Policy paper

Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax

Published 26 November 2025

Who is likely to be affected 

All foreign companies with UK permanent establishments and all UK resident businesses within or potentially within scope of the transfer pricing, or Diverted Profits Tax legislation, advisory firms, representative bodies, and legal firms. 

General description of the measure 

The government is introducing a package of legislation in respect of the UK’s rules on transfer pricing, permanent establishment, and Diverted Profits Tax. 

Transfer Pricing 

This measure has been designed to simplify the UK transfer pricing rules in a number of areas including the participation condition, intangibles, commissioners’ sanctions, UK-to-UK transfer pricing, interpretation in accordance with Organisation for Economic Co-operation and Development (OECD) principles and financial transactions.  

Permanent establishment 

This measure is also designed to bring the UK’s permanent establishment rules into line with the latest international consensus on both the definition of a permanent establishment and the attribution of profits to a permanent establishment. It will also clarify which supporting guidance and materials can be used in conjunction with UK legislation and update the legislation and Statement of Practice on the Investment Manager Exemption. A new mechanism is also being introduced for a UK-resident company to claim relief when a transfer pricing adjustment is made to a connected foreign company that relates to a UK permanent establishment.

Diverted Profits Tax

The legislation creates a new charging provision for Unassessed Transfer Pricing Profits within Corporation Tax. This is a significant simplification, repealing Diverted Profits Tax, which is currently a standalone tax, in its entirety while retaining the essential features of the regime.

Policy objective

This measure is designed to simplify the UK’s international tax rules, bring them up to date, and align them more closely with the UK’s obligations under double taxation treaties. The government is confident that the IT investment by HMRC to deliver this package of reforms will be outweighed by the benefits of simplification to businesses.

The package of reforms is intended to:

• improve fairness — ensuring multinational enterprises pay tax on profits generated from economic activity in the UK in the same way as other businesses
• simplify existing rules — aiming to develop simpler legislation that is easier to understand 
• support growth — improving tax certainty and continued access to treaty benefits, thereby promoting inward investment into the UK

Background to the measure 

A consultation on proposals to reform the UK’s legislation on transfer pricing, permanent establishment and Diverted Profits Tax was held from 19 June until 14 August 2023. The government issued a summary of responses on 16 January 2024. 

In the Corporate Tax Roadmap 2024, a second round of consultation on this measure was announced. This technical consultation, which published draft legislation, was held from 28 April 2025 until 7 July 2025. A summary of responses to that consultation was published at Budget 2025.

Detailed proposal 

Operative date 

This measure will be operative for accounting periods beginning on or after 1 January 2026. 

In relation to transfer pricing, the amendments made to ‘guarantees’, ‘position of guarantor of affected person’s liabilities under a security issued by the person’, and ‘other references to securities’ will be subject to transitional rules.  

The transitional rules are such that the reformed rules will apply to both: 

• new financing arrangements that are entered into on or after 1 January 2026
• all financing arrangements, for accounting periods commencing on or after 1 January 2028 or any earlier periods commencing on or after 1 January 2026 if a person makes an election in relation to the arrangements.  

The amendments made in relation to the treatment of exchange gains and losses will be subject to transitional provisions such that the reformed rules will apply to accounting periods beginning on or after 1 January 2026. This rule is subject to provision that an accounting period beginning before and ending on or after 1 January 2026 is to be treated as if so much of the period as falls before the date, and so much of the period that falls on or after the date, were separate accounting periods.

Current law  

The UK transfer pricing legislation is contained within Part 4 Taxation (International and Other) Provisions Act 2010 (TIOPA 10). 

The UK loan relationships legislation is contained within Part 5 Corporation Tax Act 2009 (CTA 09). 

The UK derivative contracts legislation is contained within Part 7 CTA 09. 

The UK intangible fixed assets legislation is contained within Part 8 CTA 09. 

The UK Diverted Profits Tax legislation is contained within Part 3 Finance Act 2015 (FA 15), as amended by Finance Act 2016, Finance Act 2019 and Finance Act 2021. 

The UK permanent establishment legislation is contained within section 5 and 19 to 32 of CTA 09 and sections 1141 to 1153 of Corporation Tax Act 10 (CTA 10).

Proposed revisions 

Transfer Pricing 

The legislation amends the UK transfer pricing rules at Part 4 TIOPA 10 in the following areas: 

• the participation condition 
• intangible fixed assets 
• commissioners’ sanctions 
• UK-to-UK transfer pricing 
• interpretation in accordance with OECD principles 
• financial transactions 

The participation condition is amended to include: 

• a new form of direct participation where two persons are subject to an agreement for common management and it is reasonable to suppose this results in a prescribed alignment of economic interests  
• an anti-avoidance provision ensuring participation when a person enters into arrangements with a main purpose of not meeting the participation condition 
• a power allowing HMRC to issue a transfer pricing notice requiring a taxpayer to file on the basis that there is participation for future chargeable periods (prospectively) 

Intangibles — one valuation standard is applied for the transfer of intangible fixed assets. The arm’s length price will used where there are cross-border transactions between related parties that are in scope of Part 4 TIOPA 10. The market value will be used in all other circumstances.  

Commissioners’ sanction — the requirement for HMRC’s commissioners to sanction transfer pricing determinations is removed. 

UK-to-UK transfer pricing — domestic transactions between UK companies are exempt from transfer pricing where there is no risk of tax loss. There are consequential amendments to Part 5 and Part 7 CTA 09 to prevent avoidance opportunities.  

Interpretation in accordance with OECD principles — this amendment clarifies that the OECD Model Tax Convention and Transfer Pricing Guidelines are interpretative aids regardless of whether there is a treaty in place. 

Financial transactions — the changes relating to financial transactions will better align the UK rules with the OECD Transfer Pricing Guidelines. 

The draft legislation carves out implicit support from the definition of a guarantee, provides a definition of implicit support that aligns with the OECD Transfer Pricing Guidelines, and requires that the effect of implicit support should be taken into account when applying Part 4 TIOPA 10. Explicit guarantees will also be taken into account, to the extent that they are considered to be arm’s length. 

The amendments described above will result in consequential changes to the compensating adjustment rules in Chapter 4 and Chapter 5 of Part 4 TIOPA 10. 

The legislation introduces an election mechanism whereby a UK resident company with a qualifying participatory relationship to a UK borrower can make an election to be treated as having provided a guarantee in respect of so much of the borrowing that is deemed excessive under Part 4 TIOPA 2010. 

The legislation will include an improved rule that aggregates equity holding lenders for the purposes of determining indirect participation for financing transactions involving persons acting within the same arrangement.   

The legislation also includes rules to bring exchange gains and losses on loan relationships and derivative contracts into scope of Part 4 TIOPA 10, but without disturbing existing hedging arrangements. The one-way street will also be relaxed so as to not disallow debits that represent a reversal of a foreign exchange or fair value credit.

Permanent establishment

This measure aligns the UK domestic definition of a permanent establishment with the definition set out in Article 5 of the 2017 OECD Model Tax Convention.  

It also to revises the current domestic legislation on permanent establishment attribution contained in Chapter 4 CTA 09 to align with Article 7 of the 2017 OECD Model Tax Convention. This will be supported by the OECD Commentary and the OECD Report on the Attribution of Profits to permanent establishments. 

In addition, the legislation includes a number of changes to the Investment Manager Exemption. The key changes are:

• the removal of the ‘if, and only if’ construction of the Investment Manager Exemption to ensure that it acts as a safe harbour and not as a mandatory alternative to the general agent exemption in section 1142 CTA 10 
• the revision of the scope of the Investment Manager Exemption to cover a wider range of transactions conducted within a fund 
• the inclusion of “investment advisors” such that the rules equally apply to advisors and managers 
• the removal of Condition D, ‘the 20% rule’, which has caused practical difficulties for taxpayers and which does not serve a clear purpose as an indicator of independence 
• the removal of the charging provision in section 1152 CTA 10, which serves no practical purpose in the absence of the 20% rule 

Alongside the legislation the government will publish a revised draft of Statement of Practice 1/01. 

The draft legislation also includes a new mechanism to allow a UK-resident company to claim relief when a transfer pricing adjustment is made to a connected foreign company that relates to a UK permanent establishment.

Diverted Profits Tax 

This measure repeals Diverted Profits Tax and introduces a new Corporation Tax charging provision for unassessed transfer pricing profits (UTPP) at Part 4A TIOPA 10. The new regime is simpler and, as the charge is to Corporation Tax, businesses can benefit from access to the UK’s treaty network in the usual way, including access to the Mutual Agreement Procedure to remove double taxation. 

The legislation clearly uses transfer pricing principles and links to transfer pricing legislation as requested in the 2023 consultation responses. Additionally, the legislation sets out how the unassessed transfer pricing profits assessment process will operate. It will retain the useful notice system from the Diverted Profits Tax regime but not the notification requirement.   

The legislation retains the two gateway tests from the Diverted Profits Tax regime, the effective tax mismatch outcome and the tax design condition — previously, the insufficient economic substance condition. However, it seeks to considerably simplifies these gateways and improves their functionality. It will still be possible for a company to amend its tax return to bring diverted profits into charge to Corporation Tax and reduce any associated unassessed transfer pricing profits charge accordingly.

Summary of impacts 

Exchequer impact (£ million) 

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
negligible	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer. 

Macroeconomic impact 

This measure is not expected to have any significant macroeconomic impacts. 

Impact on individuals, households and families 

There is no impact on individuals as this measure only affects businesses.

Equalities impacts

This measure only affects businesses, therefore it is not anticipated that there will be disproportionate impacts on those in groups sharing protected characteristics. 

Administrative impact on business including civil society organisations

This measure will have a negligible impact on businesses who are currently in the scope of UK transfer pricing, permanent establishment and Diverted Profits Tax rules. It will simplify the UK’s tax rules, bring those rules up to date, and align them more closely with the UK’s obligations under double taxation treaties. 

One-off costs could include familiarisation with the changes. Continuing costs for businesses should reduce and no additional administrative costs will be placed on businesses. 

This measure will have no impact on civil society organisations. 

Overall, this measure is expected to improve business’ experience of dealing with HMRC as the transfer pricing, permanent establishment and Diverted Profits Tax rules will be simpler.

Operational impact (£ million) (HMRC or other)

Some small changes will be required to HMRC IT systems, and that cost is currently estimated to be £770,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed alongside other measures in the government’s International Tax reform package including the International Controlled Transactions Schedule.

Further advice

If you have any questions about this change, email dpt-tp-pe-reform@hmrc.gov.uk.