Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Company Taxation Manual

Groups: group relief: UK permanent establishment of non-resident company – determining tax relief in a foreign jurisdiction for an EEA resident company

CTA10/S107(6B)

For general guidance about the surrender as group relief of losses and other amounts (CTM80110) of a UK permanent establishment of a non-resident company see CTM80310.

CTA10/S107(6B) is applicable on or after 1 April 2013 to companies resident in the European Economic Area (EEA).

Where CTA10/S107(6B) applies, any part of a loss attributable to the UK permanent establishment of an EEA resident company on or after 1 April 2013 that has not been relieved against non-UK profits in a foreign jurisdiction will be available for surrender as group relief (CTM80315).

Identifying whether losses and other amounts attributable to a UK permanent establishment are relieved against non-UK profits must be determined by reference to the rules of that foreign jurisdiction.

There will be cases in which the rules of that territory do not identify which losses have been used; where this is the case, the following examples may provide assistance.

Example 1

Company B is not resident in the UK but is resident in the EEA. It carries on a trade in the UK through a permanent establishment. For UK tax purposes, the permanent establishment makes a loss of £2m for the year ended 31 December 2013. Company B’s country of residence operates a consolidation regime, whereby a number of companies in a group can elect to be taxed as a single entity and their results for tax purposes are consolidated in the top company. Company B has elected to be consolidated with its immediate parent (A) and two other subsidiaries of its parent (C and D).

For the year ended 31 December 2013, the results, for foreign tax purposes, of each company are as follows:

Company A - €6m profit

Company B - €10m loss (of which €4m is attributable to its UK PE)

Company C - €9m loss

Company D - €3m profit

As the companies are part of a consolidation, the consolidated loss of €10m is reported by Company A and carried forward to set against future consolidated profits. As all the companies’ results are amalgamated, Company A cannot choose to relieve some losses in preference to others, i.e. in this case Company B could not choose to relieve only the losses of Company C against the profits of Company A and Company D. In this case, it is appropriate to assume in each year that a pro rata amount of each loss-making company’s loss will be used against the total profits of the consolidation.

The total losses of the consolidation are €19m, of which 21% (4/19) is attributable to Company B’s permanent establishment.

The total profits of the consolidation are €9m, therefore €1.9m (21% of 9m) of the losses attributable to Company B’s permanent establishment have been relieved against non-UK profits.

See CTM80333 for guidance on how to determine the losses that a company may surrender as group relief in the UK when only part of its permanent establishment losses have been relieved in a foreign jurisdiction, as in this example.

Example 2

As CTA10/S107(6B) refers to relief ‘in any period’ so the consideration of whether relief has been given may need to span a number of years. Where a loss that has been surrendered as group relief is later relieved against non-UK profits, then the benefit of the UK group relief should be withdrawn to the extent that the loss has been used against non-UK profits. This ensures that the losses are not relieved twice, once as group relief in the UK and then again in another country.

This example considers whether the losses have been relieved against non-UK profits in later years. Given that CTA10/S107(6B) was introduced in 2013, this example predicts future results.

Company X is not resident in the UK but is resident in the EEA. It is incorporated on
1 January 2013 and begins to trade in the same year. It carries on a trade in the UK through a permanent establishment. For UK tax purposes, the permanent establishment makes a profit of £0.5m for the year ended 31 December 2013 (against which it claims group relief) and a loss of £1m for the year ended 31 December 2014.

Company X’s results for foreign tax purposes are as follows:

Year ended 31 December 2013 - €4m loss (net of €2m profit attributable to its UK PE)

Year ended 31 December 2014 - €5m loss (of which €3m is attributable to its UK PE)

Year ended 31 December 2015 - €3m profit (net of €1m loss attributable to its UK PE)

Company X is not part of a group tax regime in its territory of residence. Under the law of its territory of residence its UK permanent establishment losses can only be relieved against its own profits in the current year and in future years.

As Company X made a loss in its territory of residence in the year ended 31 December 2014, no relief was given against non-UK profits in a foreign jurisdiction for its UK permanent establishment losses in that year.

In the year ended 31 December 2015, Company X relieved €3m of its brought forward losses against its profits. The law of its territory of residence does not specify which year’s losses are used.

In this case, it is reasonable to assume that its losses from earlier years are used before the losses of subsequent years (on a first in, first out basis). Therefore, €3m of its losses from the year ended 31 December 2013 are assumed to have been relieved against Company X’s profit in 2015.

At this point, as none of its UK permanent establishment losses for the year ended
31 December 2014 have been relieved against non-UK profits then no group relief restriction is necessary. Company X therefore surrenders the £1m loss attributable to its UK permanent establishment (as calculated for UK corporation tax purposes) for the year ended 31 December 2014 as group relief.

Subsequently, Company X then makes a €5m profit (net of €2m loss attributable to its UK PE) in the year ended 31 December 2016, against which it relieves €5m of its brought forward losses. On a first in, first out basis, these are assumed to consist of €1m from the year ended 31 December 2013 and €4m from the year ended 31 December 2014. As 60% (3/5) of Company X’s loss from 31 December 2014 was attributable to its UK permanent establishment, it is reasonable to conclude that €2.4m (4 x 60%) of the losses attributable to Company B’s permanent establishment have been relieved against non-UK profits and some of the group relief given in the UK may need to be clawed back.

See CTM80333 for guidance on how to determine the UK group relief available when only part of the losses have been relieved in a foreign jurisdiction

See CTM80335 for guidance on how the claw back is operated.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)