Foreign Permanent Establishments of UK Companies: introduction: exempt profits or losses: definition
The basic rule
S18A gives the rules for determining exempt profits. It applies only if the company has elected that it should apply (see INTM281020 regarding the rules for the election).
To be exempt, profits must be attributable to a PE for the purpose of establishing entitlement to credit relief in respect of any foreign tax. For profits to be included in a relevant profits or relevant losses amount, it is not necessary for any foreign tax to have been paid, but it is necessary that the profits would be attributable for credit relief purposes.
The attribution must be made in accordance with a treaty. Where the UK has a full treaty (see the definition in INTM287060 i.e. one that contains a non-discrimination article) in place with the PE jurisdiction, the attribution is to be made in accordance with that treaty (see treaty attribution of profits to a PE in INTM281050). If there is no full treaty in place, the exempt profits are those that would be attributed to the PE if a treaty was in place that is identical to the 2010 OECD Model Convention (see INTM287010).
For credit relief purposes it is not necessary to quantify a loss, but for exemption purposes losses are attributed to a PE according to the same rules and principles as apply to profits. The method of calculation is therefore just the same and the effect of branch exemption is to cancel any loss that is attributable to a PE.
For modifications to this basic rule, see: