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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Non-resident insurers: scope of UK taxing rights: the corporation tax charge: accounting periods beginning on or after 1 January 2003: 'independent enterprise'

For all non-resident companies, ICTA88/S11AA (2) as inserted by FA03/S149 sets out the ‘independent enterprise’ hypothesis in Article 7(2) of the OECD Model as a provision of UK law.

ICTA88/S11AA (3) is generally of limited interest for insurers. It explains how the hypothesis is applied to determine the arm’s length balance between liabilities which bear interest and equity capital which does not. Where, unusually, an insurance company’s permanent establishment has loan capital attributed to it, then section 11AA(3) will be applied to the permanent establishment’s capital in the same way as it is for any other company, and the assumption that the permanent establishment has the same credit rating as the non-resident company will be relevant. See INTM267120.

ICTA88/S11AA (5) provides for regulations to be made to apply section 11AA(2) to insurance companies, in particular for the purposes of attributing capital to a UK permanent establishment. This recognises the importance of technical provisions for insurers within the liabilities, and of determining the amount and type of assets an independent enterprise might hold.

The Non-resident Insurance Companies Regulations 2003 (SI2003/2714) apply to accounting periods beginning on or after 1 January 2003. Regulation 3 sets out the way that the independent enterprise hypothesis is to be applied to an insurance company. The hypothesis that the profits of the permanent establishment are the same as those of an independent enterprise requires the assumption that the permanent establishment has ‘free assets’ (GIM10124) of the same amount that

  • an independent enterprise
  • engaged in the same or similar activities under the same or similar conditions
  • dealing wholly independently with the non-resident companywould have.

The independent or ‘arm’s length’ principle is not new and does not wholly stem from the OECD Model. Denman J in Pommery and Greno v Apthorpe 2TC182 recognised the need to develop methods to arrive at the amount of profits attributable to economic activity overseas which should be excluded from the UK tax charge. This is an early example of the arm’s length rule operating under domestic law, which will apply even if there is no treaty.