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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 14 - Tax Exemption

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

Chapter 14 - Tax Exemption

The tax exemption (TIOPA10/Part 9A/CH14) is an entity level exemption (“the exemption”) and so the profits of the CFC are exempt from a charge if the exemption applies for a CFC’s accounting period.

The exemption will apply where the “local tax amount” is at least 75% of the “corresponding UK tax”. This requires comparison of the actual tax paid on the profits of the CFC in its territory of residence with what tax would have been suffered on a UK tax measure of those profits following the application of various adjustments and assumptions including the corporation tax assumptions at Chapter 19 (i.e. computing a CFC’s profits as if it were a UK resident company).

In order to apply the exemption it is first necessary to establish a territory of residence. For foreign PE exemption purposes residence is determined by the assumption in CTA09/Part 2/CH3A/S18I(3) i.e. that the foreign PE is a deemed CFC resident in the territory in which the PE carries on its business.

Chapter 14 is further modified to apply to foreign PEs by S18ID as references to local chargeable profits are to be read as references to the adjusted relevant profits amount and the corresponding UK tax is determined by S18ID(4) rather than the definition in Chapter 14. S18ID(4) defines “the corresponding UK tax” as the amount of UK corporation tax which would be payable if the adjusted relevant profits amount was subject in full to corporation tax, ignoring any double taxation credit relief and assuming, where necessary, an average rate of corporation tax over the accounting period.

The detailed rules for the application of Chapter 14 can be found here