Expansion of territorial scope of Corporation Tax and Income tax: Overview
The UK’s territorial scope of charge to corporation tax and income tax is set out in Section 5 CTA 2009 and Section 6 ITTOIA 2005.
Prior to the changes in the Finance Act 2016 a non-resident company was chargeable to UK Corporation Tax, only to the extent that the profits were attributable to a UK Permanent Establishment. In circumstances where its arrangements met the specific conditions in Part 3 Finance Act 2015 it may have been charged to Diverted Profits Tax.
The territorial restriction has been removed for UK land transactions. Section 5 CTA 2009 and Section 6 ITTOIA 2005 have been amended to the effect that non-resident companies, and non-resident non corporates are now within the charge to corporation tax or income tax (as appropriate) on the full profit, from carrying on a trade of dealing in or developing UK land.
It is not necessary for them to be trading through a permanent establishment in the UK or for them to be resident in the UK.
The expansion of the territorial scope does not impact the treatment of rental income to non-resident landlords. Where a non-resident company which does not carry on a trade in the United Kingdom through a permanent establishment in the United Kingdom is within the new CT charge on dealing in or development of land and holds investment properties or derives rental income from properties in the UK such rental income remains subject to income tax and is not taxed as part of the new trade.
Where a non-resident company is within the new corporation tax charge and it derives rental income from properties it holds as part of its trade, the rental income will be subject to corporation tax if it is derived from a permanent establishment in the United Kingdom. If the non-resident company has no permanent establishment in the UK the rental income will be subject to income tax.
Company X is not resident in the UK. It purchases a block of flats in the UK to develop and sell as part of a trading business. As Company X carries on a trade of developing UK land it is within the charge to UK corporation tax. All of the profits from the trade of developing UK land will be subject to corporation tax regardless of the place of residence of the company, or the amount of profit that would be attributed to a UK PE of Company X.