MTT62410 - Charging mechanisms: Undertaxed Profits Rule: Miscellaneous definitions: Domestic Income Inclusion Rule
Source: gov.uk (2025-08-05)


Ordinarily, a responsible member is not charged top-up amounts determined for itself, or other members of the group located in its territory.

However, some territories which have implemented an Income Inclusion Rule (IIR) charge top-up tax amounts of domestic entities to domestic responsible members under that rule (either as well as, or instead of, implementing a Domestic Minimum Top-up Tax).

These are sometimes referred to as Domestic IIRs, or DIIRs. As these rules work differently to the UK rules, this concept is newly defined in the UTPR provisions. It is a necessary concept for UTPR because a member will not be potentially undertaxed where it is subject to a DIIR.

DIIRs are defined in section 229J(3) of Finance (No.2) Act 2023.

Definition of a Domestic Income Inclusion Rule

A Domestic Income Inclusion Rule (DIIR) is defined as a tax that meets the following conditions:
- it is implemented by a Pillar Two territory (see MTT09970 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt09970)),
- it is a rule that relates to top-up amounts that would be charged and identified under an IIR, and
- the charge to tax is not limited to members who are located outside the territory of implementation.
Example

UPE Ltd is an ultimate parent located in Territory A. UPE Ltd has a top-up amount for a period determined under the IIR of Territory A, and there is also a top-up amount determined for B Ltd, a subsidiary in Territory B.

UPE Ltd will be a responsible member and will be charged the top-up amount of B Ltd under a normal IIR. It will not be charged the top-up amount determined for itself, and the amount is potentially undertaxed and may give rise to a charge under UTPR.

However, if Territory A’s IIR also charged responsible members for top-up amounts of members in Territory A, UPE Ltd would be a responsible member in relation to itself and other members in Territory A. This means the top-up amount determined for UPE Ltd will be charged on UPE Ltd itself, as the responsible member, and that amount is not potentially undertaxed and will not be brought into charge under UTPR.

DIIR exception when determining whether a member is potentially undertaxed

There are two exceptions to consider when determining whether a member is potentially undertaxed.

The second of these exceptions relates to DIIRs. It provides that top-up amounts of a member are not ‘potentially undertaxed’, if the following conditions are met:
- the member is located in the same territory as the ultimate parent, and
- the ultimate parent is located in a territory which has a Domestic IIR (DIIR) in force, and
- the ultimate parent is a responsible member.
In this case, any top-up amounts the member has will be collected through the Domestic IIR, so there is no need to collect the top-up amounts through the UTPR.

Definition of responsible member

There are a number of modifications to the normal rules defining responsible members where the relevant member is located in a territory in which a DIIR is in force. These changes are necessary because, under a DIIR, the responsible members will be responsible for additional members.
- an ultimate parent that is a responsible member of a group is responsible for all of the members of the group, including itself, and any other members of the group in its territory.
- an intermediate parent member or a partially-owned parent member may be responsible for a member in the same territory as itself.
- an intermediate parent member or a partially-owned parent member will be a responsible member where it has a top-up amount itself, even if it does not have an ownership interest in a member of the group that has a top-up amount.