MTT41420 - Particular entities and adjustments: Tax transparent entities: Meaning of ‘flow-through entity’ and ‘tax transparent’
Source: gov.uk (2025-08-05)


Meaning of ‘tax transparent’

An entity is tax transparent in a territory to the extent that the territory attributes its income, expenditure, profits or losses, for the purposes of covered taxes, to the direct owner of the entity in proportion to its interest in the entity.

This is set out in section 238 of Finance (No.2) Act 2023.

Partially transparent entities

An entity may be subject to covered taxes on some types of income but not others. This is most common with certain types of Investment Entities, where the entity may be transparent in a territory for income but not for chargeable gains.

In this case, the entity will be regarded as tax transparent to the extent of its income only. The entity must be treated separately in respect of its chargeable gains, which will form part of the entity’s underlying profits rather than part of the underlying profits of its owner.

If the requirements are met, the filing member of the group may make a tax transparency election under section 213 in relation to the investment entity and another member of the group in such a case. This will cause the investment entity to be regarded (for the purposes of section 168 and 178 of the Act) as owned by the other member of the group and tax transparent to the extent it is not already. In the example referred to, should the election be made, the investment entity would be treated as tax transparent for the purposes of chargeable gains, with those gains treated as accruing to the other entity named in the election.

Example

A life assurance company, A, invests into an Authorised Contractual Scheme (“ACS”). The ACS itself is not taxed on any income or gains. A is taxed on £100 of loan relationship income of the ACS as it arises.

The ACS disposes of a property giving rising to a gain of £200. A suffers policyholder tax in relation to a £200 fair value movement of its units in the ACS.

As A is not subject to a covered tax on the capital gain arising in the ACS, it is not a tax transparent entity to the extent of its capital gains income.

The ACS is tax transparent for income purposes. £100 of loan relationship income is to be allocated to A under the rules regarding transparent entities in section 168.

The underlying profit of the ACS will include the £200 gain. If the ACS meets the criteria, the filing member of the group can make an election to be treated as a tax transparent entity owned by another specified group member to the extent of its chargeable gains under section 213.

Meaning of ‘flow-through entity’

An entity is a flow-through entity if:
- it is regarded as tax transparent in the territory in which it is created, and
- it is not subject to a covered tax on its profits in another territory as a result of being tax resident in that territory.
This is set out in section 168 of the Act.

See MTT18030 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt18030) for guidance on determining the location of a flow-through entity.

Meaning of ‘reference entity’

The first non-flow through entity in the ownership chain of an FTE is a reference entity in relation to the FTE. Amounts of profit may be reallocated from an FTE to a reference entity (see MTT41440 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt41440)).

An entity will be a reference entity if:
- it is a member of the same group as the FTE,
- it is not itself an FTE, and
- it holds an ownership interest in the FTE directly, or indirectly through entities all of which are FTEs.
Where no reference entity is identified under this rule, the ultimate parent of a group will be the reference entity, even if it is an FTE.

Certain non-tax resident entities treated as flow-through entities

A member of a group may also be treated as an FTE where the following conditions are met:
- it is not tax resident in any territory,
- it is not subject to covered taxes,
- it does not have a place of business in the territory where it is created, and
- it is not regarded as tax transparent in that territory.
Such a member will be treated as being regarded as tax transparent in the territory it is created to the extent that:
- it is regarded as tax transparent in the territory where the holders of its direct ownership interests are located, and
- its income, expenditure, profits and losses are not attributable to a permanent establishment.
To the extent that such a member is treated as tax transparent, it will necessarily meet the definition of flow-through entity.

Note that it is possible for an entity to be partially tax transparent as a result of this rule (and therefore partially a flow-through entity), where it is created in a territory without a tax regime and where some of its direct owners see it as transparent and some do not.

This is set out in section 169 of the Act.

Amendment in Finance Act 2025

Section 168 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt09490)).