INTM554010 - Hybrids: transfers by UK permanent establishment of a multinational company (Chapter 6): overview

Chapter 6 of Part 6A TIOPA 2010 deals with mismatches within a multinational company. The legislation counteracts mismatches involving transfers of money or money’s worth from a UK permanent establishment of a company to the company in the parent jurisdiction (that is, the head office of that company).

The Chapter applies if conditions A to C are met. The conditions are as follows

Condition A

  • There is a multinational company, see INTM554030

Condition B

  • There is a relevant permanent establishment deduction, see INTM554040

Condition C

  • If this legislation or equivalent non-UK provisions did not apply, the circumstances giving rise to the PE deduction would not result in increased taxable profits or reduced losses, see INTM554050

Permanent establishment

‘Permanent establishment’ is defined for the purpose of Part 6A at s259BF as

  • a permanent establishment within the corporation tax acts, or
  • any similar concept under the law of another territory

Detailed guidance on the definition of permanent establishments within the UK is provided at INTM264050. In broad terms, under UK domestic law, a non-resident company has a permanent establishment in the UK if the company

  • carries on a business wholly or partly through a fixed place of business in the UK, or
  • appoints an agent in the UK to act on its behalf and that agent habitually exercises authority to do business on behalf of the company

An example of a transfer by a UK permanent establishment (PE) of a multinational company could be where intellectual property owned by a multinational company is exploited by its PE in the UK, and for which it is deemed appropriate that ownership of that asset is attributable solely to the company in the parent jurisdiction and that a fee should be recognised as payable to the parent jurisdiction for that use. This situation will only arise if there is a double taxation agreement in place which contains the new Article 7, see INTM267100.

When tax treaties contain the old Article 7, internal royalties are not recognised. If there is no treaty in place, UK domestic law applies in the same way as the old Article 7, and s31 CTA 2009 denies a deduction for royalties paid by the permanent establishment to another part of the same company.

If all 3 conditions are met then, to the extent of the mismatch (see INTM554060), it is to be counteracted by denying all or part of the permanent establishment (PE) deduction in the UK, see INTM554070.