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Deemed Disposal of Assets Election

Deemed Disposal of Assets

In some jurisdictions there can be a deemed disposal of assets.

This occurs in the UK for instance where a company migrates by changing its treaty residence.

In other jurisdictions it can apply on an ‘immigration’ (ie where a company becomes tax resident in a jurisdiction).

In general, the company is treated as though it had disposed of and immediately reacquired its assets. This could crystallise gains or losses on its assets and would uplift the base cost of the assets to the market value for tax purposes.

The reason for these rules is that a company could change its tax residence to a foreign jurisdiction and any gains on foreign assets may then be out of scope of tax in the former country of residence even though the gain was generated whilst it was tax resident there. 

Note that deferred tax arising in this case (ie a difference between the carrying value of assets for tax and financial accounting purposes) is recognised for Pillar Two purposes.

Article 6.3.4 of the OECD Pillar Two Model Rules allow an MNE Group to make an election to reflect the domestic tax treatment. Without this election, GloBE income would be based on the financial accounting income which wouldn’t usually reflect the uplifted base cost of the assets.

The taxable gain or loss is recognised and the carrying value of its assets for GloBE purposes are adjusted (increased where there is a gain).

The gain or loss can either be included in the GloBE income or loss in the year the gain or loss occurred or spread equally over five years.

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