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HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: exclusions and definitions: restriction on exemption

Exempt amount

The restriction at CTA09/S18D(1) on the amount to be exempt (‘the relevant profits amount’ or ‘relevant losses amount’) applies where the condition at S18D(2) is met. This condition is that if payments in respect of the transaction were made by the UK resident payer to a company resident in the territory where the permanent establishment is situated there would be an obligation under ITA07/Part 15 on the UK resident to deduct income tax.

This is where the income tax would not be fully repayable taking account of the effect of the relevant provisions of any double taxation treaty in force between the UK and the other State. Transactions will still be excluded from any relevant profits or relevant losses amount if the application of the treaty provisions would have allowed for deduction at a reduced “treaty” rate of income tax.

The restriction at S18D(1) operates by excluding profits and losses referable to transactions between the PE and a UK resident person from any relevant profits or relevant losses amount. This means that the tax treatment of these transactions will continue unchanged whether the PE is within exemption or not.

It follows that the normal rules at TIOPA10/Part 2 will apply to determine the extent to which credit relief is available for foreign tax paid in respect of amounts excluded from a relevant profits or losses amount. The same deductions will need to be taken into account in arriving at the “profits and losses referable to” the transaction as would be the case if no election under S18A had been made. TIOPA10/S44 will apply where the income is trade income.