INTM284010 - Foreign Permanent Establishments of UK Companies: transition to exemption provisions: introduction
Overview
A company elects to opt into the exemption regime; its election becomes effective at the start of the accounting period after the one in which it makes the election unless its foreign permanent establishments are in a net loss position at the start of that period.
Under the system of credit relief, loss relief in a foreign PE is clawed-back through a reduction in the amount of credit relief in subsequent years. If a loss arises in a foreign PE then it is relievable against the overall profits of the company. Typically, the source state (i.e. the PE territory) will allow the foreign PE losses to be carried forward in much the same way as happens in the UK, so that when the PE returns to profit, it will obtain relief from local taxation through that brought forward loss. This means that the UK corporation tax on the PE profits of the period when the loss is relieved locally in the PE is reduced to a lesser extent by credit relief, or maybe not at all if the loss cancels out the profits. This represents the claw-back mechanism.
The transitional provisions in sections CTA09/S18J-S18O are intended to replicate that claw-back when a company’s foreign PEs taken together in aggregate are in a net loss position at the start of the first accounting period to which exemption will apply. They do so by deferring the start of exemption for the company’s foreign PE profits until the losses have been subsequently matched by profits. If this were not done, companies with losses in their foreign permanent establishments that opted into exemption would gain a tax advantage compared with ones that did not.
For relevant accounting periods beginning on or after 1 January 2013.
Lloyd’s underwriters.
FA94/Part4/CH5/S227C is inserted to bring the Lloyds rules into line with the main foreign permanent establishment rules.
This section ensures that profits or losses which are the profits or losses of any underwriting year which began before the relevant day (the start date of the foreign permanent establishment exemption) are to be left out of account when calculating the relevant profits or losses amount for the purposes of foreign permanent establishment exemption.
Similarly, profits or losses arising from premium trust fund assets which are allocated to a previous underwriting year which began before the relevant day are also to be left out of account when calculating the relevant profits or losses amount.