Multinational Top-up Tax and Domestic Top-up Tax

MTT41010 - Particular entities and adjustments: Permanent establishments: Overview

For MTT purposes, a permanent establishment (PE) is treated as an entity that is distinct from its main entity. In the consolidated financial statements of a group, a permanent establishment will not be treated as a distinct entity. Consequently, some additional rules are required to ensure the effective tax rate is calculated appropriately for permanent establishments and their main entities.

See MTT10130 for guidance on the definitions of ‘permanent establishment’ and ‘main entity’ for MTT purposes.

Underlying profits of a permanent establishment

There are special rules regarding the determination of the underlying profits of a PE. A PE might not have separate financial accounts, in which case its underlying profits must be attributed to it based on the financial accounts of the main entity. See MTT41020 for guidance on the underlying profits of a PE.

When the underlying profits have been determined, further adjustments may be required to ensure that income and expenses have been properly attributed to the PE from the main entity.

The method of attribution of profits to a PE from a main entity varies. There are four different criteria under which a PE might be recognised for MTT purposes, and there is a different method of profit attribution for each of the four criteria.

See MTT41025 for guidance on profit attribution.

When the underlying profits of the PE have been determined, the ordinary adjustments are made (see MTT21100+) to arrive at the adjusted profits for the PE.

Covered taxes of a permanent establishment

Where profits have been allocated to a PE, the covered tax expense in respect of those profits is also allocated to the PE. See MTT41040 for guidance on allocation of covered tax expense.

Permanent establishment records adjusted loss

Where a PE records an adjusted loss, that loss will be reallocated to the main entity, where the relevant conditions are met. See MTT41030 for guidance on allocation of losses to a main entity.