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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 4: Determining the loan capital: Tax-efficient mix of capital

CTA09/S21(2)(b) provides that a UK permanent establishment (‘PE’) of a foreign bank shall be assumed to have such equity and loan capital as it could reasonably be expected to have in the circumstances specified in CTA09/S21(1). That is, it should be treated as if it were a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions. This means looking not just at the amount of equity capital that the PE would have at arm’s length , but also looking at the mix of equity and loan capital that it would have if it were a separate enterprise trading in the UK in the same or similar conditions.

HMRC does not accept that a PE would have the most tax efficient mix of capital that is theoretically possible, i.e. comprising the minimum amount of equity capital and the maximum amount of loan capital, because such capital structures are not in fact seen at arm’s length.

As indicated in INTM267725 to INTM267769, there are a number of factors that could be taken into account in reaching a view on the amount of loan capital:

  • the capital structure of the bank as a whole
  • the capital structure of other banks of the same size trading in the UK
  • the capital structure of other banks undertaking the same type of activities in the UK
  • the capital structure of another bank, trading in the UK, that is comparable, in both size and in terms of its activities, to the PE