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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 5: Determining the capital attribution tax adjustment:

Equity capital already allotted exceeding amount computed under the legislation

Where equity capital is already allotted to the permanent establishment (PE) in an amount that exceeds the amount attributed by CTA09/S21(2)(b) then, in the first instance, the reasons for the excess should be established and further consideration given to whether the amount attributed to the PE is correct (as it is possible that some factors may have been missed when considering the amount of equity capital to be attributed). Where a higher allotment of capital has been made to the PE, then there are likely to be commercial reasons for the PE having that level of equity capital. These could make the allotted level of equity capital the appropriate level of capital to attribute under CTA09/S21(2)(b).

Where the allotment is not for commercial reasons, but is, say, wholly tax driven and is in excess of an arm’s length range, then HMRC may have to accept that the capital allotted exceeds that required by CTA09/S21(2)(b). Where it is accepted that this is so then the ‘excess’ of capital needs to be re-designated as either as loan capital or as general funding, for which an adjustment will need to be made. Whether the excess equity should be treated as loan capital, general funding or a mixture of the two will depend on the facts of the particular case.

If an adjustment is made to the allotted equity capital and a tax treaty containing an Exchange of Information Article exists, Officers should submit details to Competent Authority at Business International so that the relevant fiscal authorities can be advised of the position.