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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: transition to exemption provisions: transfers of permanent establishment business

Rules on transfer of foreign PE business

There are special rules dealing with the transfer of the whole or part of a business to prevent the transfer of a foreign permanent establishment business between connected companies reducing the effect of the transitional rules. The rules only apply to business transfers between connected companies as they are defined elsewhere in CTA09. They ensure that the claw-back applies to the transferee (so that its profits are made not exempt) in respect of losses previously incurred in the transferred business when it was carried on by the transferor.

The phrase “part of a business” is not defined but can be regarded as a severable part of a company’s trading activity that is capable of:

  • being free-standing, and
  • making profits or losses in its own right.

There are a number of possible scenarios depending on whether the transferor or transferee has made an election at the time the business is transferred, but broadly any amount of transferred unmatched loss is disregarded in applying the transitional provisions to the transferor after the transfer day. In all cases it will be necessary to calculate the unmatched opening loss, called the “transferred opening negative amount”, for the transferor and transferee companies at the time the business is transferred.

Business carried on by the transferor at a time when it is non-resident will not generate any transferred opening amount: the terms of CTA09/S18A apply only to UK resident companies (see in particular the S18A(6)(a) definition, which would have no application to a foreign company).

If the transfer is of the whole or part of a business of a PE of a company that has not elected into exemption to a company that has made an election, the transferred opening negative amount is calculated as if the transferred business was the only business carried on by the transferor, and as if the first relevant accounting period of the transferor and of the transferee began the day after the transfer.

If the transferee has elected for exemption before the transfer of the business, the transferred opening negative amount is added to its own unmatched opening amount (if any) and may be streamed or not as the company chooses. The requirement that any streaming election is made at the time of the election for exemption is waived. In relation to the transferred unmatched loss it is assumed that the first period of exemption (or relevant accounting period) begins on the day after transfer - this determines the profits of the transferee that may be matched with the transferred opening amount (and see CTA09/S18O(6) regarding apportionment of profit).

If the transferor company has elected into branch exemption, but has any outstanding unmatched pool of losses at the time of the transfer, either streamed or unstreamed, then the unmatched opening amount of the transferred business is what remains after the opening amount attributable to any untransferred business up to the date of transfer has been deducted from the total unmatched opening amount of the transferor immediately before the transfer, as if the transferor’s accounting period had ended on the day of transfer. In other words, the remaining (non-transferred) opening negative amount of the transferor is the amount it would have been if the transferor had never carried on the transferred business.

If the transferee company elects for exemption after the transfer of a business occurs and the accounting period in which the transfer took place is within the look-back period (which is normally the period ending less than 6 years before the end of the accounting period in which the election is made, but longer in the case of large losses) the transferred total opening negative amount is to be taken into account in the calculation of the opening negative amount of the transferee - but only insofar as it is attributable to the period by reference to which the transferee’s opening negative amount is calculated. That is, an unmatched loss that arose in the transferor in a period earlier than the earliest affected accounting period of the transferee is ignored.

However, large losses are always taken into account in calculating an opening negative amount in respect of business previously transferred (FA11/SCH13/PARA33A).

If a business is transferred part way through an accounting period, then only profits or losses arising in the part of the period before the transfer are taken into account in calculating the unmatched loss pool. The profits or losses are calculated on a just and reasonable basis in accordance with CTA09/S18O(6).


Using the same numbers as example 1 in INTM284040 , we consider here the situation where the company shown in the table (which has not opted into exemption) transfers a PE business to another company (which has opted in). The transfer occurs at the start of 2015.

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

If the whole of territory 3’s business is transferred then the transferee will inherit a streamed loss pool of 100.

If the whole of territory 2’s business is transferred then the transferee will inherit a streamed loss pool of 1400.

If half of territory 2’s business is transferred, then a streamed loss pool of 700 is passed to the transferee. In this case there is no limitation by reference to the aggregate figure.