Determination of the qualifying income or loss
1. The qualifying income or loss of a constituent entity shall be computed by making the adjustments set out in Articles 16 to 19 to the financial accounting net income or loss of the constituent entity for the fiscal year before any consolidation adjustments for eliminating intra-group transactions, as determined under the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity.
2. Where it is not reasonably practicable to determine the financial accounting net income or loss of a constituent entity based on the acceptable financial accounting standard or authorised financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, the financial accounting net income or loss of the constituent entity for the fiscal year may be determined using another acceptable financial accounting standard or an authorised financial accounting standard provided that:
(a)
the financial accounts of the constituent entity are maintained based on that accounting standard;
(b)
the information contained in the financial accounts is reliable; and
(c)
permanent differences in excess of EUR 1 000 000 that arise from the application of a particular principle or standard to items of income or expense or transactions, where that principle or standard differs from the financial standard used in the preparation of the consolidated financial statements of the ultimate parent entity, are adjusted to conform to the treatment required for that item under the accounting standard used in the preparation of the consolidated financial statements.
3. Where an ultimate parent entity has not prepared its consolidated financial statements in accordance with an acceptable financial accounting standard as referred to in Article 3, point (6)(c), the consolidated financial statements of the ultimate parent entity shall be adjusted to prevent any material competitive distortion.
4. Where an ultimate parent entity does not prepare consolidated financial statements as referred to in Article 3, points (6)(a), (b) and (c), the consolidated financial statements of the ultimate parent entity referred to in Article 3, point (6)(d), shall be those that would have been prepared if the ultimate parent entity were required to prepare such consolidated financial statements in accordance with:
(a)
an acceptable financial accounting standard; or
(b)
an authorised financial accounting standard, provided that such consolidated financial statements are adjusted to prevent any material competitive distortion.
5. Where a qualified domestic top-up tax is applied by a Member State or a third-country jurisdiction, the financial accounting net income or loss of the constituent entities located in that Member State or third-country jurisdiction may be determined in accordance with an acceptable financial accounting standard or an authorised financial accounting standard that is different from the financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, provided that such financial accounting net income or loss is adjusted to prevent any material competitive distortion.
6. Where the application of a specific principle or procedure under a set of generally accepted accounting principles results in a material competitive distortion, the accounting treatment of any item or transaction subject to that principle or procedure shall be adjusted to conform to the treatment required for the item or transaction under International Financial Reporting Standards (IFRS or IFRS as adopted by the Union pursuant to Regulation (EC) No 1606/2002).
Adjustments to determine the qualifying income or loss
1. For the purposes of this Article, the following definitions apply:
(a)
‘net taxes expense’ means the net amount of the following items:
(i)
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 computation;
(ii)
deferred tax assets attributable to a loss for the fiscal year;
(iii)
qualified domestic top-up taxes accrued as an expense;
(iv)
taxes arising pursuant to the rules of this Directive or, as regards third-country jurisdictions, the OECD Model Rules, accrued as an expense; and
(v)
disqualified refundable imputation taxes accrued as an expense;
(b)
‘excluded dividend’ means a dividend or other distribution received or accrued in respect of an ownership interest, except a dividend or other distribution received or accrued in respect of:
(i)
an ownership interest:
—
held by the group in an entity, that carries rights to less than 10 % of the profits, capital or reserves, or voting rights of that entity at the date of the distribution or disposition (a ‘portfolio shareholding’); and
—
that is economically owned by the constituent entity that receives or accrues the dividend or other distribution for less than one year at the date of the distribution;
(ii)
an ownership interest in an investment entity that is subject to an election pursuant to Article 43;
(c)
‘excluded equity gain or loss’ means a gain, profit or loss, included in the financial accounting net income or loss of the constituent entity, arising from:
(i)
gains and losses arising from changes in the fair value of an ownership interest, except for a portfolio shareholding;
(ii)
profits or losses in respect of an ownership interest that is included under the equity method of accounting; and
(iii)
gains and losses from the disposal of an ownership interest, except for the disposal of a portfolio shareholding;
(d)
‘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:
(i)
periodically adjusts the carrying value of such property, plant and equipment to its fair value;
(ii)
records the changes in value in other comprehensive income; and
(iii)
does not subsequently report the gain or loss accrued in other comprehensive income through profit and loss;
(e)
‘asymmetric foreign currency gain or loss’ means a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is:
(i)
included in the computation of the taxable income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity;
(ii)
included in the computation of the financial accounting net income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity;
(iii)
included in the computation of the financial accounting net income or loss of a constituent entity and that is attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity; and
(iv)
attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether such third foreign currency gain or loss is included in the taxable income;
the 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; the accounting functional currency is the functional currency used to determine the constituent entity’s financial accounting net income or loss; a third foreign currency is a currency that is not the constituent entity’s tax functional currency or accounting functional currency;
(f)
‘policy disallowed expense’ means:
(i)
an expense accrued by the constituent entity for illegal payments, including bribes and kickbacks; and
(ii)
an expense accrued by the constituent entity for fines and penalties that equal or exceed EUR 50 000 or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is computed;
(g)
‘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:
(i)
a correction of an error in the determination of the financial accounting net income or loss in a previous fiscal year that affected the income or expenses able to be included in the computation of the qualifying income or loss in that previous fiscal year, except to the extent such correction of an error resulted in a material decrease of a liability for covered taxes subject to Article 25; and
(ii)
a change in accounting principles or policy that affected the income or expenses included in the computation of the qualifying income or loss;
(h)
‘accrued pension expense’ means the difference between the amount of pension liability expense included in the financial accounting net income or loss and the amount contributed to a pension fund for the fiscal year.
2. The financial accounting net income or loss of a constituent entity shall be adjusted by the amount of the following items to determine its qualifying income or loss:
(a)
net taxes expenses;
(b)
excluded dividends;
(c)
excluded equity gains or losses;
(d)
included revaluation method gains or losses;
(e)
gains or losses from the disposal of assets and liabilities excluded pursuant to Article 35;
(f)
asymmetric foreign currency gains or losses;
(g)
policy disallowed expenses;
(h)
prior period errors and changes in accounting principles; and
(i)
accrued pension expenses.
3. At the election of the filing constituent entity, a constituent entity may substitute the amount allowed as a deduction for the computation of its taxable income in its location for the amount expensed in its financial accounts for a cost or expense of such constituent entity that was paid with stock-based compensation.
Where the option to use the stock-options has not been exercised, the amount of stock-based compensation cost or expense that has been deducted from the financial accounting net income or loss of the constituent entity for the computation of its qualifying income or loss for all previous fiscal years shall be included in the fiscal year in which that option has expired.
Where part of the amount of stock-based compensation cost or expense has been recorded in the financial accounts of the constituent entity in fiscal years prior to the fiscal year in which the election is made, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted for the computation 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 for the computation of its qualifying income or loss in those previous fiscal years if the election had been made in such fiscal years shall be included in the computation of the qualifying income or loss of the constituent entity for that fiscal year.
The election shall be made in accordance with Article 45(1) and shall apply consistently to all constituent entities located in the same jurisdiction for the year in which the election is made and all subsequent fiscal years.
In the fiscal year in which the election is revoked, 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 computation of the qualifying income or loss of the constituent entity.
4. Any transaction between constituent entities located in different jurisdictions that is not recorded in the same amount in the financial accounts of both constituent entities or that is not consistent with the arm’s length principle shall be adjusted so as to be in the same amount and consistent with the arm’s length principle.
A loss from a sale or other transfer of an asset between two constituent entities located in the same jurisdiction that is not recorded consistently with the arm’s length principle shall be adjusted based on the arm’s length principle if that loss is included in the computation of the qualifying income or loss.
For the purposes of this paragraph, ‘arm’s length principle’ means the principle under which transactions between constituent entities are to be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances.
5. Qualified refundable tax credits referred to in Article 3, point (38), shall be treated as income for the computation of the qualifying income or loss of a constituent entity. Non-qualified refundable tax credits shall not be treated as income for the computation of the qualifying income or loss of a constituent entity.
6. At the election of 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 may be determined on the basis of the realisation principle for the computation of the qualifying income or loss.
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 computation of the qualifying income or loss of a constituent entity under the first subparagraph.
The carrying value of an asset or a liability for the purpose of determining a gain or a loss under the first subparagraph shall be the carrying value at the time the asset was acquired or the liability was incurred, or on the first day of the fiscal year in which the election is made, whichever date is the latest.
The election shall be made in accordance with Article 45(1) and shall apply to all constituent entities located in the 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.
In the fiscal year in which the election is revoked, an amount equal to the difference between the fair value of the asset or liability and the carrying value of the asset or liability on the first day of the fiscal year in which the revocation is made, determined pursuant to the election, shall be included, if the fair value exceeds the carrying value, or deducted, if the carrying value exceeds the fair value, for the computation of the qualifying income or loss of the constituent entities.
7. At the election of the filing constituent entity, the qualifying income or loss of a constituent entity located in a jurisdiction arising from the disposal of local tangible assets located in that jurisdiction by such constituent entity to third parties, other than a member of the group, for a fiscal year may be adjusted as set out in this paragraph. For the purposes of this paragraph, the local tangible assets are immovable property located in the same jurisdiction as the constituent entity.
The net gain arising from the disposal of local tangible assets as referred to in the first subparagraph 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 as referred to in the first subparagraph in the fiscal year in which the election is made and in the four fiscal years prior to that fiscal year (the ‘five-year period’). The net gain shall be offset first against the net loss, if any, that has arisen in the earliest fiscal year of the five-year period. Any residual amount of net gain shall be carried forward and offset against any net losses that have arisen in subsequent fiscal years of the five-year period.
Any residual amount of net gain that remains after applying the second subparagraph shall be spread evenly over the five-year period for the computation 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 as referred to in the first subparagraph in the fiscal year in which the election is made. The residual amount of net gain allocated to a constituent entity shall be proportionate to the net gain of that constituent entity divided by the net gain of all constituent entities.
Where no constituent entity in a jurisdiction has made a net gain from the disposal of local tangible assets as referred to in the first subparagraph in the fiscal year in which the election is made, the residual amount of net gain as referred to in the third subparagraph shall be allocated equally to each constituent entity in that jurisdiction and spread evenly over the five-year period for the computation of the qualifying income or loss of each of those constituent entities.
Any adjustment under this paragraph for the fiscal years preceding the fiscal year in which the election is made shall be subject to adjustments in accordance with Article 29(1). The election shall be made annually in accordance with Article 45(2).
8. Any expense related to a financing arrangement whereby one or more constituent entities provides credit to or otherwise makes an investment in one or more other constituent entities of the same group (the ‘intra-group financing arrangement’) shall not be taken into consideration in the computation of the qualifying income or loss of a constituent entity if the following conditions are met:
(a)
the constituent entity is located in a low-tax jurisdiction or in a jurisdiction that would have been low-taxed if the expense had not been accrued by the constituent entity;
(b)
it can reasonably be anticipated that, over the expected duration of the intra-group financing arrangement, the intra-group financing arrangement will increase the amount of expenses taken into account for the computation of the qualifying income or loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit (the ‘counterparty’);
(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 by the counterparty.
9. An ultimate parent entity may elect to apply its consolidated accounting treatment to eliminate income, expense, gains and losses from transactions between constituent entities that are located in the same jurisdiction and included in a tax consolidation group for the purpose of computing the net qualifying income or loss of those constituent entities.
The election shall be made in accordance with Article 45(1).
In the fiscal year in which the election is made or revoked, appropriate 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 revocation.
10. An insurance company shall exclude from the computation 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. An insurance company shall include in the computation of its qualifying income or loss 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.
11. Any amount that is recognised as a decrease in the equity of a constituent entity and is the result of distributions made or due in respect of an instrument issued by that constituent entity pursuant to prudential regulatory requirements (the ‘additional tier one capital’) shall be treated as an expense in the computation of its qualifying income or loss.
Any amount that is recognised as an increase in the equity of a constituent entity and is the result of distributions received or due to be received in respect of an additional tier one capital held by the constituent entity shall be included in the computation of its qualifying income or loss.
International shipping income exclusion
1. For the purposes of this Article, the following definitions apply:
(a)
‘international shipping income’ means net income obtained by a constituent entity from the following activities, provided that the transportation is not carried out via inland waterways within the same jurisdiction:
(i)
transportation of passengers or cargo by ship in international traffic, whether the ship is owned, leased or otherwise at the disposal of the constituent entity;
(ii)
transportation of passengers or cargo by ship in international traffic under slot-chartering arrangements;
(iii)
leasing of a ship to be used for the transportation of passengers or cargo in international traffic on charter fully equipped, crewed and supplied;
(iv)
leasing of a ship used for the transportation of passengers or cargo in international traffic, on a bareboat charter basis, to another constituent entity;
(v)
participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ship in international traffic; and
(vi)
sale of a ship used for the transportation of passengers or cargo in international traffic, provided that the ship has been held for use by the constituent entity for a minimum of one year;
(b)
‘qualified ancillary international shipping income’ means net income obtained by a constituent entity from the following activities, provided that such activities are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic:
(i)
leasing of a ship, on a bareboat charter basis, to another shipping enterprise that is not a constituent entity, provided that the duration of the charter does not exceed three years;
(ii)
sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage;
(iii)
leasing and short-term storage of containers or detention charges for the late return of containers;
(iv)
provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff and customer services personnel; and
(v)
investment income, where the investment that generates the income is made as an integral part of the carrying on of the business of operating ships in international traffic.
2. The international shipping income and the qualified ancillary international shipping income of a constituent entity shall be excluded from the computation of its qualifying income or loss, provided that the constituent entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located.
3. Where the computation of a constituent entity’s international shipping income and qualified ancillary international shipping income results in a loss, such loss shall be excluded from the computation of the constituent entity’s qualifying income or loss.
4. The aggregated qualified ancillary international shipping income of all constituent entities located in a jurisdiction shall not exceed 50 % of those constituent entities’ international shipping income.
5. The costs incurred by a constituent entity that are directly attributable to its international shipping activities listed in paragraph 1, point (a), and qualified ancillary international shipping activities listed in paragraph 1, point (b), shall be allocated to such activities for the purpose of computing the net international shipping income and the net qualified ancillary international shipping income of the constituent entity.
The costs incurred by a constituent entity that indirectly result from its international shipping activities and qualified ancillary international shipping activities shall be deducted from the constituent entity’s revenues from such activities to compute the international shipping income and qualified ancillary international shipping income of the constituent entity on the basis of its revenues from such activities in proportion to its total revenues.
6. All direct and indirect costs attributed to a constituent entity’s international shipping income and qualified ancillary international shipping income in accordance with paragraph 5 shall be excluded from the computation of its qualifying income or loss.
Allocation of the qualifying income or loss between a main entity and a permanent establishment
1. Where a constituent entity is a permanent establishment as defined in Article 3, point (13)(a), (b) or (c), its financial accounting net income or loss shall be the net income or loss reflected in the separate financial accounts of that permanent establishment.
Where a permanent establishment does not have separate financial accounts, its financial accounting net income or loss shall be the amount that would have been reflected in its separate financial accounts if they had been prepared on a standalone basis and in accordance with the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity.
2. Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(a) or (b), its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with the applicable tax treaty or domestic law of the jurisdiction where it is located, regardless of the amount of income subject to tax and the amount of deductible expenses in that jurisdiction.
Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(c), its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that would have been attributable to it in accordance with Article 7 of the OECD Model Tax Convention on Income and Capital, as amended.
3. Where a constituent entity meets the definition of a permanent establishment in Article 3, point (13)(d), its financial accounting net income or loss shall be computed based on the amounts and items of income that are exempt in the jurisdiction where the main entity is located and attributable to the operations conducted outside of that jurisdiction and the amounts and items of expense that are not deducted for tax purposes in the jurisdiction where the main entity is located and that are attributable to such operations.
4. The financial accounting net income or loss of a permanent establishment shall not be taken into account in determining the qualifying income or loss of the main entity, except as provided in paragraph 5.
5. A qualifying loss of a permanent establishment shall be treated as an expense of the main entity for the computation of its qualifying income or loss to the extent that the loss of the permanent establishment is treated as an expense in the computation of domestic taxable income of such main entity and is not set off against an item of the domestic taxable income that is subject to tax under the laws of both the jurisdiction of the main entity and the jurisdiction of the permanent establishment.
Qualifying income that is subsequently earned by the permanent establishment shall be treated as qualifying income of the main entity up to the amount of the qualifying loss that was previously treated as an expense of the main entity under the first subparagraph.
Allocation of the qualifying income or loss of a flow-through entity
1. The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the amount allocable to its owners that are not group entities and that hold their ownership interest in such flow-through entity directly or through a chain of tax transparent entities, unless:
(a)
the flow-through entity is an ultimate parent entity; or
(b)
the flow-through entity is held, directly or through a chain of tax transparent entities, by an ultimate parent entity referred to in point (a).
2. The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the financial accounting net income or loss that is allocated to another constituent entity.
3. Where a flow-through entity wholly or partially carries out business through a permanent establishment, its financial accounting net income or loss which remains after applying paragraph 1 of this Article shall be allocated to that permanent establishment in accordance with Article 18.
4. Where a tax transparent entity is not the ultimate parent entity, the financial accounting net income or loss of the flow-through entity which remains after applying paragraphs 1 and 3 shall be allocated to its constituent entity-owners in accordance with their ownership interests in the flow-through entity.
5. Where a flow-through entity is a tax transparent entity that is the ultimate parent entity or a reverse hybrid entity, any financial accounting net income or loss of the flow-through entity which remains after applying paragraphs 1 and 3 shall be allocated to the ultimate parent entity or the reverse hybrid entity.
6. Paragraphs 3, 4 and 5 shall be applied separately with respect to each ownership interest in the flow-through entity.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
