111AM. Constituent entities joining and leaving MNE group or large-scale domestic group

(1) Where during a fiscal year (in this section referred to as an ‘acquisition year’), an entity (in this section referred to as a ‘target entity’)—

(a) becomes or ceases to be a constituent entity of an MNE group or of a large-scale domestic group as a result of a transfer of direct or indirect ownership interests in the target entity, or

(b) becomes the ultimate parent entity of a new group,

the target entity shall be treated as a member of an MNE group or large-scale domestic group for the purposes of this Part provided that a portion of its assets, liabilities, income, expenses and cash flows is included on a line-by-line basis in the consolidated financial statements of the ultimate parent entity in the acquisition year.

(2) For the purposes of this Part—

(a) in an acquisition year, an MNE group or large-scale domestic group shall take into account only the financial accounting net income or loss and adjusted covered taxes of the target entity that are included in the consolidated financial statements of the ultimate parent entity;

(b) in an acquisition year and in each subsequent fiscal year, the qualifying income or loss and adjusted covered taxes of the target entity shall be based on the historical carrying value of its assets and liabilities;

(c) in an acquisition year, the calculation of the eligible payroll costs of the target entity pursuant to section 111AE shall take into account only the costs that are reflected in the consolidated financial statements of the ultimate parent entity;

(d) the calculation of the carrying value of the eligible tangible assets of the target entity pursuant to section 111AE shall be adjusted, where applicable, in proportion to the period in which the target entity was a member of the MNE group or large-scale domestic group during the acquisition year.

(3) Subject to subsection (4), the deferred tax assets and deferred tax liabilities of a target entity that are transferred between MNE groups or large-scale domestic groups shall be taken into account by the acquiring MNE group or large-scale domestic group in the same manner and to the same extent as if the acquiring MNE group or large-scale domestic group held a controlling interest in the target entity when such assets and liabilities arose.

(4) Subsection (3) shall not apply to a qualifying loss deferred tax asset referred to in section 111Y.

(5) (a) For the purposes of section 111X(9), where a deferred tax liability of a target entity has previously been included in its total deferred tax adjustment amount, it shall be treated as reversed by the disposing MNE group or large-scale domestic group and shall be treated as arising from the acquiring MNE group or large-scale domestic group in the acquisition year.

(b) Where paragraph (a) applies, any subsequent reduction of covered taxes pursuant to section 111X(9) shall have effect in the fiscal year in which the amount is recaptured.

(6) Where during an acquisition year a target entity is—

(a) a parent entity, and

(b) a member of 2 or more MNE groups or large-scale domestic groups,

it shall apply separately the provisions of this Part to its allocable shares of the top-up tax of low-taxed constituent entities determined for each MNE group or large-scale domestic group.

(7) Notwithstanding subsections (1) to (6), where the jurisdiction in which the target entity is located or, in the case of a tax transparent entity, the jurisdiction in which the assets are located—

(a) treats the acquisition or disposal of a controlling interest in the target entity in the same, or in a similar, manner as an acquisition or disposal of assets and liabilities, and

(b) imposes a covered tax on the seller based on the difference between—

(i) the tax basis, and

(ii) either—

(I) the consideration paid in exchange for the controlling interest, or

(II) the fair value of the assets and liabilities,

then the acquisition or disposal of that controlling interest in a target entity shall be treated as an acquisition or disposal of assets and liabilities.