111W Equity investment inclusion election and qualified flow-through tax benefits of qualified ownership interests

Definitions

(1) “expected tax benefit ratio” means the ratio of the amount of tax credits, and the amount of any tax-deductible losses multiplied by the statutory tax rate applicable to the owner of the qualified ownership interest, that flowed through, or are received, in respect of the qualified ownership interest in the fiscal year to the total of such items that are expected to flow-through or be received in respect of the qualified ownership interest over the term of the investment;

“proportional amortisation method of accounting” means an accounting method whereby an investor adjusts its tax expense by the net benefit that flows through a qualified ownership interest each year, where:

1. the net benefit is determined based on the excess of the tax benefits that flow-through the qualified ownership interest during the year, over the proportional amount of the investment, and
2. the proportional amount of the investment is determined based on the total investment multiplied by the ratio of the tax benefits that flow-through the qualified ownership interest during the year to the total tax benefits expected to flow-through the qualified ownership interest over the term of the investment;

“qualified flow-through tax benefit” means any amount of tax credits, other than qualified refundable tax credits, and tax-deductible losses multiplied by the statutory tax rate applicable to the owner of a qualified ownership interest, that flow through a qualified ownership interest in a tax transparent entity to the extent that it reduces the owner’s investment in the qualified ownership interest pursuant to subsection (6);

“qualified ownership interest” means an investment in a tax transparent entity that:

1. is treated as an equity interest for local tax purposes, or
2. would be treated as an equity interest under an authorised financial accounting standard in the jurisdiction in which the tax transparent entity operates,

where the assets, liabilities, income, expenses, and cash flows of the tax transparent entity are not consolidated on a line-by-line basis in the consolidated financial statements of the MNE group, and

1. the total return with respect to that ownership interest, excluding tax credits other than qualified refundable tax credits, is, at the time the investment is entered into, expected to be less than the total amount invested by the owner of the ownership interest such that a portion of the investment will be returned in the form of tax credits other than qualified refundable tax credits, and
2. the investor has a bona-fide economic interest in the flow-through entity and is not protected from loss of its investment,

but shall not include an investment in a tax transparent entity where a jurisdiction only permits the benefits of a tax credit to be transferred through such investment when the entity that originates the tax credits or investor is subject to a qualified IIR or qualified UTPR.

Elections

(2) On the making of an election by a filing constituent entity, a constituent entity which holds an ownership interest other than a qualified ownership interest shall:

• (2)(a) include in its qualifying income or loss the accounting gain, profit, or loss, adjusted as required by section 111P other than subsection 2(c) of that section (which relates to excluded equity gains or losses), with respect to any:
  1. fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a mark-to-market basis or on the impairment on the ownership interest, and the tax consequences of the mark-to-market movements or impairments on ownership interest are reflected in income tax expense,
  2. fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a realisation basis and its income tax expense includes deferred tax expense on the mark-to-market movement or impairments on the ownership interest,
  3. profit and loss attributable to that ownership interest, where the interest is in a tax transparent entity and the owner accounts for the interest using the equity method, or
  4. dispositions of that ownership interest which give rise to gains or losses that are included in the owner’s domestic taxable income, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief on that gain,

  and

• (2)(b) notwithstanding section 111U(3)(a) (relating to adjustments to current taxes for taxes on excluded income) and section 111X(5)(a) (relating to adjustments to deferred taxes for taxes on excluded income), include all current and deferred tax expenses in respect of the amounts referred to in paragraph (a) in the calculation of its adjusted covered taxes, subject to the provisions of this Part.

(3) The election referred to in subsection (2) shall apply to all ownership interests, other than a portfolio shareholding within the meaning of section 111P(1), owned by constituent entities located in the jurisdiction with respect to which the election is made.

(4) Subsections (5) and (9) shall apply to the qualified flow-through tax benefits that flow through a qualified ownership interest to which an election under subsection (2) applies.

Qualified flow-through tax benefits of qualified ownership interests

(5) Subject to subsection (8), where this subsection applies, qualified flow-through tax benefits shall be added to the adjusted covered taxes of a constituent entity that is the direct or indirect owner (held via tax transparent entities that are not constituent entities of the MNE Group) of a qualified ownership interest, to the extent that the qualified flow-through tax benefit was treated as reducing tax expense accrued in the financial accounting net income or loss of the constituent entity.

(6) Subject to subsection (8), a constituent entity’s investment in a qualified ownership interest shall be treated as being reduced by receipts with respect to the qualified ownership interest in respect of:

• (6)(a) the amount of tax credits that have flowed through to the constituent entity,
• (6)(b) the amount of any tax-deductible losses that have flowed through to the constituent entity multiplied by the statutory tax rate applicable to the constituent entity,
• (6)(c) the amount of any distributions to the constituent entity, including returns of capital, or
• (6)(d) the amount of proceeds from a sale of all or part of the qualified ownership interest,

but no amount shall be treated as reducing the investment to the extent that it would reduce the investment below zero.

(7)(a) Subject to paragraph (b), any amount referred to in subsection (6)(a), (b), (c), or (d) that flows through, or are received in respect of, a qualified ownership interest, after the constituent entity’s investment has been reduced to zero, shall be subtracted in the calculation of that constituent entity’s adjusted covered taxes.

(7)(b) An amount referred to in subsection (6)(c) or (d) or a qualified refundable tax credit, shall be subtracted in the calculation of a constituent entity’s adjusted covered taxes only to the extent of the amount of any qualified flow-through tax benefits that flowed through the qualified ownership interest and that were treated as an addition in the calculation of that a constituent entity’s adjusted covered taxes.

(8)(a) Provides that where a constituent entity uses the proportional amortisation method of accounting for its investment in a qualified ownership interest, then it shall apply that method of accounting such that any of the amounts specified in subsection (6) that flow-through or are received in respect of a qualified ownership interest shall be treated as a reduction to the investment in the qualified ownership interest in proportion to the expected tax benefits ratio.

(8)(b) The amounts specified in subsection (6) that flow-through or are received in respect of the qualified ownership interest in excess of the reduction to the investment in the qualified ownership interest pursuant to paragraph (a) shall not be included as a positive amount in the constituent entity’s adjusted covered taxes.

(9) On the making of an irrevocable election by a filing constituent entity, where the entity concerned holds a qualified ownership interest but does not use the proportional amortisation method of accounting, it may apply subsection (8) as if it used the proportional amortisation method of accounting in respect of its qualified ownership interest.

Relevant Date: Finance Act 2024