Industry Insights: Pillar 2 – Key Considerations for Fund Vehicles

Contributed by Philip Murphy from KPMG

Introduction – The Basics

Pillar 2 establishes a global minimum tax rate of 15%, applicable to entities with an effective tax rate below this threshold. The rules, which are complex, are in force in Ireland for in-scope entities with fiscal years beginning on or after 31 December, 2023. An Irish tax resident entity should only potentially be in scope of the rules where it is part of a multinational (MNE) group or a domestic group which has consolidated revenue exceeding €750 million for at least two of the preceding four fiscal years. 

There are a range of vehicles which are entirely outside the scope of the rules. For example, “investment funds” (as defined) can be considered completely outside the scope of the two main collection mechanisms. However, to be so considered, there are prescriptive criteria which need to be satisfied.  The extent to which funds and entities which are part of fund structures are in scope of the rules will potentially be a focus area of many financial statement audits for the financial year ended 31 December 2024.  

Key Considerations in Assessing Scope

To determine whether a fund vehicle is within the scope of Pillar 2, several key questions must be addressed: 

1. Does the vehicle meet the requisite conditions to be considered an “investment fund” and if so, does it fall within the scope of the Excluded Entity definition?

2. If the vehicle is not an Excluded Entity, is it part of an MNE group or domestic group?

3. If so, does the group exceed the consolidated revenue threshold?

It is important to note that not all fund vehicles will be regarded as investment funds for the purposes of the rules, so a case-by-case analysis is necessary to determine whether there is sufficient basis to regard the fund as outside the scope of Pillar 2. Furthermore, even where a fund is considered outside the scope of the rules, its revenue may need to be considered in determining whether any other entity which it is part of a group with exceeds the revenue thresholds.

Where a vehicle is in scope of the rules, it may have additional compliance obligations even where it does not have any additional tax obligation, which may give rise to an additional administrative burden collating the data required. 

The flowchart below provides a visual representation of the process for determining whether a fund vehicle is within the scope of Pillar 2. It outlines key steps and criteria to consider in order to form an initial assessment of whether a fund or entity which is part of a fund structure is in scope.   

Scoping – Is the Vehicle an Excluded Entity?

Where a fund vehicle is considered both an investment fund and an Excluded Entity for the purposes of the rules, it will be completely outside the scope of the rules without any administration required on an ongoing basis. Therefore, most fund vehicles will first assess whether they can fall within the relevant definitions, which requires an assessment of the following:

1. Does the fund fall within the investment fund definition, which requires it to have all of the following characteristics:

• it is designed to pool assets (which may be financial and non-financial) from a number of investors (some of which are not connected);

• it invests in accordance with a defined investment policy;

• it allows investors to reduce costs across transactions, research, and analytics, or to spread risk collectively;

• it has a main purpose of generating investment income or gains, or protection against a particular or general event or outcome;

• investors have a right to return from the assets of the fund or income earned on those assets, based on the contributions made by those investors;

• the entity or its management is subject to a regulatory regime in the jurisdiction in which it is established or managed (including appropriate anti-money laundering and investor protection regulation); and

• it is managed by investment fund management professionals on behalf of the investors.

2. Is the fund an Excluded Entity, which principally involves considering if it is consolidated on a line-by-line basis into any other entity?  
In assessing this there is also a deemed consolidation test (i.e. it is necessary to consider if line-by-line consolidation would be necessary if the investor in the vehicle prepared consolidated financial statements). Although many funds are widely held or there are multiple investors such that they would never need to be consolidated, there are circumstances whereby a fund may need to be consolidated into an investor (e.g. where there is a significant investor or if the manager is seeding the fund for any reasonable amount of time).

Other scoping considerations

Where an entity is part of a fund complex but not itself an investment fund, it can still be regarded as outside the scope of the rules in some circumstances. For example: 

• Where an entity is 95%+ owned by or through a fund which is considered an Excluded Entity, provided the entity operates exclusively (or almost exclusively) to hold assets or invest funds for the benefit of an Excluded Entity or carries out activities ancillary to those performed by the Excluded Entity; or

• Where an entity is 85%+ owned by or through an Excluded Entity where the entity derives substantially all of its income from dividends or gains. 

This provides a basis for “under-the-fund” entities to also be considered as outside the scope of the rules where the fund vehicle in the structure is regarded as an “Excluded Entity” (i.e. a fund which is not consolidated on a line-by-line basis into any other entity). However, there are complex provisions where there is a multi-layered ownership chain as there is a need to understand the status of each entity in the ownership chain for Pillar 2 purposes.

There are also specific rules applicable to partnerships and other types of tax transparent entities which may require consideration in the context of some structures.

Key Considerations for Fund Structures

The key considerations for funds and their underlying structures can be broken down into a number of net points:

• Fund vehicles are not automatically outside the scope of the rules, notwithstanding that there is a carve-out for investment funds. In order to be considered fully outside the scope, it is necessary to consider if the fund may be consolidated into any investor, in addition to whether it meets the relevant criteria to be an “investment fund” as defined for the purposes of the rules. It may be challenging in practice for fund-of-one type arrangements to qualify for exclusion.

• It is possible for vehicles held by investment funds to be considered outside the scope of the rules in their own right, however it is necessary to understand the profile of each entity in the ownership chain of the structure and also whether specific conditions are satisfied by the vehicle.

• Where an investment fund or vehicle in a structure does not fall outside the scope of the rules by virtue of the fund-focused exclusions, the accounting consolidation position is crucial to understand the group for Pillar 2 purposes and whether it is in scope. There are specific nuances applicable in the context of partnerships and similar entities which can give rise to additional considerations for in-scope groups.

• There may be some circumstances whereby fund vehicles do not fall outside the scope of the rules – where vehicles are in scope, the additional compliance burden that can arise should not be underestimated.

Conclusion

The introduction of Pillar 2 presents specific considerations for fund vehicles regarding whether they are in scope of the rules. Ensuring compliance requires a thorough understanding of the rules and careful analysis of each vehicle's status with the analysis likely to be more complex in the context of certain structures/strategies (e.g. fund-of-one arrangements or multi-tiered alternative fund structures). In the event a fund or fund structure entity is in scope of the rules, the compliance obligations can be onerous, even in circumstances where a tax liability does not arise.