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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: No deduction for notional costs

No deductions should normally be allowed for notional interest or royalties charged by the enterprise to the permanent establishment, in respect of loans made to, or patent rights etc. assigned to, the permanent establishment since such expenditure will not have been incurred.

The argument is sometimes put to the Revenue that there should be allowed in calculating the profits of the permanent establishment a rent for a building which it occupies and which is owned by the company being the rent which would have been paid to the head office had branch and head office been independent. Such arguments are wrong. The Article is concerned with the division of the profits. There is one company and one profit. The company does not pay a rent and notional expenses cannot be taken into account. Similarly no deduction should be made for any notional management fee or commission for services provided by the enterprise for its permanent establishment.

A similar argument applies to interest paid. We do not allow interest paid by the branch to its head office either in domestic law or under the business profits Article. But if the company itself has incurred an interest charge and some or all of the loan on which the interest is paid has been used to fund the branch, we would allow an appropriate part of the interest provided it qualifies under the normal rules for relief for interest. We would treat in the same way interest paid by the branch on a loan which the branch itself had obtained for its own use. If however the enterprise pays interest etc to a third party which is in part attributable to the activities of the permanent establishment, then a reasonable proportion of such interest can be deducted.