tangible asset carve-out |
| Using controlled contractors | May still qualify for payroll carve-out (if under MNE direction/control) |
| Leasing vs. buying assets | Right-of-use assets qualify for tangible asset carve-out |
| Intangible-heavy business | Low SBIE relative to profits → higher top-up exposure |
IP Holding Companies: Entities with high profits from intangibles but few employees or physical assets will have low SBIE relative to income. This means most of their profit is "Excess Profit" subject to top-up tax—a key Pillar Two design objective.
SBIE ensures that profits attributable to genuine economic substance (employees doing work, physical assets being used) are protected from top-up tax. It prevents the minimum tax from capturing "routine" returns on real business activity.
Yes—if SBIE ≥ Net GloBE Income, Excess Profit is zero, and no top-up tax applies to the jurisdiction. This typically occurs in jurisdictions with high substance relative to profits (e.g., manufacturing operations with significant headcount and PP&E).
No. Taxpayers may make an annual election not to apply SBIE for a jurisdiction. This might be done for simplification if SBIE would be immaterial.
The transitional rates reflect a political compromise in the GloBE negotiations. Higher initial rates gave jurisdictions time to adjust; the rates decline to reach steady-state levels of 5% each by 2033.
Compensation (wages, salaries, benefits, bonuses, and stock-based compensation) for Eligible Employees performing work in the jurisdiction. This includes both employees and independent contractors participating in ordinary operating activities under the MNE's direction and control. Payroll capitalised into Eligible Tangible Assets is excluded (to avoid double-counting).
Property, plant, and equipment (PP&E), natural resource assets, lessee's right-of-use assets, and certain government licences/arrangements tied to significant tangible investment—all based on financial accounting carrying values. Excluded: intangibles, cash, receivables, inventory, financial assets, and property held for sale, lease, or investment.
Businesses with high profits from intangibles but few employees or physical assets will have low SBIE relative to income. This means most of their profit is "Excess Profit" subject to top-up tax—a key Pillar Two design objective.
Per jurisdiction. Payroll and tangible assets from all constituent entities in a jurisdiction are aggregated, just like Net GloBE Income and Adjusted Covered Taxes.