IIR (Income Inclusion Rule): The Parent’s Top-Up Charge

Definition

The IIR — the income inclusion rule — is the primary charging mechanism of the GloBE rules: where an in-scope group entity’s jurisdictional ETR is below 15%, the parent jurisdiction (the jurisdiction of the ultimate parent entity) includes the top-up tax in the parent’s taxable income — the parent is charged the top-up on the group’s undertaxed profits. The IIR is the first mechanism in the IIR, UTPR & QDMTT sequence — the primary charge, before the UTPR (the secondary charge, where the IIR does not reach) and the QDMTT (the domestic minimum, where the jurisdiction enacts it).

The IIR, in one computation:
  1. The in-scope group entity (the consolidated CbC group, the €750m
     test) in the jurisdiction with the ETR < 15%
  2. The top-up tax (the (15% − ETR) × (ACI − SBIE) — the base, the rate)
  3. The parent jurisdiction’s inclusion: the top-up tax is included in
     the parent’s taxable income (the parent charges / pays the top-up)
  4. The condition: the IIR applies where the entity’s jurisdiction has
     not charged the top-up (no QDMTT in force in that jurisdiction)

The element	The content
The trigger	The in-scope group entity’s jurisdictional ETR below 15% (the GloBE computation, the ETR the floor test)
The charge	The top-up tax ((15% − ETR) × (ACI − SBIE)) — the top-up on the undertaxed profit, the substance excluded
The charger	The parent jurisdiction (the ultimate parent entity’s jurisdiction) — the inclusion in the parent’s taxable income, the parent’s tax on the top-up
The condition	The IIR applies where the entity’s jurisdiction has not charged the top-up (no QDMTT in force there) — the QDMTT (where enacted) takes priority over the IIR (the domestic minimum first, the IIR the fallback)
The sequence	The IIR is the primary mechanism — the UTPR is the secondary (the top-up where the IIR does not reach, the allocation to the other in-scope jurisdictions), the QDMTT is the domestic (the jurisdiction’s own minimum, where enacted)

The working read (the IIR, UTPR & QDMTT guide): the IIR is the parent’s charge — the parent jurisdiction includes the top-up in the parent’s income, and the parent pays the tax. The allocation (where multiple in-scope jurisdictions have undertaxed profits, the top-up is allocated to the parent and the other in-scope entities on the model rules’ basis — the worked allocation example) is the IIR’s mechanics. The QDMTT priority (the jurisdiction’s own domestic minimum, where enacted, takes priority over the IIR — the domestic charge first, the IIR the fallback where the QDMTT does not cover) is the IIR’s condition. The transitional safe harbour (the CbCR-based ETR test, the 3-year fast-path) is the check that can avoid the top-up (and the IIR) for the applicable years.

Example

The MNE group (the consolidated revenue €2bn, in scope): the Cayman entity (the in-scope group entity) has the jurisdictional ETR of 3% (the ACI €30m, the covered taxes €0.9m — below the 15% floor). The top-up tax: (15% − 3%) × (€30m − SBIE) — the base (the ACI minus the SBIE), the rate (12%). The Cayman has no QDMTT (no domestic minimum enacted) — the IIR applies: the parent jurisdiction (the ultimate parent’s jurisdiction, say the Netherlands) includes the top-up tax in the parent’s taxable income — the parent pays the top-up on the Cayman’s undertaxed profit. The sequence: the IIR (the primary) charges the top-up; the UTPR does not engage (the IIR reached the top-up); the QDMTT does not engage (not enacted in the Cayman). The transitional safe harbour checked for the applicable years (the CbCR-based ETR, the 5% differential) — where it applies, the top-up (and the IIR) is avoided for those years.

See also

• IIR, UTPR & QDMTT: The Three Charging Mechanisms (the guide)
• UTPR (Undertaxed Profits Rule) · QDMTT
• Top-Up Tax · GloBE

FAQ

IIR or QDMTT — which charges the top-up first? The QDMTT (the jurisdiction’s own domestic minimum top-up tax, where enacted) takes priority — the domestic charge first, the top-up charged in the jurisdiction itself. The IIR is the fallback — where the jurisdiction has not enacted the QDMTT (no domestic minimum), the parent jurisdiction includes the top-up in the parent’s income. The sequence: the QDMTT (where enacted) → the IIR (where the QDMTT does not cover) → the UTPR (where the IIR does not reach). The IIR, UTPR & QDMTT guide has the priority mechanics.

What is the IIR’s allocation, where multiple jurisdictions are undertaxed? The model rules’ allocation — where multiple in-scope group entities (in different jurisdictions) have the ETR below 15%, the top-up is allocated to the parent (and the other in-scope entities) on the model rules’ basis (the jurisdictional top-ups, the parent’s share, the other in-scope entities’ shares) — the worked allocation example. The IIR’s charge is the parent’s inclusion of the allocated top-up (the parent’s share, the parent’s tax on it). The allocation is the IIR’s mechanics — the top-up is not concentrated in the parent’s jurisdiction on the parent’s own profit, but allocated across the group’s undertaxed profits.

Does the IIR interact with the double tax relief (the treaty)? The IIR’s top-up is a Pillar Two tax (the minimum tax, the 15% floor) — it is not the income tax the treaty’s double tax relief (the credit, the exemption) addresses. The top-up’s interaction with the treaty (the treaty’s application to the top-up, the relief where the top-up is double-charged) is the GloBE rules guide edge — the model rules’ treatment of the top-up in the treaty context (the specified items, the intercompany consistency). The practical read: the top-up is the minimum tax, the treaty is the income tax relief — the two run on different bases, and the Pillar Two for TP teams guide has the documentation touchpoint (the top-up’s computation, the treaty’s interaction, the file’s cross-reference).