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HMRC internal manual

International Manual

Controlled Foreign Companies: exemptions - excluded countries: Permanent establishment income treated as local source

SI1998/3081 Regulation 6(2)

Where a controlled foreign company has a permanent establishment in a territory on Parts I or II of the list the income of that permanent establishment may be treated as local source in the controlled foreign company where certain conditions are met. These are as follows:

  • The permanent establishment must be situated in a territory specified in Part I or Part II of the list and, where the territory is specified in Part II, at no time during the accounting period is the permanent establishment entitled to any tax exemption, tax reduction or other benefit, or (as the case may be) falls within any condition, specified in respect of the territory where it is situated.
  • The profits of the permanent establishment are within the charge to tax of the territory in which it is situated.
  • The profits attributed to the permanent establishment for tax purposes are those which it might be expected to make if it were a distinct and separate enterprise from the company of which it is a permanent establishment, engaged in the same or similar activities under the same or similar conditions and dealing wholly and independently with the company of which it is a permanent establishment.
  • Not more than 10% of the net amount of the profits of the permanent establishment for the accounting period would, on the assumption that the permanent establishment were not a permanent establishment of the controlled foreign company but a separate controlled foreign company, be attributable to the aggregate of the gross amounts of any income and gains falling in any of subparagraphs (a) to (d) of SI1998/3081 regulation 5(3) and arising outside the territory in which the permanent establishment is situated. See Example 1 in INTM254590.
  • Amounts falling to be deducted in computing the taxable profits of the permanent establishment, being amounts which are paid to, or are in respect of costs incurred by, the company of which it is a permanent establishment, either:
  1. are liable to tax in the territory of residence of that company or are not allowed as a deduction, or
  2. for the purposes of computing the total taxable profit (including permanent establishment profits) of that company in its territory of residence do not reduce the amount of the taxable profits of the company unless they represent a payment to a third party.

The purpose of this rule is to ensure that a company does not benefit from a double deduction of expenses. See Example 2 in INTM254590.