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HMRC internal manual

International Manual

Non-residents trading in the UK: profits of the PE: Attirbution of capital to the permanent establishment - companies only: FA2003 domestic legislation - an overview

UK domestic legislation at CTA09/S21 et seq determines the amount of a foreign company’s profits that are chargeable to CT under the ‘separate entity principle’ (INTM267040). Under the separate entity principle profits are attributed to the PE in the amount that it would have made if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions dealing wholly independently with the non-resident company. This includes the assumption that the PE would have such equity and loan capital attributed to it as it would reasonably be expected to have if it were a separate entity. The capital attribution rules therefore apply a limit to the amount of interest that can be deducted in the CT computation of a PE of a non-resident company for tax purposes.

The capital attribution provisions were introduced in FA03/S149 (INTM264040) and apply to accounting periods beginning after 1 January 2003 for companies only. Prior to FA03 there was no requirement to attribute capital to a UK PE of a foreign company.

It is only necessary to consider the attribution of capital to a PE if interest is claimed as a deduction in the computation of PE profits. The vast majority of PE taxpayers in the UK have not historically charged interest costs in calculating UK chargeable profits. In those cases a capital attribution exercise would not be material or necessary. The bulk of relevant cases are expected to be amongst the regulated banking and financial business sectors. Specific capital attribution guidance for banks and other financial businesses can be found at INTM267700.

Where debt and interest costs have been attributed to a PE so that it is necessary to attribute capital also, we use thin capitalisation transfer pricing principles to determine the amount of any computational adjustments. There is no legal requirement that capital actually be moved from the foreign company jurisdiction into the UK PE. More detailed guidance on thin capitalisation transfer pricing is at INTM540000. An important distinction between that guidance and the attribution of capital to a PE is that for the PE the legislation at CTA09/S21(2)(a) imposes the assumption that the PE has the same credit rating as the non-resident company. Consequently there should be no hypothesised payment from the PE to the rest of the entity of which it is a part on the assumption that the rest of the entity guaranteed the PE’s assumed borrowings.