Revenue Note for Guidance

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Revenue Note for Guidance

111AN Transfer of assets and liabilities

Summary

This section provides rules for the recognition or non-recognition of gain or loss on the disposition of assets and liabilities and for determining the carrying values of assets and liabilities acquired in an ordinary acquisition or disposition and an acquisition or disposition in connection with a Pillar Two reorganisation where the seller is not subject to tax on the gain (or loss), in whole or part.

Details

Definitions

(1) Introduces definitions relating to the recognition or non-recognition of gains or losses arising on the disposition of assets and liabilities for the purposes of calculating qualifying income or loss, and for determining the carrying values of assets and liabilities following an acquisition.

“non-qualifying gain or loss” means the lesser of:

  1. the gain or loss of the disposing constituent entity arising in connection with a reorganisation that is subject to tax in the disposing constituent entity’s location, and
  2. the gain or loss arising in connection with the reorganisation recorded in the disposing constituent entity’s financial accounting net income or loss;

“reorganisation” means a transformation or transfer of assets and liabilities such as in a merger, demerger, liquidation or similar transaction where;

  1. (i) the consideration for the transfer is, in whole or in significant part, equity interests issued by the constituent entity acquiring the assets and liabilities (in this section referred to as the “acquiring constituent entity”) or by a person connected with the acquiring constituent entity,
    1. in the case of a liquidation, the consideration for the transfer is the cancellation of the holding of the equity interests of the entity being liquidated, or
    2. no consideration is provided, and the issuance of an equity interest would have no economic significance,
  2. the disposing constituent entity’s gain or loss on those assets and liabilities is not subject to tax, in whole or in part, and
  3. where the tax laws of the jurisdiction in which the acquiring constituent entity is located require the acquiring constituent entity to calculate taxable income after the disposal or acquisition using the value of the assets for tax purposes of the disposing constituent entity under the tax laws of the jurisdiction in which the disposing constituent entity is located at the date of the transfer, adjusted for any non-qualifying gain or loss on the disposal or acquisition.

Application

(2) Subject to subsections (4) and (5), a disposing constituent entity shall include the gain or loss arising from the disposal of its assets and liabilities in the calculation of its qualifying income or loss for a fiscal year.

(3) Subject to subsections (4) and (5), an acquiring constituent entity shall determine its qualifying income or loss on the basis of its carrying value of the acquired assets and liabilities determined under the financial accounting standard used in preparing consolidated financial statements of its ultimate parent entity.

Non-qualifying gain or loss

(4)(a)&(b) Subject to subsection (5), on the happening of a reorganisation the disposing constituent entity shall exclude any gain or loss arising on the disposal of its assets or liabilities from the calculation of its qualifying income or loss, and the acquiring constituent entity shall determine its qualifying income or loss on the basis of the carrying value of the acquired assets and liabilities of the disposing constituent entity upon disposal.

(5) On the happening of a reorganisation that results in a non-qualifying gain or loss for the disposing constituent entity:

  • (5)(a) the disposing constituent entity shall include the gain or loss on the disposal of its assets and liabilities in the calculation of its qualifying income or loss to the extent of the non-qualifying gain or loss, and
  • (5)(b) the acquiring constituent entity shall determine its qualifying income or loss after the acquisition of its assets and liabilities using the disposing constituent entity’s carrying value of the acquired assets and liabilities upon disposal, as adjusted consistently with the tax law in the jurisdiction where the acquiring constituent entity is located to account for the non-qualifying gain or loss.

Elections

(6) On the making of an election by a filing constituent entity, where a constituent entity is required or permitted to adjust the basis of its assets and the amount of its liabilities to fair value for tax purposes under the tax law in the jurisdiction where it is located then such constituent entity shall:

  • (6)(a) subject to subsection (7), include in the calculation of its qualifying income or loss for a fiscal year an amount of gain or loss in respect of each of its assets and liabilities, which shall be:
    1. equal to the difference between the carrying value for financial accounting purposes of the asset or liability immediately before the date of the event that triggered the tax adjustment (hereinafter referred to as the ‘triggering event’) and the fair value of the asset or liability immediately after the triggering event as determined under the tax law in the jurisdiction where it is located, and
    2. decreased or increased as the case may be, by the non-qualifying gain or loss, if any, arising in connection with the triggering event,
  • (6)(b) use the fair value for financial accounting purposes of the asset or liability immediately after the triggering event to calculate qualifying income or loss in the fiscal years ending after the triggering event.

(7) Where an election is made in accordance with subsection (6), a constituent entity may include:

  • (7)(a) the net total of the amounts determined in accordance with subsection (6)(a) in its qualifying income or loss in the fiscal year in which the triggering event occurs, or
  • (7)(b) an amount equal to the net total of the amounts determined in accordance with subsection (6)(a) divided by 5 in the fiscal year in which the triggering event occurs, and in each of the immediate 4 subsequent fiscal years, but where the constituent entity leaves the MNE group or large-scale domestic group in a fiscal year within that period, the remaining amount shall be included in that fiscal year.

Relevant Date: Finance Act 2024