Article 21 - Equity Investment Inclusion Election

At the election of the Filing Constituent Entity in relation to Constituent Entities located in the Kingdom holding Ownership Interests other than Qualified Ownership Interests, all of the following shall apply:

1. The Constituent Entities shall include in their Constituent Entity Income or Loss the accounting gain, profit, or loss, adjusted as required by Paragraph A of Article 12 of these Regulations with the exception of any adjustment described in Clause 3 of Paragraph A of Article 12 of these Regulations, with respect to any of the following:

   1. Fair value gains and losses and impairments on the Ownership Interests where the owner is taxable on a mark-to-market basis or on the impairment, and the tax consequences of the mark-to-market movements or impairments on Ownership Interests are reflected in the tax expense, or the owner is taxable on a realisation basis and the tax expense includes deferred tax expense on the mark-to-market movement or impairments on the Ownership Interests.

   2. Profit and loss attributable to the Ownership Interests other than Qualified Ownership Interests, where the interest is in a Tax Transparent Entity and the owner accounts for the Ownership Interests using the equity method.

   3. Dispositions of the Ownership Interests which give rise to gains or losses that are included in the owner's Taxable Profit or Loss, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief on that gain.

2. The Constituent Entities shall, notwithstanding Clause 1 of Paragraph B of Article 31 and Clause 1 of Paragraph C of Article 33 of these Regulations, include all current and deferred tax expenses in respect of the amounts referred to in Clause 1 of this Paragraph in the calculation of their Adjusted Covered Tax.

All of the following shall apply in relation to the election in Paragraph A of this Article:

1. The election shall apply to all Ownership Interests held by all Constituent Entities of the Multinational Enterprise Group which are located in the Kingdom, but shall not apply to any Portfolio Shareholdings owned by the Constituent Entities.

2. The election is a Five-Year Election which can be made in accordance with Article 20 of the Law.

Paragraphs D to N of this Article shall apply to Qualified Flow-through Tax Benefits that flow through a Qualified Ownership Interest to which the election under Paragraph A of this Article applies.

Subject to Paragraphs K and L of this Article, where the election under Paragraph A of this Article applies, Qualified Flow-through Tax Benefits shall be added to the Adjusted Covered Taxes of a Constituent Entity that is the direct owner of a Qualified Ownership Interest, or indirect owner held via Tax Transparent Entities that are not Constituent Entities of the Multinational Enterprise Group, to the extent that the Qualified Flow-through Tax Benefit was treated as reducing tax expense accrued in the Financial Accounting Net Income or Loss of the Constituent Entity.

Subject to Paragraphs K and L of this Article, a Constituent Entity's investment in a Qualified Ownership Interest shall be treated as being reduced by receipts with respect to the Qualified Ownership Interest in respect of any of the below, provided that no amount shall be treated as reducing the investment to the extent that it would reduce the investment to below zero:

1. The amount of tax credits that have flowed through to the Constituent Entity.

2. The amount of any tax-deductible losses that have flowed through to the Constituent Entity multiplied by the nominal rate applicable to the Constituent Entity.

3. The amount of any distributions to the Constituent Entity, including returns of capital.

4. The amount of proceeds from a sale of all or part of the Qualified Ownership Interest.

Subject to paragraph G of this Article, any amount referred to in Clauses 1 to 4 of Paragraph E of this Article that flows through, or are received in respect of, a Qualified Ownership Interest, after the Constituent Entity's investment has been reduced to zero, shall be subtracted in the calculation of that Constituent Entity's Adjusted Covered Taxes.

An amount referred to in Clauses 3 and 4 of Paragraph E of this Article or a Qualified Refundable Tax Credit shall be subtracted in the calculation of a Constituent Entity's Adjusted Covered Taxes only to the extent of the amount of any Qualified Flow-through Tax Benefits that flowed through the Qualified Ownership Interest and that were treated as an addition in the calculation of that a Constituent Entity's Adjusted Covered Taxes.

A Qualified Ownership Interest means an investment in a Tax Transparent Entity that satisfies all of the following conditions:

1. Either of the following apply:

   1. The investment in the Tax Transparent Entity is treated as an equity interest for local tax purposes.

   2. The Tax Transparent Entity would be treated as an equity interest under an Authorised Financial Accounting Standard in the jurisdiction in which the Tax Transparent Entity operates.

2. The assets, liabilities, income, expenses, and cash flows of the Tax Transparent Entity are not consolidated on a line-by-line basis in the Consolidated Financial Statements of the Multinational Enterprise Group.

3. Both of the following apply:

   1. The total return with respect to that Ownership Interest, excluding tax credits other than Qualified Refundable Tax Credits, is, at the time the investment is entered into, expected to be less than the total amount invested by the owner of the Ownership Interest such that a portion of the investment will be returned in the form of tax credits other than Qualified Refundable Tax Credits.

   2. The investor has a genuine economic interest in the Tax Transparent Entity and is not protected from loss of its investment.

Notwithstanding Paragraph H of this Article, a Qualified Ownership Interest shall not include an investment in a Tax Transparent Entity where a jurisdiction only permits the benefits of a tax credit to be transferred through such investment when the Entity that originates the tax credits or investor is subject to a Qualified Income Inclusion Rule (IIR) or Qualified Undertaxed Payments Rule (UTPR).

A Qualified Flow-through Tax Benefit means any amount of tax credits, other than Qualified Refundable Tax Credits, and tax-deductible losses multiplied by the nominal rate applicable to the owner of a Qualified Ownership Interest, that flow through a Qualified Ownership Interest in a Tax Transparent Entity to the extent that it reduces the owner's investment in the Qualified Ownership Interest pursuant to Paragraph E of this Article.

Where a Constituent Entity uses the Proportional Method of Accounting for its investment in a Qualified Ownership Interest, the Constituent Entity shall apply that method of accounting such that any of the amounts specified in Clauses 1 to 4 of Paragraph E of this Article that flow-through or are received in respect of a Qualified Ownership Interest shall be treated as a reduction to the investment in the Qualified Ownership Interest in proportion to the Expected Tax Benefits Ratio.

The amounts specified in Clauses 1 to 4 of Paragraph E of this Article that flow-through or are received in respect of the Qualified Ownership Interest in excess of the reduction to the investment in the Qualified Ownership Interest pursuant to K of this Article shall not be included as a positive amount in the Constituent Entity's Adjusted Covered Taxes.

On the making of an election by a Filing Constituent Entity, where the Entity concerned holds a Qualified Ownership Interest but does not use the Proportional Amortisation Method of Accounting, the Entity may apply Paragraphs K and L of this Article as if it used the Proportional Amortisation Method of Accounting in respect of its Qualified Ownership Interest.

An Expected Tax Benefit Ratio means the ratio of the amount of tax credits, and the amount of any tax-deductible losses multiplied by the nominal rate applicable to the owner of the Qualified Ownership Interest, that flowed through, or are received, in respect of the Qualified Ownership Interest in the Fiscal Year to the total of such items that are expected to flow-through or be received in respect of the Qualified Ownership Interest over the term of the investment.

Proportional Amortisation Method of Accounting means an accounting method whereby an investor adjusts its tax expense by the net benefit that flows through a Qualified Ownership Interest each Fiscal Year, where all of the following apply:

1. The net benefit is determined based on the excess of the tax benefits that flow-through the Qualified Ownership Interest during the Fiscal Year, over the proportional amount of the investment.

2. The proportional amount of the investment is determined based on the total investment multiplied by the ratio of the tax benefits that flow-through the Qualified Ownership Interest during the Fiscal Year to the total tax benefits expected to flow-through the Qualified Ownership Interest over the term of the investment.

The election under Paragraph M of this Article must be made by the Filing Constituent Entity for a Qualified Ownership Interest in the first Fiscal Year in which the investor acquired the interest or became subject to this Law. The election under Paragraph M is an irrevocable election that shall remain in effect for all subsequent Fiscal Years.