Foreign Permanent Establishments of UK Companies: introduction: overview
A summary of the exemption
CTA09/S18A excludes profits attributable to a foreign permanent establishment of a UK resident company (“PE”) from the corporation tax computation. Losses attributable to a PE are similarly cancelled.
S18A is optional. It has no effect unless a company elects for it to apply, but an election for S18A to take effect is permanent and affects all the PEs of a company. See INTM281020 for more information about the form and effect of the election. For relevant accounting periods starting on or after 1 January 2013, there is no longer a requirement for the company to be UK resident prior to making an election for S18A to apply.
Profits and losses are attributed to a PE in accordance with treaty principles (see INTM281050). A profit attributable to a PE is referred to in S18A as a “relevant profits amount” and a loss as a “relevant losses amount”. Where S18A applies in respect of an accounting period, a company’s relevant profits and losses amounts for each foreign territory are aggregated to form a “foreign permanent establishments amount”, which may be positive (if profits exceed losses) or negative (if losses exceed profits).
The foreign PE amount is the aggregate of profits and losses arrived at by the attribution process. The constituent parts of each profit or loss retain their identities. Adjustments, called ‘exemption adjustments’ are made so that the transactions, accruals, valuations etc. that together result in each such profit or loss are “left out of account” in calculating the corporation tax profit or loss of an accounting period to which S18A applies.
In this way each head of charge is appropriately adjusted in the way necessary to omit the results of the company’s business that are attributable to its foreign PEs. For example, if a trade profit and a non-trade loan relationship (NTLR) loss are each attributed to foreign PEs of a company, the effect of S18A will be to reduce the company’s overall trade profit (or to increase a trade loss) but to increase the company’s NTLR profit (or reduce its loss).
The calculation of exempt profits or losses is given in S18A, subject to adjustments made elsewhere in CTA09/Part2/Chapter 3A. In particular, see the guidance on: