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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: chargeable gains: foreign gains or loss in an earlier period

Treatment of foreign gains or losses arising in earlier accounting periods

As mentioned in INTM282040, credit relief may sometimes be given against corporation tax due in respect of a gain arising in an accounting period for foreign tax paid in respect of an earlier accounting period. The sort of situation described in INTM282040 may mean that a gain (or loss) would be taxable (or allowable) in the State in which the permanent establishment is situated for an accounting period before the company’s election for branch exemption has effect.

CTA09/S18B(3) determines that where this occurs the earlier gain or loss is not to be taken into account in the calculation of a relevant profits or losses amount. This prevents the application of CTA09/S18A to foreign gains or losses realised before exemption takes effect for a company and ensures that relief is not duplicated. In such cases credit relief will continue to be available for the foreign tax paid.

Example (ignoring indexation, costs, etc)

An asset is acquired for £50 and used exclusively in a PE until 2008 when it is transferred to be used by UK head office. At that time its market value is £150 so a gain of £100 may be taxed in the other State. The asset continues to appreciate in value until it is sold to an unconnected company in 2018, a relevant accounting period for exemption, for £550. The gain in the corporation tax computation will be £500. The £100 will not be included in any calculation of a “relevant profits amount” under CTA09/S18A(6) but credit will be available in respect of foreign tax paid on it, subject to the normal rules on such credit

The gain of £100 represents what is referred to by CTA09/S18B(3) as a gain which would be taken to be attributable to the PE “for the purposes of ascertaining credit to be allowed in respect of tax payable under the law of the territory before the election has effect”.