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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: introduction: exempt profits or losses: interaction between credit relief and PE exemption

Key treaty requirements

Treaties contain an article for the elimination of double taxation, which typically includes words such as:

“Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

[Country] tax payable under the laws of [Country] and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within [Country] … shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which [Country] tax is computed”

In the case of a PE, the above contains three key requirements:

  • The foreign tax must be paid in accordance with the treaty (usually this will be the business profits article); and
  • Credit shall not exceed the UK tax paid on the profits attributable to the PE under UK law; and
  • Credit is subject to any limitation provided for in UK law, although these may not undermine the general principle of relief as set out in the treaty.

It is for the purpose of the second of these two requirements that the business profits article requires an attribution of profit to the PE to be made by the state in which the company is resident. CTA09/S18A gives exemption in respect of this same measure of profits.

The third requirement above allows the measure of profit so determined to be modified by rules in TIOPA10. Any such modification also alters the measure of exempt profits, thereby keeping the exemption and credit measures the same. The principal statutory rule that may be relevant is at TIOPA10/S43, which provides rules for the attribution of capital.

Treaties that do not call for an attribution of profit to a PE

There are a few treaties (for example the UK / India treaty) that lack the requirement for the state of residence to make an attribution of profit to a PE. In such cases, CTA09/S18A(10) has the effect that exemption will be given as if there were such a requirement.