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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: anti-diversion rule: Chapter 13 - Low Profit Margin Exemption

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

Chapter 13 - Low profit margin Exemption

The low profit margin exemption (TIOPA10/Part 9A/CH13) is a relatively simple entity level exemption which, if applicable for the relevant accounting period of the CFC, means that no charge arises for that period.

The exemption applies if a company’s accounting profits (or profit margin) is no more than 10% of its relevant operating expenditure (as defined for the purposes of the exemption) for the relevant accounting period of the CFC.

The exemption is subject to an anti-avoidance provision targeting artificial arrangements designed to ensure that the exemption applies to a CFC when, absent the arrangement, it would not.

The exemption is essentially aimed at those CFCs that perform substantial (in terms of volume) but relatively low value added functions outside the UK such as:

  • back-office functions,
  • local marketing and distribution operations,
  • toll manufacturing, or
  • call or data processing centres.

Chapter 13 is modified to apply to foreign PEs by CTA09/Part 2/CH3A/S18IC. This omits TIOPA10/Part9A/S371MB(2) which refers to accounting profits before any deduction of interest as the basis for calculating the profit margin. Instead references to accounting profits are to be read as references to the adjusted relevant profits amount before any deduction for interest.

The detailed rules for the application of Chapter 13 can be found here: