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HMRC internal manual

International Manual

The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets: Inter-company transactions

The Financial Services Authority (FSA) generally requires transactions between two separate corporate entities, whether in the UK, or elsewhere, to be risk weighted using the appropriate risk weights. This approach should be followed when calculating the amount of capital to be attributed to a permanent establishment (PE). Thus, where a PE enters into a transaction with another company, whether connected or not and whether in the UK or abroad, any financial asset arising from that transaction should be assigned the appropriate risk weight under the FSA rules (but see INTM267725 regarding treasury functions).

Where the home state regulatory rules are used as a starting point and the home state treatment of inter-company transactions differs from that of the FSA, this will need to be adjusted for and taken into account in arriving at a figure for the attribution of capital (and thus profit) to the PE for tax purposes.