Specific Implications for Intangible Assets : Regulatory Fundamentals and Architecture of Pillar Two in France

1.1 Exclusion of Tokenized Carbon Credits from the Substance-Based Carve-Out (SBCO)

The Substance-Based Carve-Out (SBCO), also referred to as the Substance-Based Income Exclusion (SBIE), is one of Pillar Two’s key mechanisms for preserving the attractiveness of productive investments. It allows a portion of the GloBE income subject to tax to be excluded from the calculation, proportional to the value of eligible tangible assets and personnel costs held in the jurisdiction. Initial mark-up rates are set at 8% for tangible assets and 10% for personnel costs, with a gradual reduction over ten years down to 5% for both components.

However, tokenized carbon credits (TCCs), as digital assets representing intangible rights to emission reductions, are systematically excluded from benefiting from this substance-based exclusion. This exclusion is not the result of a legislative omission, but rather a deliberate characterization of tokenized environmental assets as non-eligible intangible assets, in line with the logic of GloBE, which aims to precisely target mobile income decoupled from substantial economic activity.

This asymmetry in treatment creates a significant competitive distortion for investment portfolios composed exclusively of TCCs. While an industrial portfolio of 100 million euros could benefit from a substantial reduction in its taxable base thanks to the SBIE, a portfolio of tokenized carbon credits of the same nominal value sees 100% of its return exposed to the effective tax rate calculation and, where applicable, to the top-up tax.

1.2 Full Exposure of Carbon Contract Arrangements (CCA) Returns to the Top-up Tax in the Absence of Tangible Assets

The direct consequence of excluding the SBCO is the full exposure of CCA returns to the top-up tax mechanism in situations where the effective tax rate is below 15%. For a typical investment vehicle holding CCAs via a French vehicle, all generated income—capital gains on disposal, income from participation acquisition, or arbitrage gains on carbon price fluctuations—is incorporated into the calculation of the GloBE income for the French jurisdiction.

The extent of the tax impact crucially depends on the holding structure and the qualification of the income. For an institutional investor holding CCAs via a French investment fund without distinct legal personality or through a low-substance holding company, the risk of triggering the top-up tax is maximal. CCA disposal income, if qualified as ordinary business income, may benefit from taxation at the nominal French rate of 25%, which theoretically places the jurisdiction above the 15% threshold. However, the GloBE adjustment mechanisms—exclusion of certain items from accounting profit, treatment of deferred taxes, allocation of expenses—can mechanically reduce the calculated effective rate below the critical threshold, triggering the top-up tax.

1.3 The « Substance Trap » for Investment Vehicles with Low Operational Substance

The notion of the « substance trap » (substance trap), conceptualized by STEELLDY, refers to a situation where an investment vehicle holding assets with high intangible intensity is unable to reduce its taxable base through the Substance-Based Income Exclusion (SBIE) due to the absence of tangible assets and eligible personnel. This phenomenon is particularly acute for investment structures involving tokenized carbon credits, historically structured as light entities with minimal operational substance, often outsourced to third-party asset managers.

The substance trap materializes concretely in the calculation of the top-up tax. Let’s consider a French holding company holding a portfolio of TCCs (presumably carbon credits) valued at 50 million euros, with two employees and negligible tangible assets. The applicable SBIE would be approximately: (2 × average personnel cost × 10%) + (value of tangible assets × 8%), resulting in a negligible amount relative to the GloBE income generated. Consequently, almost 100% of the income constitutes excess profits subject to the top-up tax. STEELLDY simulations indicate that the value erosion in this substance trap can reach 57% of the portfolio in an extreme stress scenario characterized by total tax neutrality.