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HMRC internal manual

International Manual

HM Revenue & Customs
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The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 3: Determining the equity capital: overview

There is an inevitable tension between the hypothesis of a permanent establishment (PE) being a distinct and separate enterprise and the fact that it is, in practice, part of a larger entity. The requirement of the legislation at CTA09/Part 2/Chapter 4 that the attribution should be based on the hypothesis that the PE is a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions goes some way to resolving this tension. It recognises the need to look at the economic reality of the PE’s activities, which may in practice go beyond those which would be possible for a small independent bank. In line with this, and making it clear that the legislation is not simply seeking to treat the PE for tax purposes as if it were a free standing subsidiary of similar size, CTA09/S21(2)(a) states, for the avoidance of doubt, that among the same or similar conditions are included the fact that the PE has the same credit rating as the non-resident bank of which it is part. This reflects the economic and legal reality - that it is able to obtain funds at a cost below that of an independent entity of the same size.

The amount of equity capital to be attributed to the PE will therefore be that appropriate to the level of the PE’s risk-weighted assets, any exceptional factors, and the likely UK equity capital requirement for a UK banking business of similar size and business activities. That level of attributed capital is likely to exceed the Financial Services Authority (FSA) minimum regulatory requirement (see INTM267701) which would be appropriate for a UK banking business of similar size and activities. It reflects the difference between FSA requirements for UK banks and actual level of capital used in the UK banking business.