The OECD’s Pillar 2 introduces new, complex rules designed to harmonise international taxation.
Among these, the treatment of asset disposals—whether internal (intragroup) or external—presents a major challenge for ensuring optimal compliance and avoiding unexpected tax liabilities.
In this article, we provide an in-depth overview of asset disposal monitoring, covering the neutralisation mechanisms, the crucial role of the transition year, and the options available to optimise your tax position.
1. Understanding Asset Disposals under Pillar 2
1.1. Specificities of the Asset Disposal Regime
Pillar 2 rules strictly govern asset transfers within groups to prevent the disposal results (capital gains or losses) from distorting the overall tax outcome, commonly referred to as the “GloBE result.”
Therefore, from 1 December 2021 until the opening of the transition year, all disposal results between entities within the GloBE scope must be neutralised. This neutralisation, as defined by Article 913 of the GLoBE rules, ensures that value fluctuations linked to intragroup disposals do not affect the tax result calculation at this stage.
1.2. The Concept of the Transition Year
The transition year is a key milestone in monitoring asset disposals. It represents the first year in which a jurisdiction fully implements the GloBE rules.
For example, if a jurisdiction opts to apply transitional measures (TSH) for three years, the period will begin in December 2021 and extend through 2022 to 2026, setting the transition year as 2027. From this year onwards, intragroup transfers must be recorded at fair value.
lThis change in methodology, detailed in Article 631, affects both the transferring entity (whose disposal result will be included in the GloBE result) and the acquiring entity (with asset depreciation based on the purchase value).
2. Transitioning to Fair Value from the Transition Year Onwards
From the transition year, intragroup asset disposals no longer benefit from the neutralisation mechanism and must be recorded at fair value, in accordance with Article 631.
This approach ensures compliance with the arm’s-length principle, as reaffirmed by Article 323, which aims to assess assets objectively and transparently.
Notable Exception:
Transfers conducted as part of a merger or a Strategic Asset Disposal (CISS) are treated differently. In these cases, the transfer is recorded at net book value (NBV), and the resulting gain or loss is only recognised upon a subsequent transaction.
3. A Special Case: External Capital Gains on Real Estate
Apart from intragroup transfers, there is a specific scenario to consider: capital gains (and losses) on the disposal of real estate by an entity in a given jurisdiction, external to the group.
Unlike intragroup transfers, real estate transfers within the group are not subject to this mechanism.
Article 326 provides an annual option to spread a capital gain from a real estate disposal over the current fiscal year and the four preceding years. This implies that losses from previous years may have been carried forward, and the option to carry back can be exercised to recalculate the Tax Use Index (TUI) for the relevant years. This option increases the TUI in the year the option is exercised, thereby reducing the impact of a significant capital gain—which, if recognised immediately, could lower the TUI below the critical 15% threshold and trigger the payment of additional tax.
Key Points to Remember:
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The carry-back of capital gains allows for an adjustment of tax results from previous years.
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This option is only viable if losses on real estate disposals have been recorded in past results.
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Implementing this mechanism requires rigorous monitoring and thorough analysis to ensure its effectiveness without compromising the 15% threshold.
4. Monitoring Mechanisms: Carry-Forward and Carry-Back
4.1. Carry-Forward of Losses
The carry-forward mechanism involves using losses recorded from asset disposals as a fiscal advantage to reduce future tax liabilities. Once integrated into the GloBE result calculation, these losses will be carried forward regardless of whether subsequent years yield profits or losses.
This process aims to offset variations arising from asset disposals and maintain continuity in tax computations.
4.2. Carry-Back of Capital Gains
Conversely, the carry-back of capital gains allows for the retroactive adjustment of tax results from previous years to optimise the TUI.
This option is particularly relevant when the immediate recognition of a significant capital gain would cause the TUI to drop below the 15% threshold, resulting in additional tax liability.
🚨 Choosing this option requires careful consideration, as it also entails carrying back any tax due on that capital gain.
5. Why Rigorous Monitoring is Indispensable
Managing asset disposals under Pillar 2 is not a one-off task. It necessitates:
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Precise planning of the transition year: This determines the method for recording assets (neutralisation before, fair value after).
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Continuous monitoring of capital gains and losses: Tracking both intragroup and external disposals is essential.
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Detailed analysis of the options available under the GloBE rules: Especially concerning the carry-back option for capital gains.
Indeed, the decision to apply or not the TSH (transitional measures) option directly impacts the transition year and, consequently, the integration of disposal results into the overall tax outcome.
For instance, if TSH is applied in 2024 and 2025, the transition year will be set to 2026, thereby altering the group’s fiscal trajectory.
6. The Role of GMT Insight in Monitoring Asset Disposals
Faced with such complexity, GMT Insight emerges as an indispensable tool for automating and optimising the fiscal management of asset disposals. With its advanced features, GMT Insight enables you to:
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Simulate the calculation of capital gains and losses and anticipate their impact on the GLoBE result.
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Analyse the best fiscal option to apply, whether it be the immediate payment of additional tax or utilising the TSH option.
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Monitor in real time the evolution of asset values and ensure adherence to critical thresholds (notably the 15% threshold).
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Ensure full compliance with Pillar 2 rules, considering the specific requirements of each jurisdiction.
Conclusion
Managing asset disposals under Pillar 2 is a high-precision exercise that requires a deep understanding of the GLoBE rules and their implications.
From the neutralisation of disposal results before the transition year to the application of fair value thereafter, and including the specific options for external capital gains on real estate, every decision has repercussions on the overall fiscal performance of the group.
To navigate this complex environment effectively, it is essential to implement rigorous monitoring and to utilise specialised tools such as GMT Insight. By automating simulations and anticipating fiscal impacts, you will be better equipped to optimise your compliance strategy and avoid unforeseen additional tax liabilities.
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