Taxes Consolidation Act 1997 section 111AE

Substance-based income exclusion

Section 111AE provides for a substance-based income exclusion that allows multinational enterprise groups and large-scale domestic groups to reduce their net qualifying income in a jurisdiction by reference to their local payroll costs and tangible assets, thereby recognising genuine economic substance.

• The net qualifying income for a jurisdiction may be reduced by the sum of a payroll carve-out (5% of eligible payroll costs) and a tangible asset carve-out (5% of the carrying value of eligible tangible assets), collectively known as the substance-based income exclusion amount; however, transitional higher rates apply under section 111AX for fiscal years beginning between 2023 and 2032.
• Eligible employees include full-time and part-time employees as well as independent contractors working under the group's direction; eligible payroll costs cover salaries, wages, benefits such as health insurance and pensions, employment taxes, and employer social security contributions.
• Eligible tangible assets comprise property, plant and equipment, natural resources, lessees' rights of use over tangible assets, and government licences or similar arrangements involving significant investment in tangible assets, all of which must be located in the jurisdiction.
• Special allocation and adjustment rules apply to permanent establishments, flow-through entities, stateless constituent entities, investment entities, operating lessors, and entities subject to deductible dividend regime adjustments.

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