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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: anti-diversion rule: Application of the Diverted Profits Gateway

This applies for relevant accounting periods beginning on or after 1 January 2013.

Application of the Diverted Profits Gateway

Certain adjustments are made to the CFC rules for the purposes of the diverted profits calculation. One of these is the fact that TIOPA10/Part9A/CH8 of the CFC regime (bank solo consolidation) does not apply in the context of foreign PEs because bank solo consolidation only applies to a UK company and its foreign subsidiary not its foreign PE.

CTA09/Part2/CH3A/S18HA 18HE modifies chapters 3, 4, 5, 7 and 9 of the CFC rules at TIOPA10/Part9A to ensure that they can be applied in the context of foreign PEs.

Modified Chapter 3 is the initial gateway filter which sets out how to determine which, if any, of chapters 4, 5, 6, 7 or 9 of the CFC Charge Gateway apply. Full guidance on Chapter 3 can be found here.

The different chapters cover different categories of profit, as follows:

  • Chapter 4 deals with any profit from UK activity other than non-trading finance profit and profit arising from a property business. Full guidance on Chapter 4 can be found here.
  • Chapter 5 and Chapter 9 deal with non-trading finance profits. Full guidance on Chapter 5 can be found here and full guidance on Chapter 9 can be found here.
  • Chapter 6 deals with trading finance profits. Full guidance on Chapter 6 can be found here.
  • Chapter 7 deals with captive insurance profits. Full guidance on Chapter 7 can be found here.

With regard to foreign PE exemption, the modified CFC Charge Gateway chapters are applied to the “adjusted relevant profits amount” after that amount has been calculated i.e. after profits have been correctly attributed to the foreign PE under either an existing Double Taxation Agreement if the UK has a full treaty with the foreign territory or under the Model Treaty if it has not (INTM281060).