INTM414240 - The participation condition: Participation - anti-avoidance

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

TIOPA10/S162B is an anti-avoidance provision to tackle arrangements where the main purpose (or one of the main purposes) is to prevent the participation condition from being met. This may include a main purpose of subverting a transfer pricing notice which deems the participation condition to be met.  

Where applicable, TIOPA10/S162B will create participation where a person enters into an arrangement which has a purpose of taking them outside of the scope of TIOPA10/Part 4. 

Example  

  • Company A - a UK resident trading company, pays large royalties to Company B - an IP holding company with little substance (based in a low-tax jurisdiction), for use of its IP 

  • The amount of the royalty payment to Company B is a non-arm's length amount and significantly reduces the profits of Company A 

  • Each company is held by a separate entity in a different jurisdiction that is structured to have no formal equity owners (an “ownerless vehicle (OV)”) 

  • Company A is owned by a UK OV 

  • Company B is owned by a non-UK OV 

  • The structure of the group has the effect that the participation condition is not met (TIOPA10/S148), the arrangement is not considered an agreement for common management (TIOPA10/S162A), and the criteria to issue a transfer pricing notice are not met (TIOPA10/S148A).  

  • Therefore, the structure has secured that Company A and Company B appear as independent entities and the royalty payment, which leads to an erosion of the UK tax base, falls outside the scope of the UK transfer pricing rules. 

  • Minutes from committee and management meetings and governance documents record the purpose of the structure and insertion of the OVs - to remove formal equity ownership but preserve control.  

  • Although both OVs claim to be independent, it is found that their affairs are influenced by the same family (the original founders of the business). Without the insertion of the OVs into the group structure, Company A and Company B would otherwise meet the participation condition and the actual royalty payment would be replaced with the arm’s length amount of the royalty payment. 

UK transfer pricing rules apply provided the basic pre-condition, including the participation condition is met. In this example, a main purpose of inserting the OVs is to break participation. When reviewing the arrangement, HMRC can look through the artificial separation to determine if the decision to insert the OVs into the group structure is found to be the main purpose or a main purpose of avoiding the participation condition. Where HMRC consider this to be the case, the anti-avoidance provision may be utilised to treat the participation condition as met.