INTM610050 - Parties (Continued)

The Resident Party

The “Resident Party” is defined at paragraph 1(2)(a) Schedule 4 Finance Act 2019.

The resident party is the party that is the subject of the legislation and to whom the rules will apply. The resident party must be a person (which would include a body corporate) resident in the UK.

The adjustments to be made under the Profit Fragmentation legislation relate to the expenses income, profits or losses of the resident party for the tax period in which the value is transferred as a result of the material provision. This means where Profit Fragmentation Arrangements exist the resident party will be required to increase their taxable profits.

The Resident Party may make a claim for adjustments to be made in relation to double taxation resulting from the application of the Profit Fragmentation legislation (see section INTM610240).

The Overseas Party

The “Overseas Party” is defined at paragraph 1(2)(b) Schedule 4 Finance Act 2019.

The overseas party is the party to which the value is transferred under the Profit Fragmentation arrangements. An overseas person or entity is defined as:

  • a person abroad within the meaning of s718 Income Tax Act 2007 (“ITA 2007”),
  • a company, partnership, trust or other entity, or any other arrangements established or having effect under the law of a country or territory outside the UK.

The overseas party cannot be a UK resident person for Profit Fragmentation purposes. This means the overseas party cannot be the resident party. If for example an overseas incorporated company was tax resident in the UK by reason of its central management and control being in the UK it would be precluded from being the overseas party in Profit Fragmentation arrangements. Neither could a UK-resident trust governed by British Virgin Islands law.

A person abroad as defined at s718 ITA 2007 is a person that is resident outside the UK (or an individual who is domiciled outside the UK – though this is not relevant for the definition overseas party). This explicitly includes persons treated as non-UK resident under s475(3) ITA 2007 (Trustees of Settlements) and s834(4) ITA 2007 (Personal Representatives).

Example 4 – The Overseas Party

O BVI Ltd. (“O”) is a British Virgin Islands incorporated company. O is wholly owned by its director, A, who is UK resident. A carries out all the activities in relation to the entire business of O from his offices in the UK. Since O is centrally managed and controlled in the UK, and is therefore UK-resident, it cannot be the overseas party when considering the Profit Fragmentation legislation.

In these circumstances, if value were transferred from A’s UK business to O, and O subsequently transferred this value outside of the UK then, depending on the nature of the activities carried on by A and O, O could be treated as the resident party and the Profit Fragmentation legislation may be applicable to O’s subsequent transfer of value outside of the UK.

The “Related Individual” is defined at paragraph 1(2)(c) Schedule 4 Finance Act 2019.

The related individual is the individual in relation to whom the enjoyment conditions must be met (see paragraph 4 Schedule 4 Finance Act 2019). The related individual can be:

  • the resident party,
  • a member of a partnership of which the resident party is a partner, or
  • a participator in a company which is the resident party.

They must be an individual who is interested in the business of the resident party – if the resident party is a body corporate the body corporate itself cannot also be the related party.

For Profit Fragmentation Arrangements to exist there needs to be a link between the related individual and the value transferred between the resident party and the overseas party as a result of the material provision which is prescribed by paragraph 4(1)(a). The enjoyment conditions are explained in more detail at INTM610110.

Partnerships

Paragraph 10 Schedule 4 Finance Act 2019 sets out the treatment of a person that is a member of a partnership for the purposes of the Profit Fragmentation legislation.

If a person is a member of a partnership, references to the expenses, income or revenue, or a reduction in income, or to the adjustment of the expenses, income, profits or losses of, the person includes references to the person’s share of the expenses, income or revenue, or a reduction in the income, of the partnership.

The person’s share of an amount is determined by apportioning the amount between the members of the partnership on a just and reasonable basis.

For more details regarding the application of the enjoyment conditions to partners see INTM610130.

For more details regarding the application of the tax mismatch test for partners and other tax-transparent entities see INTM610180.