A capital gains election allows an MNE group to spread gains and losses on sales of local immovable tangible assets over the current year and the previous four years and to match gains with losses. The intention behind this is to avoid volatility in the ETR calculation that could arise if one-off gains or losses reflected in the financial accounts flowed through into the Pillar Two GloBE income or loss calculation.
The election works by allocating the total gains from all sales of immovable tangible assets in the jurisdiction (aside from intra-group transfers), firstly to any net asset losses starting with the earliest year first (ie the fourth year before the year of the election).
If there are no net asset losses or the loss is insufficient to cover the gain, the remainder is carried forward and offset against the next year (eg year 3).
If any gain remains after the offset of losses, this is then simply pro-rated over the 5-year period and allocated to constituent entities based on their share of the total net asset gain in the election year.
For instance, if total gains were 10 million euros and company A had gains of 8 million euros and company B had gains of 2 million euros, a remaining gain of 5 million would be allocated as 4 million euros to company A and 1 million euros to company B, and be spread over the 5 year period.
The approach is therefore to (1) carry back the gain to a loss year in the lookback period, and then (2) prorate any remaining gain evenly over the lookback period.
Capital Gains Election – Example
Company 1 realized a loss on tangible net assets of 5,000,000 euros in 2026. In 2028 it realized a net asset gain of 25,000,000 euros on tangible assets. It made a Pillar Two GloBE election for the carryback of the gain in 2028.
The gain is carried back to 2026 first and offset against the loss.
This reduces the gain to 20,000,000 euros. This gain is then offset evenly with 4,000,000 euros being allocated to 2024,2025,2026,2027 and 2028.
As a result of this 2026 would have a gain allocated to it of 9,000,000 euros and 4,000,000 would be allocated for each of the remaining years.
The ETR and top-up tax of any previous years affected by the carry back would need to be recalculated for Pillar Two GloBE purposes.
Any covered taxes that are included in the tax expense in the financial accounts must be removed from adjusted covered taxes for Pillar Two GloBE purposes if an election is made.
This is a jurisdictional election made on an annual basis.
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