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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Non-discrimination

ICTA88/S338 (4) denies a deduction for charges paid by a non-resident company to a non- resident person to the extent that they fall within Sub-section (3)(a) (yearly interest etc.), so that a permanent establishment in the United Kingdom of a non-resident company would not normally be entitled to a deduction for such charges where paid by the company to a non- resident. This prohibition may be overridden by that part of the non-discrimination Article which requires a permanent establishment to be taxed no less favourably than the taxation levied on United Kingdom enterprises carrying on the same activities.

A permanent establishment of a non- resident enterprise will therefore be entitled to deduct the charges it pays if the other conditions in Section 338 are satisfied and the requirements of the business profits Article (see DT1725 - DT1729) are observed, namely

a) the charges paid are on an arm’s length basis, and
b) the charges are properly attributable to the permanent establishment. If, for example, the United Kingdom permanent establishment had borrowed money on behalf of its Head Office, the interest payments would not meet this requirement and would not be deductible.