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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 attributed but no funding costs in the UK permanent establishment

It is theoretically possible that equity capital could be attributed to a permanent establishment (PE) under CTA09/S21(2)(b) but the PE has no debt funding for the equity capital to displace, for example, a PE that provided only guarantees. The Financial Services Authority will (as do other banking regulators) require capital to be held against such obligations because, although contingent, the bank is exposed to risk and the possibility of loss. Thus, regulatory capital is required even though there are no actual assets for which funding is required.

In the case of there being no funding requirement, it is necessary to consider what would be done with the equity capital the regulator would require to be held. The most likely answer is that the capital would effectively be loaned to head office or another PE of the company at inter-bank rates and income of that amount should be imputed. It would be exceptional for the PE to be treated as providing more than general funding and so be entitled to a share of any profit or loss on a specific asset, since the PE is unlikely to have had any role in the creation of the asset.