INTM414220 - The participation condition: Participation - transfer pricing notice

S148A Participation condition treated as met: transfer pricing notice

What has been amended, removed, or added in broad terms

The Commissioners for HMRC have the power to issue a transfer pricing notice, which will result in the participation condition being treated as met.

ctions 148(2) and (3) state that the participation condition is met if at the time of the provision or within six months of it:

  • one of the affected persons was directly or indirectly participating in the management, control or capital of the other, or
  • the same person or persons was or were directly or indirectly participating in the management, control or capital of each of the affected persons.

TIOPA10/S217 determines that control is defined by reference to CTA10/S1124 which considers matters such as voting power, power given by the Articles of Association, and the ability of a person to direct the affairs of the company in the absence of such rights and powers.

In contrast, Article 9 of the OECD Model Tax Convention (MTC) provides no definition of control.

Consequently, the scope of the UK’s participation condition can, in limited circumstances, lead to non-arm's length provisions escaping the requirement to comply with the UK transfer pricing rules.

Detailed explanation of how the rule operates

The Commissioners for HMRC may give the potentially advantaged person a transfer pricing notice where all of the following criteria are met:

  • the basic transfer pricing pre-condition at TIOPA10/S147 would be met if the participation condition in TIOPA10/S148 were met
  • the participation condition is not met because of the application of TIOPA10/S157 to S161, which focus on a control test
  • having regard to all of the circumstances, there would be participation under Article 9 of the OECD Model

Therefore, the prescriptive definitions of control that apply for the purposes of TIOPA10/S148, do not apply to TIOPA10/S148A.

TIOPA10/S148A(1)(c) introduces similar wording to paragraph 1 of Article 9 of the OECD Model, where there is no definition of direct or indirect participation in management, control or capital. Alongside the reference added at TIOPA10/S164(1)(a) (Part to be interpreted in accordance with OECD principles) to TIOPA10/S148A, this provides for HMRC to issue a transfer pricing notice where there would be participation under Article 9 of the OECD Model, but not under TIOPA10/Part 4 and the provision made or imposed is on non-arm's length terms.

The Commissioners for HMRC will consider all of the circumstances to decide if a notice is required. Where the Commissioners for HMRC issue a transfer pricing notice, the participation condition is treated as met in relation to the chargeable period in which it is given and subsequent chargeable periods.

HMRC expect these notices to be used in limited circumstances. For further details on when HMRC may issue a transfer pricing notice, see INTM414330. 

Where the Commissioners for HMRC consider that a case is analogous to one that would only meet the participation condition only as a result of TIOPA10/S161 (actual provision relates, to any extent, to financing arrangements), this must be stated in the notice. For further information on TIOPA10/S161 see INTM414250.

The recipient of a transfer pricing notice may appeal against such a notice on the grounds that either the condition in TIOPA10/S148A(1)(c) is not met or the case is not analogous to a TIOPA10/S161 case.

Example

  • Company B is a non-UK resident company that directly holds 25% of the ordinary share capital of Company A, a UK resident company
  • Company A and Company B enter into a long-term exclusive supply agreement under which Company A agrees to supply critical components to Company B at a fixed price for 10 years
  • Company B approves certain strategic decisions of Company A (e.g. production capacity, technology changes) to protect its supply chain
  • Company B pays Company A significantly below the arm’s length price, creating a UK tax advantage
  • Having regard to all of the circumstances, independent parties transacting at arm’s length would be unlikely to enter into such an agreement, for example: at a fixed price without indexation and regular price reviews, and with Company B exercising control over the affairs of Company A.  

In the absence of TIOPA10/S148A, although the actual provision differs from the arm's length provision, the transfer pricing rules would not be engaged as the participation condition has not been met.

That is because under CTA10/S1124, the shareholding of Company B in Company A alone does not mean that Company B participates in the “control” of Company A. Therefore, Company B does not have the power to secure that the affairs of Company A are conducted in accordance with its wishes and it is not participating in the management, capital or control of Company A.

TIOPA 2010/S148A requires the Commissioners for HMRC to have regard to all of the circumstances when determining if the participation condition is met. The facts of this example would give rise to a participatory relationship under Article 9 of the OECD Model. The Commissioners for HMRC may therefore proceed to issue a transfer pricing notice.  

Commencement date

The amendments made have effect in relation to chargeable periods commencing on or after 1 January 2026.

Consequential changes

  • TIOPA10/S164(1)(a) is amended to include a reference to TIOPA10/S148A to confirm that it should be read in such a manner which is consistent with the OECD model
  • TIOPA10/S157(1)(a) is amended to include a reference to TIOPA10/S148A(1)(c)
  • TIOPA10/S170 is amended to provide for appeals to be made against such a transfer pricing notice