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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: chargeable gains: attribution of assets and gains

OECD principles

The attribution of assets to a permanent establishment and of gains or losses attributable to the period of the PE’s economic ownership should take account of the extent to which the asset has been used in the functions performed by the PE and the conditions under which it has been used, including the factors relevant to the determination of the economic ownership of the asset within the company.

The principles on which this determination should be based are set out in the OECD’s 2010 Report on the Attribution of Profits to Permanent Establishments (“the Report”). The term ‘economic’ ownership is first used in the Report at Para 14 of Part I, where its meaning in the context of the business profits article is considered.

These OECD principles recognise the possibility of changes in economic ownership as well as shared economic ownership between parts of a company. The need for an appropriate apportionment of gains and losses in such cases is clear, for example from the separate entity principle and the aim of treaties to avoid double taxation. No specific rules in relation to the method of apportionment are needed in the legislation as the guiding principle must be what will give an acceptable result for both treaty Contracting States.

Particular issues may arise where a gain or loss in a company’s corporation tax computation is one which accrued over more than one accounting period and there have been changes in economic ownership or shared economic ownership within the company.

For example an earlier transfer of an asset within the company (between a foreign PE and the head office of the company, or between two PE’s of the entity) will not have constituted a disposal for the purposes of UK corporation tax on chargeable gains, but will need to be taken account of in the computation on the eventual disposal. As well as assets subject to the chargeable gains regime, these issues may also be significant for assets subject to the intangible fixed assets regime at CTA09/Part 8. Particular issues with the application of the authorised OECD approach to intangible property are discussed in the Report at Part I D2(iii)(c).

The examples in the guidance on pages INTM282040 onwards (both on chargeable gains and in the section on intangible fixed assets at INTM283000 onwards) are provided only to illustrate the computational principles for branch exemption. They are not intended to give guidance on when a change of economic ownership should be recognised under OECD principles.