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HMRC internal manual

International Manual

Foreign banks trading in the UK through permanent establishments: Transfer of loans

In general HMRC will not accept that a loan transferred from a UK permanent establishment (PE) to another part of the same entity is effective for tax purposes. This is because it seldom makes commercial sense for such cross-border transfers to take place between independent banks i.e. the transferring bank may not be willing to give up the future income stream from profitable performing loans and the receiving bank may not wish to take on the funding costs of non-performing loans.

This approach is based on the wording in paragraph 15 of the Organisation for Economic Co- operation and Development (OECD) Commentary on Article 7 of the Model Tax Convention, and the principle has now been incorporated into UK domestic law. CTA09/S26 provides that transfers of loans and other financial assets between the PE and any other part of the non-resident company will only be recognised if they would have taken place between independent enterprises and that such a transfer will not be recognised where it cannot reasonably be considered to be carried out for valid commercial reasons. CTA09/S26(4) makes it clear that tax motivated transfers will not be regarded as carried out for a valid commercial reason.

So, if the UK PE enters into a loan with a customer, the financial asset will be attributed to the UK along with any profits and losses arising from that asset. Any subsequent transfer of the asset to another part of the same entity will not normally be recognised except in certain specific circumstances where it has been agreed that a transfer may be effective for tax purposes:

  • Closure of PE in the UK: where the PE in the UK is closed and the PE has to transfer (intra-bank) any of its loan assets not sold to independent third parties
  • Debt Trading Desk: where a loan is transferred from the PE to another part of the bank where it forms part of the trading stock of that other part, provided that:


  • the other part is involved in active trading, as opposed to simply disposing of loans of that type, and
  • the trade does not consist solely or mainly of acquiring and disposing of loans from related parties, and
  • the transaction is both within the normal trading parameters and is conducted in the normal course of trading activity


  • New PEs: It may make commercial sense to transfer existing loans into a newly set up PE. This might be the case where the transferred loans are with customers in the country of the new PE and where consequently the customer relationship will develop in future.

These may not be the only circumstances in which it is appropriate to recognise loan transfers for tax purposes but all cases where such a transfer is claimed to take place should be examined critically and consideration given to whether or not there are genuine commercial reasons for the transfers and whether they would have taken place between independent banks. The Transfer Pricing team within CSTD Business, Assets & International should be informed of any cases where this issue is raised.

If a transfer is recognised, then consideration will also need to be given to the transfer value and whether it has been accounted for at open market value.