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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: Chapters 5 and 9.

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

Chapters 5 and 9.

TIOPA10/Part 9A/CH5 considers the non-trading finance profits that are not excluded by Chapter 3. If the non-trading finance profits derive from qualifying loan relationships, a claim for the profits to be dealt with under Chapter 9 can be made. If such a claim is made and accepted, this applies to all qualifying loan relationships in existence during the whole or part of an accounting period and exempts 75% of the profits from charge.

For foreign PE exemption purposes, modified Chapter 5 needs to be considered in conjunction with CTA09/Part 2/Ch3A/S18CB. This section excludes from the relevant profits amount, or relevant losses amount, any profits or losses of any part of the company’s business which consists of the making of investments unless the profits or losses arise from assets that are effectively connected with any part of the PE through which a trade or overseas property business is carried on in the territory (INTM287070).

Chapter 5 is then applied to identify total profits of Company X (INTM286320) that pass through the Diverted Profits Gateway and are included in the adjusted relevant profits amount. Chapter 5 is modified for foreign PE exemption purposes by amending the application of Chapter 5 so that all non-trading finance profits fall within the charge under TIOPA10/Part 9A/S371EA(1), and omitting entirely the classes of non-trading finance profits set out in S371EB- S371EE. The effect is to ensure that all non-trading finance profits are considered for the purposes of S18H(2).

The detailed rules for the application of Chapter 5 can be found here:

Chapter 9 is modified under CTA09/Part 2/CH3A/S18HE by making references to a chargeable company read as references to Company X for the purposes of applying the partial exemption rules which means Company X has to make a claim for modified Chapter 9 to apply.

Replacing TIOPA10/Part 9A/S371IA(5) with a reference to 75% of the profits of each qualifying loan relationship being exempt means a single 75% exemption is available for the purposes of foreign PE exemption, rather than the partial or full exemption available in relation to the qualifying loan relationships of CFCs under unmodified Chapter 9. Full exemption is not available to foreign PEs.

On this basis the detail of how full exemption is applied at S371IB to S371IE is omitted, the reference to Chapter 8 solo consolidation in S371IA is removed as Chapter 8 does not apply for foreign PE purposes and the reference to relevant UK funds or other assets and UK connected companies in S371IH(11)(a) are to be read without applying the modification in S18HC(b) which itself omits reference to such elements from the application of Chapter 5. In other words, the application of Chapter 9 requires definitions used in S371EB to S371EE to be considered, notwithstanding the fact that they can be disregarded for the application of modified Chapter 5 for foreign PE exemption purposes. References to the relevant corporation tax accounting period in S371IJ is to be read as references to period X (INTM286320) for the purposes of S18H(2) and omitting S371IJ(6), which refers to the application of the debt cap rules for the purposes of Chapter 9.

The detailed rules for the application of Chapter 9 can be found here: