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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: anti-diversion rule: lower level of tax test

This applies for relevant periods beginning before 1 January 2013.

CTA09/S18G (4): the lower level of tax test

Where permanent establishments in a foreign territory meet the lower level of tax test (“LLT”) any adjusted relevant profits amount arising in respect of that jurisdiction is reduced to nil, but only if the de-minimis or motive test carve-out provisions do not apply.

The LLT is met where the amount of tax paid under the law of the territory in accordance with the relevant treaty provision, in respect of its adjusted relevant profits amount, is less than 75% of the corporation tax that would be payable on that amount if it were subject in full to corporation tax.

For the purposes of the lower level of taxation calculation it should be noted that any credit relief which would have been permitted under TIOPA10/S18(3) is to be ignored in the corresponding UK corporation tax calculation.

As noted above, even when the lower level of tax test is met, the UK company branch may still be able to override the trigger of the anti-diversion rule for that branch, where it can show that either:

  • the adjusted relevant profits amount in relation to that territory is less than £200,000; or
  • the motive test in CTA09/S18H is met.

The de minimis provision applies to the entire territory and not just the individual branch. This takes into account the situation where the company may have more than one branch in the same territory. Where this is the case, it is the aggregate of all non-exempt branch profits that needs to be established, not those of each branch in isolation.

Where either the adjusted relevant profits are below £200,000, or the motive test is met and the specific exclusions do not apply, then the adjusted relevant profits amount will not be reduced.