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Finance Act 2012

Part 2.Foreign Permanent Establishments

474.Statutory references in the explanatory note for Part 2 of the Schedule are to CTA 2009 unless otherwise stated.

475.Part 2 of the Schedule makes amendments to Chapter 3A which (if a company so elects) excludes profits or losses arising in PEs from the charge to corporation tax, subject to certain conditions including an anti-diversion rule.

476.Part 2 repeals the existing anti-diversion rule and replaces it with one that adapts the main CFC provisions in Part 1 of this Schedule so that they can be applied to PEs in respect of which an election for exemption from corporation tax has been made. Some other changes are also made to Chapter 3A.

477.Two separate approaches are taken in order to apply the main CFC rules to PEs.

478.With regard to the CFC charge gateway rules in Chapters 3 to 9 of Part 9A of TIOPA, the relevant conditions are adjusted so that the rules are applied to any UK resident company which has a PE, and then, if any CFC chargeable profits arise, they determine whether any of those profits have arisen in the PE(s) (see paragraphs xxx to yyy below).

479.The eentity level CFC exemptions in new Chapters 11 to 14 of Part 9A of TIOPA are applied however to the PEs as if each PE were a CFC, resident in the territory of the PE (see paragraphs xxx to yyy below).

480.Paragraph 3 removes the reference to “UK resident” from section 18A of Chapter 3A. This, together with the amendment in paragraph 5 below, allows a company which is at the time non-UK resident to make an election under that section in relation to a future accounting period when it will be UK resident.

481.Paragraph 4 inserts new sections 18CA and 18CB into Chapter 3A.

482.New section 18CA specifies that income from immovable property used for the business of the PE (having regard to the extent of that use) can be included in profits attributable to PEs for the purposes of section 18A. The section also provides that references to losses in section 18A(7) are to be construed accordingly.

483.New section 18CB excludes any profits or losses from any part of the company’s business that consists of the making of investments from the computation of exempt amounts, unless the profits or losses are generated by assets which are “effectively connected” with a part of the PE that carries out a trade or overseas property business. “Effectively connected” takes the same meaning that it has in the OECD Model Tax Convention on Income and on Capital. This means that if a PE carries on only investment business, its profits or losses will not be exempt from corporation tax.

484.Paragraph 5 amends the term “relevant day” in section 18F, which refers to the day at which an election for section 18A takes effect. For a non-UK resident company, the relevant day is the day it becomes UK resident. For a UK resident company it is the date at which the next accounting period is expected to begin, or if the election is made before the company’s first accounting period it is the date the first period begins. Sub-paragraph (5) further amends section 18F with the effect that an election made by a UK company is revoked if the UK company ceases to be UK resident and an election made by a non-UK company is revoked if, having become UK-resident, it ceases to be UK resident.

485.Paragraph 6 replaces the current anti-diversion rules in sections 18G to 18I with new sections 18G to 18HE. These new sections apply the new CFC rules in Part 9A of TIOPA to PEs. There is no modification of the Chapter 8 (Solo Consolidation) rules as these rules do not apply to PEs.

486.New section 18G determines how the main CFC gateway rules are to be applied to PEs. The effect of this section is to identify for each PE of a UK resident company whether the profits which would otherwise be exempt under the PE rules (‘the relevant profits amount’) include any “diverted profits”.

487.New section 18G(1) provides that the anti-diversion rule will apply if a company has a PE in a territory outside the UK, the profits of the PE include any “diverted profits”, and none of the CFC entity level exemptions apply. The company with the PE is referred to as “company X” and the accounting period of that company as “period X”. The PE territory is referred to as “territory X”.

488.New section 18G(2) requires that in such circumstances, the “diverted profits” are to be left out of the “adjusted relevant profits amount” for that PE. Such amounts would therefore not be exempt under Chapter 3A.

489.New section 18G(3) defines “adjusted relevant profits” as the relevant profits amount (the amount which would be subject to exemption under Chapter 3A) as adjusted for any chargeable gains or allowable losses. This brings the PE profits or losses into line with the general approach to CFC profits, which exclude gains or losses.

490.New section 18H defines “diverted profits” for the purposes of the anti-diversion rule in section 18G.

491.New section 18H(1) and (2) provides that “diverted profits” are the amount of company X’s total profits that pass through the “diverted profits gateway”, determined by reference to the CFC charge gateway set out in section 371BB of TIOPA, but disregarding Chapter 8 of Part 9A of TIOPA (Solo Consolidation). In applying Part 9A TIOPA, references to the CFC charge gateway are to be read as references to the diverted profits gateway.

492.New section 18H(3) applies the CFC charge gateway rules for the purposes of the diverted profits gateway as they would apply if company X was a CFC resident in territory X with period X as its accounting period and whose assumed total profits equal the total profits of company X.

493.New section 18H(5) provides that the application of section 371BB of TIOPA is subject to the adjustments in new sections 18HA to 18HE, which amend the application of particular CFC rules.

494.New section 18H(6) provides that in applying section 371BB of TIOPA to PEs, subsection (2)(b) is to be omitted. Subsection (2)(b) refers to adjustments to profits in relation to the exempt period exemption in new Chapter 10, which does not apply to PEs.

495.New section 18HA modifies the application of Chapter 3 of TIOPA (which determines whether new Chapters 4 to 8 of that Act apply) in respect of PEs. It does this by omitting various references within the Chapter, so that they are not applied to PEs.

496.New section 18HA(a) removes references to the UK activities of the CFC or any UK PE of the CFC for the purposes of Chapter 4.

497.New section 18HA(b) and (f) remove references to Chapter 8 of Part 9A of TIOPA as that chapter does not apply to PEs.

498.New section 18HA(c) and (d) remove references to the incidental finance income rules for holding companies.

499.New section 18HA(e) removes references to the group treasury finance income rules.

500.New section 18HB prescribes modification of the UK activities rules (Chapter 4 of Part 9A of TIOPA) as follows.

501.New section 18HB(2) removes a reference to UK SPFs carried on by the CFC other than through a PE in section 371DA of TIOPA and inserts a reference to banking activity regulated in the UK in section 371DH of TIOPA.

502.New subsection (3) amends the definition of “related person” in section 371VF of TIOPA by limiting it to persons connected or associated with the CFC.

503.New section 18HC modifies the non-trading finance profit rules (Chapter 5 of Part 9A of TIOPA). The effect of this amendment is that, for PE purposes, all non-trade finance profits of a PE fall within Chapter 5 unless they are excluded by sections 371CB to 371CD of TIOPA, which exclude certain non-trading finance profits that are incidental to a trade or overseas property business of the PE.

504.New section 18HD modifies the captive insurance rules (Chapter 7 of Part 9A of TIOPA). The captive insurance provisions apply, but the references in section 371GA(6)(b) of TIOPA to amounts arising from the activities of a PE in a non EEA state are disregarded.

505.New section 18HE prescribes modifications to the exemption rules for profits from qualifying loan relationships (Chapter 9 of Part 9A of TIOPA) as follows:

  • The exemptions for qualifying loan relationships are amended so that references to chargeable companies and company C claims are read as references to company X;

  • Sections 371IB and 371IC of TIOPA, which deal with loans from qualifying resources, are to be disregarded for the purposes of PEs;

  • Section 371D of TIOPA, which provides for 75 per cent of the profits of a qualifying loan relationship to be exempted if section 371IB of that Act does not apply to it, is to be disregarded (but see the explanation of new section 18HE(3));

  • Section 371IE of TIOPA, which deals with matched interest, is also to be disregarded; and

  • In section 371IJ of TIOPA, which deals with claims within new Chapter 9 of Part 9A of that Act, references to a chargeable company and the relevant corporation tax period are to be read as references to company X and period X accordingly.

506.New section 18HE(3) applies Chapter 9 of Part 9A of TIOPA to PEs by exempting 75per cent of the profits of a qualifying loan relationship. As noted above, the qualifying resources and matched interest rules in Chapter 9 do not apply to PEs.

507.New section 18I prescribes modifications to the exemptions from the CFC charge for the purposes of defining exemptions from the PE anti-diversion rule for the purposes of section 18G(1)(c). The exempt period exemption in Chapter 10 of Part 9A of TIOPA does not apply to PEs, so that Chapter does not need to be modified but modifications are made that apply for the other exemptions in Chapters 11 to 14 of Part 9A of TIOPA.

508.New section 18I(2)(a) requires references in those Chapters to the application of the exemptions within section 371BA of TIOPA are to be read as references to their application for the purposes of section 18G(1)(c).

509.New subsection (2)(c) restricts the definition of related person in section 371VF(3) of TIOPA by limiting it to persons connected or associated with the CFC.

510.New subsection (3) applies a number of assumptions which are required in order to apply Chapters 11 to 14 of Part 9A of TIOPA to PEs. The overall effect of these assumptions is to deem that the PE under consideration is a CFC resident in the same territory, and whose accounting periods match those of the UK resident company of which it is a PE. The connected or associated persons of, and the persons with an interest in, the UK resident company are deemed to have the same connections with and interests in the deemed CFC. The assumed total profits of this deemed CFC are taken to be the adjusted relevant profits of the PE. These assumptions enable the PE to be considered as if it was a CFC and for the entity level exemptions in Chapters 11 to 14 of Part 9A of TIOPA to be applied accordingly.

511.New subsection (4) further modifies the application of Chapters 11 to 14 of Part 9A of TIOPA by reference to new sections 18IA to 18ID, which make modifications for specific chapters.

512.New section 18IA prescribes modifications to Chapter 11 of Part 9A of TIOPA (the excluded territories exemption).

513.New section 18IA(2) disregards the category C income condition within Chapter 11 of Part 9A of TIOPA.

514.New subsection (3) disregards section 371KC of Part 9A of TIOPA and applies in its place the residence assumption that the separate company is a CFC resident in territory X.

515.New subsection (4) omits section 371KD(3) and references to accounting profits are to be read as references to the adjusted relevant profits amount.

516.New subsection (6) removes references to category A income of a PE.

517.New subsection (7) requires, in relation to Category B income, that references to the CFC are to be read as references to company X for equity and debt purposes.

518.New subsection (8) provides that section 371KI(2) and (3) of Part 9A of TIOPA which deal with a reduction of income arising from a transfer pricing adjustment are not to apply.

519.New subsection (9) requires references to the CFC to be read as references to company X in applying the IP condition in section 371KJ.

520.New section 18IB prescribes modifications to Chapter 12 of Part 9A of TIOPA (the low profits exemption). Chapter 12 is amended for PE purposes by omitting references to accounting profits in section 371LB and references to group mismatch rules in section 371LC.

521.New section 18IC prescribes modifications to Chapter 13 of Part 9A of TIOPA (the low profit margin exemption). Chapter 13 is amended for PE purposes by omitting section 371MB(2), which refers to accounting profits, and by requiring that references to accounting profits are read as references to the adjusted relevant profits amount before interest deductions.

522.New section 18ID prescribes modifications to Chapter 14 of Part 9A of TIOPA (the tax exemption). Chapter 14 is amended for PE purposes by deeming that the residence assumption in section 18I(3)(b) applies for the purposes of Step 1 of section 371NB(1) of TIOPA.

523.New section 18ID(3) requires references to local chargeable profits to be read as references to the adjusted relevant profits amount, so that sections 371NB(4) and 371NC(2) to (4) of TIOPA are disregarded.

524.New subsection (4) provides for the omission of section 371NE OF TIOPA and for the amount of corresponding UK tax to be determined in accordance with new subsection (5) for the purposes of step 3 in section 371NB(1) of that Act.

525.Paragraph 7 inserts new section 18P(3) which provides that section 18P(2) does not apply in the case of chargeable gains in relation to the disposal of assets used only for the purposes of a trade carried on by a PE, and chargeable gains in relation to currency or debt where it is, or represents, money in use for a trade carried on by a PE. Section 18P(3) in effect provides some relaxation of the anti-avoidance rule in section 18P(2) where a trade is carried on through a PE.

526.Paragraph 8 inserts new section 227C into FA 1994 (Lloyd’s Underwriters) to deal specifically with PEs of corporate members of Lloyds syndicates.

527.New section 227C modifies the application of Chapter 3A in the case of a Lloyd’s underwriter.

528.New section 227C(2) requires foreign tax credit regulations made under section 229(1)(d) to be disregarded.

529.New subsection (3) concerns profits or losses of any relevant accounting period which arise to corporate members of syndicates which are profits of a previous underwriting year which began before the relevant day (the date on which a PE election takes effect under section 18F). It provides that those profits or losses are then disregarded for the purposes of Chapter 3A.

530.New subsection (4) concerns profits or losses arising to corporate members from premium trust funds which are allocated under Lloyd’s rules or practice to a previous underwriting year which began before the relevant day. It provides that such profits and losses are also disregarded for the purposes of Chapter 3A.

531.Paragraph 9 inserts new subsection (2B) into section 15 of CAA 2001.

532.New section 15(2B) disapplies section 15(2A) in respect of a plant or machinery lease under which the company is a lessor if profits or losses arising from the lease are left out of account by virtue of section 18C(3).

533.Section 15(2A) provides that where a company carries on a business though a PE and an election is made under section 18A CTA 2009, the business carried on in the PE is to be treated as a separate activity from the beginning of the first accounting period after the election is made. Section 18C(3) provides that profits or losses arising from plant or machinery leases are left out of account for the purpose of calculating any relevant profits amount or relevant losses amount under section 18A, if any capital allowance has been made to the company or a connected company in respect of expenditure on the provision of any plant or machinery subject to the lease.

534.This amendment ensures that where profits or losses are left out of account in accordance with section 18C(3) the relevant plant and machinery is not also subject to the separate activity treatment in section 15(2A) of CAA 2001.

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