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HMRC internal manual

International Manual

Profits attributable to a permanent establishment of a UK resident company - TIOPA10/S43: overview


Before it was amended by FA 2011, TIOPA10/S43 applied the permanent establishment (PE) provisions of Chapter 4, Part 2 CTA09 (previously ICTA88/S11AA) in determining for the purposes of S42(2) how much of a UK resident company’s chargeable profits was attributable to an overseas PE of the company.

TIOPA10/S43 as amended by FA 2011 introduces specific rules for the PEs of UK resident companies, particularly in relation to the attribution of capital. Although this change was introduced alongside branch exemption it applies to all overseas PEs of UK resident companies whether or not the company has made an election under CTA09/S18A (see INTM281010 onwards).

Capital Attribution under TIOPA10/S43

Like the CTA09/Chapter 4, Part 2 provisions, TIOPA10/S43 applies the separate entity principle, attributing profits to the PE in the amount that it would have made if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with the company of which it is part.

However S43(3)(b) specifies that this includes the assumption that the PE has such equity and loan capital as it would reasonably be expected to have if the equity and loan capital of the company were allocated between the company’s foreign PEs and the rest of the company. For this purpose S43(4) treats the rest of the company as the entity it would consist of if each of its foreign PEs were distinct and separate entities. This makes it clear that the process must include consideration of the funding structure that would be reasonably expected to support that part of the company’s business that is not carried on through foreign PEs. This follows the “capital allocation” approach, rather than the “thin capitalisation” approach that is adopted in Chapter 4 of Part 2 CTA09.