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HMRC internal manual

International Manual

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HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: anti-diversion rule: safe harbour provisions

This applies for relevant periods beginning before 1 January 2013.

FA2011 safe harbour provisions

FA2011/SCH13/PARA31 and 32 provide a “safe harbour” by specifying circumstances in which it will be assumed that condition B of the motive test in CTAS09/S18H is met in relation to a foreign permanent establishment. The safe harbour provisions do not exhaust the circumstances in which condition B will be met.

The provisions apply where the business of the foreign PE was previously carried on throughout a period of 12 months up to the day before the exemption regime comes into effect (the ‘pre commencement year’). Two specific situations are addressed.

Paragraph 31 - The UK company carried on the business through the foreign PE throughout the pre-commencement year

Condition B of the motive test is assumed to be met if the following three criteria are satisfied:

  • The gross income attributable to the foreign PE for the relevant affected accounting period does not exceed by more than 10% the gross income of the 12 previous months immediately before that period. The comparable period is adjusted where the relevant accounting period is less than 12 months.
  • There has been no major change in the nature or conduct of the business carried on through the foreign PE in the period starting with the pre-commencement year and ending at the end of the relevant affected accounting period.
  • Neither the assets held by, nor the business carried on through, the foreign PE were previously within a company whose chargeable profits and creditable tax were (or but for an agreement made, or undertaking given would have been) apportioned under TA88/S747(3) for an accounting period which ends within the relevant period.

A major change in the nature or conduct of the business includes:

  • a major change in the type of property dealt in, or services or facilities provided, in the business; or
  • a major change in customers, outlets or markets of the business.

For the purposes of the gross income calculation, foreign exchange gains and losses in respect of the business carried on through the foreign PE should be excluded, because they arise as a consequence of the currency in which transactions are enacted rather than reflecting the volume of business carried on.

Paragraph 32 - A non-UK resident company, controlled by the UK company, carried on the business of the foreign PE throughout the pre-commencement year

Four provisions apply for condition B of the motive test to be assumed to be met.

  • The gross income attributable to the foreign PE for the relevant affected accounting period does not exceed by more than 10% the gross income of the business for the 12 previous months immediately before that period. The comparable period is adjusted where the relevant accounting period is less than 12 months.
  • There has been no major change in the nature or conduct of the business carried on through the foreign PE in the period starting with the pre-commencement year and ending at the end of the relevant affected accounting period.
  • The non-UK resident company which previously carried on the business was not one to which TA88/S747(3) (or but for an agreement made, or undertaking given would have) applied for an accounting period ending in the relevant period.
  • Neither the assets held by, nor the business carried on through, the foreign PE were previously within a company whose chargeable profits and creditable tax were (or but for an agreement made, or undertaking given would have been) apportioned under TA88/S747(3) for an accounting period which ends within the relevant period.