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HMRC internal manual

International Manual

Profit Fragmentation Arrangements: Transfer of Value

The Transfer of Value condition at paragraph 2(1)(b) Schedule 4 Finance Act 2019 requires that the Material Provision results in a transfer of value from the resident party to the overseas party. The value transferred must derive directly or indirectly from the profits of a business chargeable to income tax or corporation tax in the tax year or accounting period of the resident party. This section raises two questions:

  • Has value been transferred?
  • Does the value transferred derive directly or indirectly from the profits of a business chargeable to income tax or corporation tax?

Paragraph 3 Schedule 4 Finance Act 2019 expands on what constitutes a transfer of value deriving directly or indirectly from the profits of a business.

 

Has value been transferred?

In determining whether value has been transferred to the overseas party, consideration should be given to the ‘worth’ that has been transferred from the resident party rather than to a specific ‘amount’. This requires a holistic analysis of provisions and transactions with a view to determining the difference between the value that has been transferred from the resident party and the value that has been transferred to the resident party. If the value that has been transferred from the resident party exceeds the value that has been transferred to the resident party then there has been a transfer of value to the overseas party. See the examples below for illustrations of how this works in practice.

In determining whether value has been transferred, account must be taken of any method used to transfer the value. Value can be transferred between the resident party and the overseas party in a number of ways, all of which are intended to be caught by this legislation. The legislation includes a non-exhaustive list of methods by which a transfer of value could arise as follows:

  • sales, contracts and other transactions made otherwise than for full consideration or for more than full consideration,
  • any method by which any property or right, or the control of any property or right, is transferred or transmitted by assigning share capital or other rights in a company, rights in a partnership, or an interest in settled property,
  • the creation of an option affecting the disposition of any property or right and the giving of consideration for granting it,
  • the creation of a requirement for consent affecting such a disposition and the giving of consideration for granting it,
  • the creation of an embargo affecting such a disposition and the giving of consideration for releasing it, and
  • the disposal of any property or right on the winding up, dissolution or termination of a company, partnership or trust.

Value in this context is not limited to amounts of money actually transferred to the overseas party but also includes any property or right being transferred or transmitted, or the value of any property or right being enhanced or diminished.

The value transferred between the resident party and the overseas party can be traced through any chain of entities, however long and complex that chain may be. In many instances, the arrangements affected by this legislation will use a series of interconnected companies, or other foreign legal entities to transfer value.

Property held by companies, partnerships, trusts or other entities (such as profits, assets and rights), must be attributed to the shareholders, partners or members, beneficiaries or other participants on a just and reasonable basis.  This will normally be in proportion to their shares in a company or their rights in a partnership. This allows value to be properly traced through the chain of entities.

 

Example 6 – Transfer of Value Income Received Offshore

This example shows what is meant by a transfer of value where the resident party reduces the amount of income they take into account. As with other examples in this guidance, it is likely that accounting principles, other legislation or case law would ensure the appropriate amount of profits are charged to UK tax: the following example illustrates how Profit Fragmentation rules would apply if that were not the case.

F Ltd is a UK-resident company that provides consultancy services to UK and non-UK clients out of its offices in London. F Ltd arranges for its non-UK clients to make payments in return for these services to O Ltd which is an offshore company where none of the relevant business activity takes place.

F Ltd provides services with a value of £100,000 to a non-UK client. The non-UK client pays the £100,000 to O Ltd. rather than to F Ltd.

F Ltd has not made any direct payments out of the UK but there has been a transfer of value out of the UK. This is because F Ltd has provided services with a value of £100,000 but received £0 in return – this means there has been a transfer of £100,000 of value out of the UK.

 

Example 7 – Transfer of Value Expenses Paid from UK

This example illustrates what is meant by a transfer of value where excess expenses are paid by the resident party. As with other examples in this guidance, it is likely that accounting principles, other legislation or case law would ensure the appropriate amount of profits are charged to UK tax: the following example illustrates how Profit Fragmentation rules would apply if that were not the case.

G Ltd is a UK-resident company that provides consultancy services out of its offices in London. G Ltd carries out all its IT support functions in-house but makes a payment of £50,000 per year, described as IT costs, to O Ltd, an offshore company which lacks the capacity to fulfil the function such that no relevant activity takes place in O Ltd.

G Ltd has made a payment of £50,000 to an overseas party but has received no services, i.e. something with nil value, in return. This means there has been a transfer of £50,000 of value out of the UK.

 

Does the value transferred derive directly or indirectly from the profits of a business chargeable to income tax or corporation tax?

For value transferred to derive from the profits of a business chargeable to income tax or corporation tax it must be obtained from the source of the profits of a business chargeable to income tax or corporation tax: profits chargeable to income tax or corporation tax are diminished as a consequence of the value being transferred.

The concept of deriving from the profits of the business should be read widely and can relate to anything done by the business. How this concept will apply in practice is highly dependent on the facts of individual cases.

 

Example 8 – Deriving From the Profits of a Business

This example illustrates how the concept of deriving from the profits of a business chargeable to income tax applies where an individual who is non-domiciled claims to use the remittance basis and has foreign source income. As with other examples in this guidance, it is likely that accounting principles, other legislation or case law would ensure the appropriate amount of profits are charged to UK tax: the following example illustrates how Profit Fragmentation rules would apply if that were not the case.

Judy is a UK-resident non-domiciled individual who claims the remittance basis. 

Judy is self-employed and carries on a trade in the UK as a pharmaceuticals consultant. Judy has offices in London and a small team of staff that she employs, all of who perform their duties in her London offices. Judy also occasionally travels to Geneva to perform pharmaceutical consulting for a Swiss company (A) in her capacity as a sole trader.

Judy incorporates a ‘brass plate’ company (B) in Switzerland and asks A to make a contract with B when they seek to use her business’s services, including the work of her UK staff. Judy does not change anything about her business activities except for arranging that consultancy payments from A are now paid to B instead of to her as a self-employed individual. We assume for the purpose of this example that no other provisions are applicable here (such as for example Central Management and Control).

Judy also spends every other weekend carrying out a trade in Switzerland through a further Swiss company (D) leading executive team building excursions in the Alps. This activity takes place solely in Switzerland and all the activities are carried out by Judy through her Swiss Company (D) in Switzerland.

The Profit Fragmentation legislation would apply to the transfer of value arising from the diversion of income from Judy’s UK business to the Swiss company, B. This is because these payments are properly attributable to the UK business and derive from the profits of a business chargeable to income tax. These amounts are not eligible for the remittance basis as they are UK source income.

The Profit Fragmentation legislation will not apply to the income derived from her team building company, D, in Switzerland as this is foreign source income so is not derived from the profits of a business chargeable to income tax.