Unpacking Pillar Two: trust issues

15 July 2022

The application of the new global minimum tax will create added complexity for groups whose holding structure includes non-corporate entities such as trusts.

The Problem

The starting point for the GloBE rules is the definition of an MNE group. This is drawn by reference to accounting principles: in its simplest form, the group will consist of entities that the ultimate parent entity (UPE) includes in its consolidated financial statements.  As a result, the identity of the UPE becomes crucial, because it is the relationship between it and the entities which it controls (directly or indirectly) that determines the scope of the MNE group.

Potential UPEs are defined broadly, including both entities with legal personality and other “arrangements” such as partnerships or trusts. Whilst, in many cases, it should be straightforward to identify a group’s UPE by looking to the top-most entity that prepares group accounts, complexities are likely to arise because of an extended definition of “consolidated financial statements” in the rules.

This concept extends beyond the financial statements that a parent entity in fact prepares; under limb (d) of the definition of consolidated financial statements (included at the back of the model rules) there is a deeming rule which requires parent entities that do not ordinarily prepare consolidated financial statements to consider financial statements as if they were prepared in accordance with an Acceptable Financial Accounting Standard (AFAS).

A requirement to hypothesise a set of financial statements is not a straightforward starting point for a new tax regime and is likely to catch some out. Whilst the policy logic is to provide for situations where the parent isn’t required to (and doesn’t in fact) prepare accounts under its local company law, or where it prepares accounts other than under an AFAS, it creates a host of complications.

The point is particularly relevant when it comes to trusts.  This is because:

  • trusts are “entities” under the rules (and so can therefore be UPEs); and
  • although trustees are often subject to obligations to produce trust accounts, they are unlikely to be subject to an obligation to prepare consolidated financial statements under either 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 not typically regarded as a group’s “parent” may nonetheless be the UPE for GloBE purposes – even where it does not in fact prepare consolidated accounts. The result is that, when a trust owns what might ordinarily be thought of as the parent entity of an in-scope MNE group, the group must consider whether that trust may itself be the UPE rather than the underlying parent.

Why it matters

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

Consequences for the group

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

Ignoring the trust, the position of the business and portfolio under the GloBE rules should be independent; neither must consider the other when it comes to working out whether it is in scope or calculating any potential liability for top-up tax. However, the interposition of the trust as a common UPE could mean that the “two groups” are regarded as a single MNE group whose top-up tax position will be calculated by reference to all the entities across both.

The need to calculate jurisdictional ETRs on this blended basis could come as a surprise to two separate groups originally structured not only to build a diversified portfolio but to protect against the risk of cross-contamination between the trading group and investments. The operation of the GloBE rules will make that independence much harder.

Consequences for trusts holding groups

Under the GloBE rules, the burden of paying the top up tax will typically fall on the group’s UPE.  A trust which is a UPE may find this something of a (nasty) surprise.

One obvious reason is this is likely to represent a new tax burden on the trust, the genesis of which may relate to operations and arrangements of entities in distant jurisdictions over which the trustees have little oversight and to which the beneficiaries feel little nexus.

A trust that largely holds illiquid assets may also face cashflow difficulties when seeking to pay such top up tax that becomes due under the IIR.  There may also be tax or planning sensitivities around the manner in which funds are introduced to the trust that make alleviating such cashflow difficulties a complex task. 

Finally, there may be challenges to overcome around the interaction of trustee powers and duties, and this new tax liability. For instance, do trustees have the necessary powers to obtain the required funds and take the necessary action to ensure the new tax is paid? And will retaining the interest in that particular group remain in the best interests of beneficiaries?

Additional complications

Putting to one side the uncertainty around which AFAS a trust should adopt for its hypothetical financial statements, whichever AFAS applies, there is the difficulty of applying accounting standards arguably not designed with trusts in mind. 

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

If the trust has more than a passive interest in the investee then it is likely to demonstrate power over the investee, but for the right to be substantive the trust must have the practical ability to exercise it. In this regard one needs to consider whether there are any barriers to exercising these rights (including whether the agreement of more than one party is needed for the rights to be exercised) and then whether the parties that hold the rights would benefit from exercising those rights. Where trusts are involved, the answers to such questions could vary widely depending on the relationship between trustees, beneficiaries and (where relevant) protectors in a particular set of circumstances.

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


The GloBE deeming rule which must be considered by groups owned by a trust reinforce the importance of identifying the group’s UPE at an early stage.  Such groups should engage with this question sooner rather than later, and ensure a good understanding of the facts and circumstances that can determine the identity of a group’s UPE.

Keep up to date with the latest developments and other useful information on our OECD BEPS 2.0 hubpage