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HMRC internal manual

International Manual

HM Revenue & Customs
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Non-residents trading in the UK: profits of the PE: Attribution of capital to the permanent establishment - companies only: alternative approaches to calculating the capital attribution tax adjustment

Use of comparables

The legislation in CTA09/S21(1) requires the permanent establishment to be regarded as a separate and distinct enterprise carrying on the same or similar activities under the same or similar conditions. There are a number of reasons why the activities of the permanent establishment might differ from those generally carried on by a separate entity of the same size as the permanent establishment, trading in the UK. It may therefore be difficult to find UK companies that are true comparables to the permanent establishment in terms of both size and level or type of activities. If appropriate comparables can be found, then these can be used as an indicator of the amount of equity and loan capital that the permanent establishment would have had at arm’s length.

Use of calculations based on funding of the company

In most cases the way the non-resident company, of which the permanent establishment is part, funds itself in the market will be the most obvious measure of an arm’s length mix of funding for that company. Where this is so, there is clearly scope for considering the extent to which the funding of the permanent establishment would replicate the funding of the whole company. Generally, unless the activities carried on by the permanent establishment are sufficiently different (that is, either inherently more or less risky) from those carried on by the company as a whole, it may be possible to apply the capital ratios of the company to the UK permanent establishment. Even where the activities of the permanent establishment are sufficiently different from those of the rest of the company to warrant an argument that the permanent establishment would have a somewhat different capital structure, the capital structure of the whole company could still be used as a starting point with appropriate adjustments being made.

The use of more than one method as a back-up check might be considered if a particular case warranted the resources necessary to undertake the exercise. For example, comparables might prove to be a good check where capital has been attributed to the permanent establishment based on the capital mix of the company as a whole.