GloBE Rules Series

ITQ G-

035

November 4, 2022

Question

ACo 1 is located in jurisdiction A, and is a Constituent Entity in MNE Group # 1. ACo 1 owns several businesses.

ACo 2 is also located in jurisdiction A, and is a Constituent Entity in MNE Group # 2.

ACo 1 sells the assets and liabilities in one of its businesses to ACo 2, for consideration in 2 parts: (1) shares issued by ACo 2 (70% of the value of the total consideration); and (2) cash (30% of the value of the total consideration). The issue of shares by ACo 2 does not cause it to leave MNE Group # 2 or to join MNE Group # 1.

In ACo 1's financial statements, it reports a profit on the sale, and it records the ACo 2 shares according to their value.

In ACo 2's financial statements, it records the assets and liabilities according to the value of the consideration it provided to ACo 1.

However, under the jurisdiction A tax law: (i) ACo 1 does not recognize any gain or loss on the sale; (ii) ACo 1's basis in the ACo 2 shares is equal to its basis in the transferred assets (minus the amount of transferred liabilities); and (iii) ACo 2 inherits ACo 1's basis in the transferred assets.

How will this transaction be treated under the GloBE rules, for each of ACo 1 and ACo 2?

Answer

The key question is whether the transaction constitutes a "GloBE Reorganisation", as defined in Art. 10.1.1.

There are 2 issues:

(1) First issue

Is the transaction “a transformation or transfer of assets and liabilities such as in a merger, demerger, liquidation, or similar transaction" (the opening words in the "GloBE Reorganisation" definition)?

It is not a "transformation", which (according to the Commentary) refers to a change in the form of an Entity.

It is a "transfer of assets and liabilities" – but what about "such as in a merger, demerger, liquidation, or similar transaction"?

As ACo 2 does not change its MNE Group from #2 to #1 (i.e., control does not change), I think the transaction is not a "merger". And it’s obviously not a "liquidation".

The transaction is possibly a "demerger" of the transferred assets or liabilities, or a "similar transaction" to such a demerger. Nevertheless, there is a risk that the opening words are not satisfied.

(2) Second issue

Is "the consideration for the transfer …, in whole or in significant part, equity interests issued by [ACo 2]" (para. (a) in definition of "GloBE Reorganisation")?

Does 70% of the value of the total consideration satisfy the "significant part" condition? The Commentary provides no guidance on the meaning of "significant part".

My personal view is that 70% should satisfy that condition.

(3) Conclusion on "GloBE Reorganisation"

The definition will be satisfied, if the transaction is a "demerger, … or similar transaction".

If the transaction is a "GloBE Reorganisation": (i) ACo 1 will exclude the gain from its GloBE Income or Loss; and (ii) ACo 2 will use ACo 1's carrying value of the transferred assets and liabilities in computing its future GloBE Income or Loss (Art. 6.3.2).

If the transaction is not a "GloBE Reorganisation": (i) ACo 1 will include the gain (generally as reported in its financial statements) in its GloBE Income or Loss; and (ii) ACo 2 will use the value determined under the relevant accounting standard, as the carrying value of the transferred assets and liabilities in computing its future GloBE Income or Loss (Art. 6.3.1).

In both situations: ACo 1 will use the value in its financial statements, as the carrying value of the shares in ACo 2 in computing its future GloBE Income or Loss.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.