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HMRC internal manual

International Manual

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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 4: Determining the loan capital: Innovative or hybrid Tier 1 capital

When considering the mix of equity and loan capital that the permanent establishment (‘PE’) would have at arm’s length, it is possible that in certain circumstances this mix could include interest-bearing Tier 1 instruments - see INTM267763. Where it is accepted that a PE can be hypothesised as having innovative or hybrid Tier 1, then the amount of any such issue cannot exceed the amount that the company would be able to issue if it were a separate enterprise trading in the UK. That will reflect both the fact that the Financial Services Authority (‘FSA’) will not permit the hybrid or innovative Tier 1 to exceed 15% of the total Tier 1 capital, and that the level of innovative or hybrid Tier 1 actually held by banks is less than the 15% limit.

The position where the company has issued innovative/hybrid Tier 1 capital

If the company itself has issued innovative or hybrid Tier 1 capital, then an appropriate proportion of this may be attributed to the PE if the PE would meet the FSA requirements for such an issue if it were a separate enterprise. At present the FSA requires a bank to have 6% Tier 1 capital before it can issue innovative or hybrid Tier 1 and, as already mentioned, this innovative or hybrid Tier 1 cannot exceed 15% of the total Tier 1 capital.

Provided that the conditions mentioned above are met, HMRC would be prepared to accept that an appropriate proportion of the actual innovative or hybrid Tier 1 issued by the company could be hypothesised as attributable to the PE, even if the branch was not itself of a size (in terms of assets etc.) to make such an issue likely.

The position where the company has not issued innovative/hybrid Tier 1 capital

There may be cases where the home state regulator does not allow the issue of innovative or hybrid Tier 1 instruments - so there is none in the company - but the UK PE as a standalone company in the UK would both satisfy the FSA requirements for an issue of such Tier 1 and would be of a sufficient size to make such a Tier 1 issue. If this is the case, HMRC will accept, in principle, that the UK PE may include an appropriate proportion of innovative or hybrid Tier 1 in its loan capital.

However, where there is no innovative or hybrid Tier 1 in the company as a whole and the home state regulator does allow such issues, it is extremely unlikely that HMRC would accept that the PE would have such Tier 1 instruments, even if the PE were of a size etc. to make such an issue. That is, the fact that the company as a whole has chosen not to issue such instruments would be taken as a strong indication that the PE would similarly have chosen not to issue such instruments if it were a separate enterprise.