Where a constituent entity-owner of an investment entity is not itself an investment entity and can be reasonably expected to be subject to tax on distributions from that investment entity at a tax rate that equals or exceeds the minimum tax rate, that constituent entity-owner shall apply a taxable distribution method.

Under the taxable distribution method, distributions and deemed distributions of the investment entity’s qualifying income are included in the constituent-owner’s qualifying income, and creditable covered taxes incurred by the investment entity are included in the constituent-owner’s qualifying income and adjusted covered taxes. The constituent-owner’s share of undistributed net qualifying income arising in the third year preceding the fiscal year (the tested year) is treated as qualifying income and the amount equal to that qualifying income multiplied by the minimum tax rate is treated as top-up tax for Chapter 2. Qualifying income or loss and adjusted covered taxes of the investment entity are excluded from the effective tax rate calculation except for the covered taxes referred to above. Undistributed net qualifying income for the tested year is qualifying income reduced by covered taxes, distributions and deemed distributions to non-investment-entity shareholders during the testing period, qualifying losses in the testing period and residual qualifying losses not already applied, subject to limits and without double reduction for items already applied to a previous tested year. A deemed distribution arises on transfer of a direct or indirect ownership interest to a non-member and equals the attributable share of undistributed net qualifying income on the transfer date, determined without regard to that deemed distribution. If the election is withdrawn, the constituent-owner’s share in the undistributed net qualifying income for the tested year at the end of the preceding fiscal year is treated as qualifying income and the equal amount multiplied by the minimum tax rate is treated as top-up tax for Chapter 2. The election must be made in accordance with section 111AAAD.