Can the second pillar prevent a tax-free exit from the opportunity zone?

Groups of American companies of multinationals based in the United States or abroad can take advantage of the advantages of the QOF (Qualified Opportunity Fund) program to develop their activities in the United States. For example, a U.S. group may invest its qualifying gain in a controlling majority interest in a QOF partnership, which in turn may hold majority controlling interests in a Qualified Opportunity Zone Business, or QOZB, partnerships. Under section 1400Z-2(b)(1)(B), corporate tax on this invested qualifying gain would be deferred until 2026.

Under Treasures. Reg. 1.1400Z2(c)-1(b)(2)(ii)(A), after 10 years of ownership by the US group of the QOF interest, a QOZB can generally sell its assets without recognition of taxable gain to the US group . A direct sale of QOZB’s assets may be the most desirable exit strategy as a business deal when, for example, potential buyers may be concerned about unknown or contingent liabilities of QOZB.

OECD Pillar 2 — Acquisition of QOF

The possible forthcoming application of the OECD second pillar rules would, in certain cases, impose a special tax on the income of a US corporate group of a large multinational based in the United States or abroad, when this US group’s US effective tax rate on its combined US income is less than 15%. The US ETR is generally determined by dividing the US group’s provision for corporate income tax expense by the US group’s pre-tax profit, generally as determined by the ultimate parent’s financial accounting method.

In some cases, the second pillar tax could be imposed by the United States as part of a national qualified minimum tax. In some cases, the second pillar tax could be imposed by foreign countries through an income inclusion rule or a profit undertax rule.

Under the second pillar, US deferred accounting income taxes are generally taken into account favorably, although limited to a rate of 15%, in the numerator of the US ETR fraction. They are generally not recoverable if canceled within five years.

To illustrate, assume that in 2025 a US group of a large multinational timely invests in a QOF with recognized 2024 qualifying earnings. The 2024 US corporate income tax applicable to those 2024 qualifying earnings will be triggered in 2026. Under the second pillar under the deferred tax financial accounting rules, 2026 prospective corporate taxes could be favorably considered in 2024 at a rate of 15% to avoid a lower marginal U.S. ETR to 15% in 2024.

Sale of assets by QOZB

Suppose that at least 10 years after the American group bought its stake in QOF in 2025, say in 2037, the QOZB sells its assets. When an entity in a line-by-line consolidated U.S. constituent group, which could include a first-tier or lower-tier majority-owned and majority-controlled U.S. partnership, sells its assets, that sale of assets triggers a gain or loss. accounting accountant for the United States group. Under the second pillar, US C corporations that are members of a US group that are upper or lower level partners in a tax-transparent entity, such as a US partnership, take into account their financial accounting income on a pro rata basis. of this fiscally transparent entity. entity. They also take into account their own accounting charge for associated corporation tax on this allocated income.

The US group’s share in 2037 of QOZB’s accounting financial gain on the sale would therefore generally increase the denominator of the US ETR fraction. The second pillar, however, makes it possible to choose to spread the accounting real estate capital gains over a retrospective period of five years.

In contrast, due to the permanent exemption from US corporate income tax in 2037 under the QOF rules, the numerator of the US ETR fraction would not increase. For example, if the income tax expense of the US group’s financial accounting between 2033 and 2037 was low and the authorized compensation of the second pillar of the tax base (concerning 5% of the payroll and 5% of the book value of the property) was low, the second pillar tax could apply to a large part of this asset gain QOZB of 2037.

The potential adverse application of the second pillar tax to the QOZB accounting asset gain could be seen as a natural consequence of the worldwide application of the second pillar tax to the operations of multinationals that are located in special economic zones. which reduce the income tax of the host country. The potential adverse application of Pillar 2 tax to accounting income permanently excluded from the US tax base under the Code is also not unique to the QOF gain. For example, U.S. members of large multinational groups whose U.S. members own large portfolios of tax-exempt U.S. municipal bonds have expressed concern that they will be considered to have a U.S. ETR below 15% and therefore potentially face second pillar tax on their municipal bonds. bond interest.

As part of its discussion of pillar two, the Biden administration’s fiscal year 2023 budget proposal refers to an “unspecified mechanism to ensure that U.S. taxpayers would continue to benefit from tax incentives that favor jobs and investment in the United States”. Treasury officials have indicated that they are aware of the Pillar 2 issues raised by some US social tax subsidies, such as the Low-Income Housing Credit, which could reduce the US ETR of US groups in below 15%. On the other hand, the proposal for a minimum tax on the book income of very large companies contained in the Build Back Better Act does not reduce the book financial income of the gains excluded according to the rules of the QOF.

In some cases, a possible method of avoiding the seller’s second pillar tax could be to restructure a sale of QOZB assets into a sale of the holdings, such sales generally being exempt from immediate second pillar tax. However, equity sales can raise other commercial, corporate income tax and pillar two issues for both seller and buyer.


Multinationals whose U.S. groups are considering using the QOF program will want to consider the proposed U.S. and overseas implementation of Pillar Two, as well as other tax and non-tax aspects, as they assess possible investments in QOF, and again at the time of provisions.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder of Gunster, Yoakley & Stewart, PA in Fort Lauderdale, Florida.

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