Article 38 - Constituent Entities Joining or Leaving the Multinational Enterprise Group

For the purposes of applying the provisions of this Article, a Target Entity means an Entity to which either of the following applies during a Fiscal Year (the Acquisition Year):

1. The Entity becomes or ceases to be a Constituent Entity of a Multinational Enterprise Group as a result of a transfer of direct or indirect Ownership Interests in the Entity.

2. The Entity becomes the Ultimate Parent Entity of a new Group.

A Target Entity shall be treated as a member of a Multinational Enterprise Group during the Acquisition Year provided that a portion of its assets, liabilities, income, expenses and cash flow is included on a line-by-line basis in the Consolidated Financial Statements of the Ultimate Parent Entity.

In the Acquisition Year, a Multinational Enterprise Group shall take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of the Target Entity that are included in the Consolidated Financial Statements of the Ultimate Parent Entity.

In the Acquisition Year and each subsequent Fiscal Year, the Constituent Entity Income or Loss and Adjusted Covered Taxes of the Target Entity shall be based on the historical carrying value of its assets and liabilities adjusted for depreciation and amortisation as well as additions, capitalised expenditure and disposals.

For the purposes of Article 10 of the Law, the following shall apply in relation to the calculation of the Substance-based Income Exclusion in an Acquisition Year:

1. Eligible Payroll Costs of the Target Entity shall be taken into account only if such costs are included in the Consolidated Financial Statements of the Ultimate Parent Entity.

2. The carrying value of the Eligible Tangible Assets of the Target Entity shall be adjusted in proportion to the period in which the Target Entity was a member of the Multinational Enterprise Group during the Acquisition Year.

With the exception of the Constituent Entity Loss Deferred Tax Asset, the deferred tax assets and deferred tax liabilities of a Target Entity that are transferred from one Multinational Enterprise Group to another shall be taken into account by the Multinational Enterprise Group which has acquired the Target Entity in the same manner and to the same extent as if the Multinational Enterprise Group held a Controlling Interest in the Target Entity when such assets and liabilities arose.

For the purposes of determining the amount of the Recaptured Deferred Tax Liability under Paragraphs H and I of Article 33 of these Regulations, where a deferred tax liability of a Target Entity has previously been included in its Total Deferred Tax Adjustment Amount, it shall be treated as reversed in the Acquisition Year by the Multinational Enterprise Group which disposes of the Target Entity and shall be treated as arising in the Acquisition Year by the Multinational Enterprise Group which acquires the Target Entity.

Where Paragraph G of this Article applies, any subsequent reduction of Covered Taxes in accordance with Paragraphs H and I of Article 33 of these Regulations shall have effect in the year in which the amount is recaptured.

Notwithstanding Paragraphs B to H of this Article, the acquisition or disposal of a Controlling Interest in a Target Entity shall be treated as an acquisition or disposal of assets and liabilities under Article 39 of these Regulations where all of the following apply to the jurisdiction in which the Target Entity is located:

1. The jurisdiction treats the acquisition or disposal of a Controlling Interest in the Target Entity in the same, or in a similar manner, as an acquisition or disposal of assets and liabilities.

2. The jurisdiction imposes a Covered Tax on the seller based on the difference between the tax basis and either the consideration paid in exchange for the Controlling Interest or the fair value of the assets and liabilities.

For the purposes of Paragraph I of this Article, where the Target Entity is a Tax Transparent Entity, Clauses 1 and 2 of Paragraph I of this Article will be applied in relation to the jurisdiction in which the assets of the Tax Transparent Entity are located.