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HMRC internal manual

International Manual

HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: transition to exemption provisions: streaming of permanent establishment losses

Permanent establishment loss streaming

A company may specify at the time it elects into exemption that the opening negative amount or losses of a particular territory are streamed as if they were the only foreign PE losses. They are not aggregated with the profits or losses of PEs of other territories, and form a separate opening negative amount. Only the subsequent profits of PEs in that territory that have been subject to corporation tax under the existing credit relief rules are matched with those losses.

This means that if the opening negative amounts of PEs in other territories have been fully matched by profits, or there was no opening negative amount in those PEs at the start of the first period of exemption, then exemption is not disapplied in respect of their profits simply because of the need to claw back the streamed losses of PEs in the other territories.

This element of the election is irrevocable like other aspects once the first accounting period of exemption begins. The election has to specify the territory which is being streamed, but is only effective if the company specifies the opening negative amount (or loss) to be streamed in its tax return for that period. The amount it can stream may be any amount up to the total opening negative amount calculated by reference to the streamed territory.

Profits of all the foreign PEs in that streamed territory are matched with the opening loss in the usual way until the latter has been fully matched, when subsequent profits will be potentially exempt. However if there is still an unstreamed negative amount at that time, CTA09/S18N(3) has the effect of treating any relevant profits amounts which are not matched with streamed losses as part of the unstreamed profits (see example 3 below).

The profits and losses of PEs in all the other unstreamed territories effectively form a separate residual amount and are matched separately. In both cases the disapplication of exemption in the final period when the opening loss is used up is treated in the same way (see INTM284030) although it will normally occur in different periods. Again, the company can specify in its tax return for that period which part of the profits amount the exemption applies to.

An unstreamed opening amount is calculated when there is a streaming election. This is equal to the total opening amount (as calculated in the normal way by reference to all foreign PEs) less the total of streamed opening amounts. This is matched with all unstreamed territories, as described under “Transitional Rule: matching of opening negative amount” above.

Example 1

A company with 4 foreign PEs elects into exemption in 2014. The profits and losses arising in the 4 territories in the preceding 6 years are as follows:

Year Territory 1 Territory 2 Territory 3 Territory 4 Aggregate
2009 100     -500 -400
2010 200 -200 -100 100  
2011 -100 -500 200 100 -300
2012 300 200 100 -100 500
2013 100 -1000 -200 -100 -1200
2014 100 100 100 100 400
RNA   1400 100 400 1000

If the company elects for territory 2 to be streamed, then the streamed loss for that territory is the lower of 1400 or 1000, i.e. 1000. The company streams no other territory, so the unstreamed loss is the difference between the aggregate pool of losses (1000) and the streamed pool (1000), which is nil.

Therefore this company has a streamed opening loss of 1000 for territory 2 and no other opening negative amount.

This means that the first 1000 of profits arising in territory 2 after exemption is excluded from exemption. All other profits and losses are included in exemption.

The company could alternatively have created a streamed pool of (say) 500, in which case there would have been unstreamed losses of 500.

Example 2

The amounts are now as shown below. The numbers are exactly the same except for a large loss in territory 1 in 2009.

Year Territory 1 Territory 2 Territory 3 Territory 4 Aggregate
2009 -5000     -500 -5500
2010 200 -200 -100 100  
2011 -100 -500 200 100 -300
2012 300 200 100 -100 500
2013 100 -1000 -200 -100 -1200
2014 100 100 100 100 400
RNA 4400 1400 100 400 6100

If the company streams just territory 1, then its streamed loss will be 4400 and the unstreamed loss will be 6100 - 4400 = 1700.

This means that the profits from territory 1 to be matched with the 4400 opening loss from territory 1 will be excluded from exemption; and the first 1700 of profits from the permanent establishments in other territories will also be excluded. Once the 4400 for territory 1 is exhausted, any remaining part of the 1700 unstreamed opening negative amount would be set against profits of territory 1 in the same way as for any other territory.

Example 3

The loss (residual negative amount) pools and profits (residual positive amounts) for a company are as follows:

Year Territory 1 (streamed)   Territory 2 Territory 3
loss cf Profits Unstreamed
Loss cf Profits Profits        
  At election 1000   500    
  1 400 600 400 100 -200
  2   600   100 200

Here the calculation of opening negative amount results in a streamed loss of 1000 in territory 1 and unstreamed loss of 500 at the start of the first exemption AP.

In the first period, the whole of the territory 1 profits of 600 is excluded from exemption, reducing the streamed loss to 400. Territory 2’s profit of 100 is similarly blocked, reducing the unstreamed unmatched loss balance to 400. The loss of 200 in territory 3 is cancelled under the exemption regime.

In the next period, the streamed loss in territory 1 is wholly matched leaving 200 of profit in territory 1 potentially within exemption; but there is also 100 profit in territory 2 and 200 profit in territory 3, making 300 overall to match with the 400 unstreamed loss. The company must match all of the unstreamed loss with profits, but because it is unstreamed it may choose profits from any territory: for example, it might exclude the profits from territories 1 and 3 entirely and leave the territory 2 profit in exemption. Alternatively, it might exclude territories 2 and 3 and exclude half the remaining profit from territory 1. One way or another, the company is allowed to include 100 of profit within exemption.

This is because CTA09/S18N(4) disapplies exemption in relation to the residual aggregate relevant profits amount of 500 (the aggregate relevant profits amount of 900 less the 400 reduction of the streamed balance under CTA09/S18M(1)). However, as this is the last relevant accounting period for which there is a reduction of the streamed balance, CTA09/S18N(5) limits the disapplication of exemption to the unstreamed opening negative balance of 400.

To the extent that the profit is included within exemption, any foreign tax paid in respect of the profit is disregarded for all credit relief purposes, including for Unrelieved Foreign Tax (TIOPA10/S72).