MTT41440 - Particular entities and adjustments: Tax transparent entities: Reallocation of profits of flow-through entities
Source: gov.uk (2025-08-05)


A proportion of the underlying profits of a member that is a flow-through entity (FTE) will be allocated to each of its reference entities in relation to which one of two conditions is met.

The conditions require the FTE, and every intermediate entity in the ownership chain, to be considered tax transparent by the reference entity’s territory.

Where there is an external investor, a proportion of the FTE’s underlying profits will be excluded from the adjusted profits where certain conditions are met.

This is set out in section 168 of Finance (No.2) Act 2023.

See MTT41420 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt41420) for guidance on the meaning of flow-through entity and reference entity.

Proportion to be allocated

The proportion of the underlying profits to be allocated is equal to the percentage ownership interest the reference entity has in the FTE, as long as one of two conditions are met.

The conditions are met in relation to an ownership interest held by an reference entity in the FTE. Where the reference entity has multiple ownership interests in an FTE, only the ownership interests which meet one of the conditions are to be considered when determining the proportion of underlying profits to be allocated.

See MTT17040 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt17040) for guidance on determining the percentage ownership interest held by a specific entity.

Conditions

Condition A is met if:
- the reference entity has a direct ownership interest in the FTE,
- that ownership interest is a flow-through ownership interest, and
- the FTE is regarded as tax transparent in the territory of the reference entity.
Condition B is met if:
- the reference entity has an indirect ownership interest in the FTE,
- that ownership interest is a flow-through ownership interest,
- every entity through which ownership is held is regarded as tax transparent by the reference entity’s territory, and
- the reference entity does not hold the interest through another reference entity.
Flow-through ownership interest

An ownership interest held in an FTE by a member of a group is a flow-through ownership interest if:
- the FTE is regarded as tax transparent in the territory in which it was created, disregarding any treatment as such by section 169 (see MTT41420 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt41420)),
- the interest is held directly and the FTE is treated as tax transparent by section 169 to the extent of the interest, or
- the interest is derived from such a direct ownership interest.
Example

UPE Ltd is a reference entity in respect of a flow-through entity ("FTE"). It is located in Territory A, which regards the FTE as tax transparent. The FTE was created in Territory B, which regards the FTE as tax transparent.

It owns 100% of the FTE via two ownership interests:
- 90% through a direct ownership interest.
- 10% through an indirect ownership interest, held through a single entity, X Ltd.
X Ltd is not a member of the same group and is therefore not a reference entity. It is regarded as opaque by Territory A.

90% of the profits of the underlying profits of the FTE will be allocated to UPE Ltd, because:
- the FTE is regarded as tax transparent in the territory in which it was created,
- the ownership interest that UPE Ltd holds in the FTE is therefore a flow-through ownership interest,
- that ownership interest is a direct ownership interest,
- the territory of UPE Ltd, the reference entity, regards the FTE as tax transparent,
Therefore, Condition A is met in respect of the 90% direct ownership interest held by UPE Ltd.

Condition A is not met in respect of the 10% indirect ownership interest held by UPE Ltd, because it is not a direct ownership interest.

Condition B is not met in respect of the 10% ownership interest held by UPE Ltd, because:
- although the ownership interest is a flow-through ownership interest, and X Ltd is not a reference entity,
- the reference entity holds the interest through an entity (X Ltd) which is not regarded as tax transparent in the territory of the reference entity.
Therefore, no more than 90% of the FTE’s profits will be allocated to UPE Ltd.

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)).