111P Adjustments to determine qualifying income or loss

Summary

In calculating the amount of top-up tax due with regards to a constituent entity, certain adjustments are required to the financial accounting net income or loss of that constituent entity.

Details

Definitions

(1) Introduces definitions required for the purposes of determining qualifying income or loss.

“accounting functional currency” is the functional currency used to determine the constituent entity’s financial accounting net income or loss;

“accrued pension expense” means the difference between the amount of pension liability expense (accrued expense) or income (accrued income) included in the financial accounting net income or loss in relation to a pension fund and the amount contributed by the constituent entity to a pension fund for the fiscal year. This is calculated as follows:

where—

Accrued Income is the pension liability income of a constituent entity accrued for the fiscal year and is expressed as a positive amount,

Accrued Expense is the pension liability expense of a constituent entity accrued for the fiscal year and is expressed as a negative amount, and

Contribution is the amount contributed by the constituent entity to a pension fund for the fiscal year and is expressed as a positive amount;

“additional tier one capital” means an instrument issued by a constituent entity pursuant to prudential regulatory requirements;

“arm’s length principle” means the principle under which transactions between constituent entities must be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances;

“asymmetric foreign currency gain or loss” is a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is:

1. included in the calculation of the taxable income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,
2. included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,
3. included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity, and
4. attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether that third foreign currency gain or loss is included in the taxable income;

“excluded dividend” means, subject to subsection (14), a dividend or other distribution received or accrued in respect of an ownership interest, other than a dividend or other distribution received or accrued in respect of:

1. an ownership interest:
   • that carried rights to less than 10% of the profits, capital, reserves or voting rights of that entity (hereinafter referred to as a “portfolio shareholding”), and
   • is beneficially held by the constituent entity for less than one year at the date of the distribution,

   or

2. an ownership interest in an investment entity that is subject to an election pursuant to section 111AV (i.e. an election to apply a taxable distribution method).

Where a dividend or other distribution is received or accrued in respect of an ownership interest which is a financial instrument that has both equity and debt components under the acceptable financial accounting standard, only the amounts received or accrued in respect of the equity component of the ownership interest shall be treated as an excluded dividend;

“excluded equity gain or loss” means a net gain or loss, included in the financial accounting net income or loss of the constituent entity, arising from:

1. changes in the fair value of an ownership interest, other than a portfolio shareholding,
2. an ownership interest that is included under the equity method of accounting, or
3. the disposal of an ownership interest, other than for the disposal of a portfolio shareholding;

“included revaluation method gain or loss” means a net gain or loss, increased or decreased by any associated covered taxes for the fiscal year, arising from the application of an accounting method or practice that, in respect of all property, plant and equipment—

1. periodically adjusts the carrying value of such property, plant or equipment to its fair value,
2. records these changes in value in other comprehensive income as gain or loss, and
3. does not subsequently report the gain or loss accrued in other comprehensive income through profit and loss;

“intra-group financing arrangement” means a financing arrangement whereby one or more constituent entities directly or indirectly provide credit to, or otherwise makes an investment in, one or more other constituent entities of the same group;

“net taxes expense” means, in respect of a constituent entity and a fiscal year, the net amount of:

1. covered taxes accrued as an expense and any current and deferred covered taxes included in the income tax expense, including covered taxes on income that is excluded from the qualifying income or loss calculation,
2. deferred tax assets attributable to a loss accrued for the fiscal year,
3. qualified domestic top-up taxes accrued as an expense,
4. taxes arising pursuant to the rules of the Directive or, as regards third country jurisdictions, the OECD Model Rules, accrued as an expense,
5. disqualified refundable imputation taxes accrued as an expense, and
6. taxes accrued by an insurance company in respect of returns to policyholders to the extent that subsection (10)(a) applies in relation to those taxes (i.e. where the insurance company must exclude from the calculation of its qualifying income or loss any amount charged to policyholders for taxes paid by the insurance company in respect of returns to policyholders),

in the calculation the financial accounting net income or loss;

“policy disallowed expense” means, in respect of a fiscal year, an expense accrued by the constituent entity for all illegal payments, or fines and penalties that are equal to or greater than €50,000 or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is calculated, in the calculation of financial accounting net income or loss;

“prior period errors and changes in accounting principles” means a change in the opening equity of a constituent entity at the beginning of a fiscal year that is attributable to:

1. a correction of an error in the determination of the financial accounting net income or loss of the constituent entity in a previous fiscal year that affected the income or expenses that may be included in the calculation of the qualifying income or loss of the constituent entity in that previous fiscal year, except to the extent that section 111AB (post filing adjustments and tax rate changes) applies to such error correction, or
2. a change in accounting principles or policy that affected the income or expenses included in the calculation of the qualifying income or loss of the constituent entity.

“tax functional currency” is the functional currency used to determine the constituent entity’s taxable income or loss for a covered tax in the jurisdiction in which it is located;

“third foreign currency” is a currency that is not the constituent entity’s tax functional currency or accounting functional currency;

Adjustments to net income or loss

(2) This section details the adjustments to be made to the financial accounting net income or loss of a constituent entity to determine the qualifying income or loss in respect of a fiscal year. The following should be adjusted for:

• (2)(a) net taxes expense,
• (2)(b) excluded dividends,
• (2)(c) excluded equity gains or losses,
• (2)(d) included revaluation method gains or losses,
• (2)(e) gains or losses from the disposal of assets and liabilities excluded pursuant to section 111AN (which sets out the rules regarding transfers of assets and liabilities generally),
• (2)(f) asymmetric foreign currency gains or losses,
• (2)(g) policy disallowed expenses,
• (2)(h) prior period errors and changes in accounting principles,
• (2)(i) accrued pension expenses, and
• (2)(j) the net amount of the additions and reductions to qualifying income for the fiscal year as set out in section 111W (which sets out rules regarding the equity investment inclusion election and qualified flow-through tax benefits).

Stock-based compensation expenses

(3) This subsection sets out the treatment of expenses related to stock-based compensation when calculating qualified income or loss.

(3)(a) A constituent entity may, on the making of an election by the filing constituent entity, substitute the amount of stock-based compensation allowed as a deduction in the calculation of its taxable income in place of the amount expensed in its financial accounts with regards to a cost or expense paid with stock-based compensation.

(3)(b) Where a stock-option granted by a constituent entity expires without being exercised, the amount previously included as an expense in the calculation of its qualifying income or loss for all previous fiscal years in respect of that stock-option shall be included as additional income in the fiscal year in which that option has expired.

(3)(c) Where the election referred to in paragraph (a) is made in a fiscal year after a fiscal year in which part of the amount of stock-based compensation expense of a transaction has been recorded in the financial accounts but before the exercise date, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted in the calculation of its qualifying income or loss in those previous fiscal years and the total amount of stock-based compensation cost or expense that would have been deducted in the calculation of its qualifying income or loss in those previous fiscal years had the election been made in respect of those fiscal years shall be included in the calculation of the qualifying income or loss of the constituent entity for that fiscal year.

(3)(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in the same jurisdiction for the fiscal year in which the election is made and all subsequent fiscal years.

(3)(e) Where the election referred to in paragraph (a) is withdrawn, the amount of unpaid stock-based compensation cost or expense deducted pursuant to the election that exceeds the financial accounting expense accrued shall be included in the calculation of the qualifying income or loss of the constituent entity in respect of the fiscal year in which the election is withdrawn.

Intra-group transactions

(4) This subsection provides for an adjustment for certain transactions between constituent entities of an MNE group when calculating qualified income or loss.

(4)(a) Where the constituent entities are located in different jurisdictions, the transactions shall be adjusted for the purposes of calculating qualifying income or loss so as to be the same amount and consistent with the arm’s length principle for both constituent entities.

(4)(b) Where the constituent entities are located in the same jurisdiction, any loss from a sale or transfer of an asset between them shall be adjusted in the calculation of qualifying income or loss of the constituent entities based on the arm’s length principle.

Marketable transferable tax credits

(5)(a)&(b) Qualified refundable tax credits and marketable transferable tax credits shall be treated as income and non-qualified refundable tax credits shall not be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(5)(c) Where a qualified refundable tax credit or marketable transferable tax credit is related to the acquisition, or construction, of an asset and the constituent entity which has the benefit of the tax credit:

• has an accounting policy of reducing the carrying value of the asset in respect of such a tax credit, or
• recognises the tax credit as deferred income over the productive life of that asset,

then, the constituent entity concerned may follow the same accounting policy for the purposes of determining the qualifying income or loss of the constituent entity for a fiscal year.

Gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting

(6) This subsection sets out the allowable treatment of gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting when calculating qualified income or loss.

(6)(a) On the making of an election by the filing constituent entity, gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting in the consolidated financial statements for a fiscal year shall be determined on the basis of the realisation principle in the calculation of qualifying income or loss of a constituent entity, i.e. gains and losses are taken into account on a realised basis.

(6)(b) Gains or losses which result from applying fair value or impairment accounting in respect of an asset or a liability shall be excluded from the calculation of the qualifying income or loss of a constituent entity for a fiscal year under paragraph (a).

(6)(c) The carrying value of an asset or a liability for the purpose of determining a gain or a loss under paragraph (a) shall be the carrying value adjusted for accumulated depreciation on the later of:

• the time the asset was acquired, or the liability was incurred, or
• the first day of the fiscal year in respect of which the election is made.

(6)(d) This election under this subsection shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in a jurisdiction to which the election is made unless the filing constituent entity chooses to limit the election to the tangible assets of the constituent entities or to investment entities.

(6)(e) Where the election is withdrawn in respect of a fiscal year, an amount equal to the difference between the fair value of the asset or liability, and the carrying value adjusted for accumulated depreciation of the asset or liability on the first day of the fiscal year in respect of which the withdrawal is made, shall either be included, if the fair value exceeds the carrying value adjusted for accumulated depreciation, or deducted, if the carrying value adjusted for accumulated depreciation exceeds the fair value, in the calculation of qualifying income or loss of the constituent entities in respect of that fiscal year.

Disposal of local tangible assets to entities, other than entities who are members of the same group

(7) This subsection sets out the treatment of the disposal of local tangible assets (i.e. immovable property located in the same jurisdiction as the entity) to entities, other than entities who are members of the same group, when calculating qualified income or loss.

(7)(a) On the making of an election by the filing constituent entity, the qualifying income or loss arising from the disposal of local tangible assets to entities other than entities who are members of the same group shall be adjusted.

(7)(b) The net gain arising from the disposal of local tangible assets in the fiscal year in which the election is made shall be offset against any net loss of a constituent entity located in that jurisdiction arising from the disposal of local tangible assets in the fiscal year in which the election is made and in the four fiscal years prior to that fiscal year, hereinafter referred to as ‘the five-year period’.

(7)(c) The net gain referred to in paragraph (b) shall be offset against the net loss that has arisen in the earliest fiscal year of the five-year period in priority to later fiscal years, with any remaining net gain being offset against the net loss, if any, in subsequent fiscal years of the five-year period.

(7)(d) Any amount of net gain remaining unrelieved after the application of paragraph (b) shall be spread evenly over the five-year period for the purpose of the calculation of the qualifying income or loss of each constituent entity located in that jurisdiction that has made a net gain from the disposal of local tangible assets in the fiscal year in which the election is made.

(7)(e) The amount of net gain which is to be allocated to each constituent entity, shall be calculated as follows:

where—

NG is the amount of net gain referred to in paragraph (d),

NGCE is the amount of the net gain from the disposal of local tangible assets of the constituent entity for the fiscal year in respect of which the election referred to in paragraph (a) is made, and

NGCES is the amount of the net gain from the disposal of local tangible assets of all constituent entities that have a net gain from the disposal of local tangible assets for the fiscal year in respect of which the election referred to in paragraph (a) is made.

(7)(f) Where no constituent entity (that has made a net gain from the disposal of local tangible assets in the fiscal year for which the election referred to in paragraph (a) is made) is located in the local tangible asset jurisdiction in a fiscal year that occurs during the 5year period, the residual amount of net gain referred to in paragraph (d) shall be allocated equally to each constituent entity in that jurisdiction in that fiscal year.

(7)(g) Any adjustments made pursuant to this subsection for a fiscal year preceding the fiscal year in respect of which the election is made shall be subject to adjustments in accordance with section 111AF (which provides the rules for calculating additional top-up tax when there is a prior period adjustment).

(7)(h) The election referred to in this subsection is an annual election in accordance with section 111AAAD.

Intra-group financing

(8) This subsection provides that any expense related to an intra-group financing arrangement shall not be taken into consideration in the calculation of qualifying income or loss of a constituent entity for a fiscal year where:

• (8)(a) the constituent entity is located in a low-tax jurisdiction or in a jurisdiction that would have been low-taxed if the expenses had not accrued to the constituent entity,
• (8)(b) it is reasonable to assume that, over the expected duration of the arrangement, the arrangement will increase the amount of expenses taken into account for the calculation of the qualifying income of loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit (the ‘counterparty’), and
• (8)(c) the counterparty is located in a jurisdiction that is not a low-tax jurisdiction or in a jurisdiction that would not have been low-taxed if the income related to the expense had not been accrued to the counterparty.

Elimination of income, expense, gains or losses from certain groups

(9)(a) This subsection allows an ultimate parent entity to elect to apply its consolidated accounting treatment to eliminate income, expense, gains or losses from transactions between constituent entities that are located in the same jurisdiction and included in a tax consolidation group, for the purpose of calculating the net qualifying income or loss of those constituent entities.

(9)(b) Adjustments shall be made so that items of qualifying income or loss are not taken into consideration more than once or omitted as a result of such election or withdrawal in the fiscal year in respect of which the election is made or withdrawn.

(9)(c) For the purposes of this subsection, constituent entities are included in a tax consolidation group if under the law of a jurisdiction the income, expenses, gains and losses of those constituent entities may for tax purposes be aggregated, surrendered to each other or otherwise shared or transferred between them as a result of a connection between those constituent entities.

(9)(d) The election shall be made in accordance with section 111AAAD.

Insurance Companies

(10)(a)&(b) An insurance company shall exclude from the calculation of its qualifying income or loss, any amount charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders, and include any returns to policyholders that are not reflected in its financial accounting net income or loss to the extent that the corresponding increase or decrease in liability to the policyholders is reflected in its financial accounting net income or loss.

Additional tier one capital

(11)(a)&(b) Any amount that is recognised as an increase or decrease, as the case may be, in the equity of a constituent entity as a result of distributions made, received or due in respect of additional tier one capital shall be treated as an expense or income, as the case may be, in the calculation of its qualifying income or loss for that fiscal year.

Treatment of financial instruments

(12)(a) A financial instrument issued by one constituent entity and held by another constituent entity in the same MNE group or large-scale domestic group shall be classified as debt or equity consistently for both the issuer and holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(12)(b) Where constituent entities in the same MNE group or large-scale domestic group have classified a financial instrument differently, the classification adopted by the issuer of the financial instrument shall be applied by the issuer and the holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

Foreign exchange gains or losses

(13) On the making of an election by a filing constituent entity, foreign exchange gains or losses included in a constituent entity’s financial accounting net income or loss shall be treated as an excluded equity gain or loss to the extent that:

• (13)(a) such foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in ownership interests other than portfolio shareholdings,
• (13)(b) such foreign exchange gains or losses are recognised in other comprehensive income in the consolidated financial statements, and
• (13)(c) the hedging instrument is considered an effective hedge under the acceptable or authorised financial accounting standard used in the preparation of the consolidated financial statements.

Dividends from a portfolio shareholding

(14) On the making of an election by the filing constituent entity, any dividend or other distribution received by the constituent entity with respect to a portfolio shareholding shall be included in the calculation of its qualifying income or loss for a fiscal year.

Movements in an insurance company’s reserves

(15)(a) Where a movement in an insurance company’s reserves economically matches an excluded dividend, net of any investment management fee, from a security held by the insurance company on behalf of a policyholder, the movement in the insurance reserves shall not be allowed as an expense in the computation of the constituent entity’s qualifying income or loss.

(15)(b) Where a movement in an insurance company’s reserves is related to an excluded dividend or an excluded equity gain or loss from a security held by the insurance company on behalf of a policyholder, it shall not be allowed as a deduction in the computation of the constituent entity’s qualifying income or loss.

Debt release

(16) On the making of an election, the amount of a debt release included in the financial accounting net income or loss of a constituent entity shall be excluded from the calculation of the constituent entity’s qualifying income or loss, where the debt release:

• (16)(a) is undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed,
• (16)(b) arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor, and it is reasonable to assume that the debtor would be insolvent within 12 months but for the release of the debt under the arrangement, or
• (16)(c) subject to subsection (17) and where paragraph (a) or (b) do not apply, occurs when the debtor’s liabilities are in excess of the fair market value of its assets determined immediately before the debt release.

(17) An amount of a debt release shall only be excluded from the calculation of the constituent entity’s qualifying income or loss in accordance with subsection (16)(c) with respect to debts owed to a creditor that is a person that is not connected with the debtor and only to the extent of the lesser of:

• (17)(a) the excess of the debtor’s liabilities over the fair market value of its assets determined immediately before the debt release, or
• (17)(b) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release.

Relevant Date: Finance Act 2024