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HMRC internal manual

International Manual

HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: anti-diversion rule: Chapter 11 - Excluded Territories Exemption

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

Chapter 11 - Excluded Territories Exemption

TIOPA10/Part 9A/CH11 provides for the “excluded territories exemption” (ETE). The ETE is an entity level exemption. Its purpose is to exempt those CFCs that pose a low risk to the UK corporate tax base of artificial diversion of UK profits partly due to their territory of residence but also by looking at the type of income they can receive and any amounts that may be received from intellectual property (IP) held. These are set out as a number of conditions that must be met in order for the CFC to qualify for the ETE for a specific accounting period.

For foreign PE exemption purposes, the modified ETE works by looking at the adjusted relevant profits amount of the foreign PE (which is deemed to be a CFC resident in the same territory as the PE). It is acceptable for a group to take a risk assessment approach to the application of the ETE.

The ETE in Chapter 11 is supported by the Controlled Foreign Companies (Excluded Territories) Regulations 2012 SI 3024 (The Regulations). The Regulations provide the list of excluded territories for the purposes of the ETE.

The Regulations set out an extra condition that must be met for the ETE to apply if the CFC carries on insurance business. The extra condition is that none of the insurance business is carried on in Luxembourg. They also provide a simplified ETE that is available for entities resident in Australia, Canada, France, Germany, Japan and USA provided alternative conditions are met (the simplified ETE). The simplified ETE is an additional, optional basis for exemption that does not affect entitlement to the ETE provided by Chapter 11. A TAAR applies to both the ETE and the simplified ETE.

Chapter 11 is modified to apply to foreign PE’s by CTA09/Part 2/CH3A/S18IA in the following ways in order to accommodate the different legal structures of a CFC and PE:

  1. Category C income which accrues to the trustees of a settlement of which the CFC is a settlor or beneficiary or income which accrues to the CFC as a partner of a partnership is disregarded by omitting TIOPA10/Part 9A/S371KH for the purposes of foreign PE exemption.
  2. TIOPA10/Part 9A/S371KC, which determines the CFC’s territory of residence, is omitted and the general approach set out is CTA09/Part 2/CH3A/S18I(3) that the PE is deemed to be a CFC resident in the same territory as the PE applies.
  3. References to the CFC’s accounting profits are to be read as references to the adjusted relevant profits amount.
  4. TIOPA10/Part 9A/S371KF, which refers to PEs in excluded territories, is omitted.
  5. References in S371KG to the equity and debt of the CFC are to be read as references to the equity and debt of Company X.
  6. References in S371KI to income arising from arrangements between connected companies is to be omitted.
  7. References in S371KJ to intellectual property held by the CFC are to be read as references to intellectual property held by Company X.

The detailed rules for the application of Chapter 11 can be found here