MTT41460 - Particular entities and adjustments: Tax transparent entities: Exclusion of profits of ultimate parent that is a flow-through entity
Source: gov.uk (2025-08-05)


Where the ultimate parent of a group is a flow-through entity (FTE), the profits of the flow-through entity will typically be taxed at the level of the owners, who will not be members of the group.

Because the owners are not members of the same group, the taxes they incur cannot be realigned with the profits of the ultimate parent. This could potentially result in a low effective tax rate for the ultimate parent, even though its profits are being taxed in the hands of its owners.

To address this, the profits of an ultimate parent that is an FTE are excluded where certain conditions are met in relation to its direct owners. The conditions differ depending on whether there is a profit or a loss in the adjusted profits.

Where an amount of the adjusted profit is excluded, a commensurate adjustment to the covered tax balance of the ultimate parent is made.

In addition to the ultimate parent itself, certain permanent establishments may also have an amount of their adjusted profit or loss excluded under this provision.

This is set out in section 170 of Finance (No.2) Act 2023.

See MTT21000 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt21000)+ for general guidance on calculating the adjusted profits.

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

Determining the amount to be excluded

An amount of profits will be excluded where the ultimate parent has a positive adjusted profit if:
- it represents an amount of profits to which the holder of a direct ownership interest in the ultimate parent ('the owner') is entitled, as a result of that interest, and
- condition A, B, or C is met in relation to the owner.
The conditions are set out in section 170(3)-(5) of the Act.

The amount of adjusted profits to be excluded is the amount proportionate to the ownership interests that meets the condition.

The actual amount of profits to which the owner is entitled is not relevant, because the adjusted profits determined for MTT purposes will likely be different to the amount determined for accounting purposes.

Determining the amount to be excluded – loss in adjusted profits

Where the ultimate parent has negative adjusted profits, that loss may be further adjusted to exclude an amount of the loss.

For an amount of loss to be excluded, the holder of an ownership interest in the ultimate parent must be allowed to use that amount when computing its taxable income.

Profits reallocated to ultimate parent as a result of section 168

Where profits have been reallocated to an ultimate parent under section 168 of the Act (see MTT41440 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt41440)), the holders of ownership interests in the ultimate parent are potentially regarded, when determining the amount to be excluded, as being entitled to those profits, as though the profits had accrued to the ultimate parent.

This means that, for the first part of Condition A (section 170(3)(b)) to apply to an ownership interest under this scenario, the holder of the ownership interest must be taxed on those reallocated profits. In practice, this will require the ownership interest holder to see the entire chain of entities down to the entity making a profit as transparent.

Example

XYZ Holdings is a flow-through entity located in Territory X. It is the ultimate parent of XYZ Group.

An individual who is tax resident in Territory X has a direct ownership interest in XYZ Holdings which entitles them to 3% of the profits and assets of XYZ Holdings.

XYZ Holdings has adjusted profits of 100,000 for the period to 31 December 2025. The group’s accounting period runs to 31 December.

The individual is subject to a basic rate of income tax of 25% on their entitlement to the profits of XYZ Holdings. They will be taxed on their entitlement to XYZ Holding’s 2025 income in the tax year ending 5 April 2026.

A further adjustment is required for this period because:
- the ultimate parent of the group, XYZ Holdings, is a flow-through entity,
- XYZ Holdings has recorded a profit in its adjusted profits for the period,
- a holder of a direct ownership interest in XYZ Holdings would be entitled to an amount of its profits as a result of that ownership interest, and
- at least one of the three conditions are met.
The individual is entitled to 3% of the profits of XYZ Holdings. XYZ Holdings made an adjusted profit of 100,000 in the period. Therefore, 3000 will be excluded from the adjusted profits of XYZ Holdings.

The actual amount of profits to which the individual is entitled is not relevant. For instance, although XYZ Holdings has made an adjusted profit for MTT purposes, it may record a loss for the purposes of determining the profit entitlement of its owners. Nonetheless, the amount of 3000 would still be excluded in accordance with the proportion of ownership interests held.

Effect of exclusion on covered tax balance

Where an amount of adjusted profits of the ultimate parent has been excluded, the covered tax balance must be adjusted by the same proportion.

If there is a positive covered tax balance, the balance is reduced. If it is negative, it will be increased.

See MTT25010 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt25010) for guidance on determining the covered tax balance.

Example

An ultimate parent that is a flow-through entity has adjusted profits of 100 and a covered tax balance of 20 in a period.

As a result of section 170, 10 of the adjusted profits are excluded.

As the amount excluded represents 10% of the adjusted profits, the covered tax balance will be reduced by 10%.

After the exclusion, the ultimate parent has adjusted profits of 90 and a covered tax balance of 18.

If the covered tax balance were –20, the adjustment would result in an increase to the covered tax balance of 10%. This would increase the covered tax balance to –18.

Permanent establishments of the ultimate parent

Section 170 may apply to a permanent establishment where the ultimate parent is an FTE, and either:
- the ultimate parent wholly or partly carries out its business through the permanent establishment, or
- an FTE carries out business through the permanent establishment, and:
- the FTE is regarded as tax transparent in the ultimate parent’s territory, and
- the ultimate parent holds an interest directly in that FTE, or indirectly through one or more entities, and all those are regarded as tax transparent in the ultimate parent’s territory.