PART 3Diverted profits tax

Avoidance of a UK taxable presence

86Non-UK company avoiding a UK taxable presence

1

This section applies in relation to a company (“the foreign company”) for an accounting period if—

a

the company is non-UK resident in that period,

b

it carries on a trade during that period (or part of it),

c

a person (“the avoided PE”), whether or not UK resident, is carrying on activity in the United Kingdom in that period in connection with supplies of services, goods or other property made by the foreign company in the course of that trade,

d

section 87 (exception for companies with limited UK-related sales or expenses) does not operate to prevent this section applying in relation to the foreign company for the accounting period,

e

it is reasonable to assume that any of the activity of the avoided PE or the foreign company (or both) is designed so as to ensure that the foreign company does not, as a result of the avoided PE’s activity, carry on that trade in the United Kingdom for the purposes of corporation tax (whether or not it is also designed to secure any commercial or other objective),

f

the mismatch condition (see subsection (2)) or the tax avoidance condition (see subsection (3)) is met or both those conditions are met,

g

the avoided PE is not excepted by subsection (5), and

h

the avoided PE and the foreign company are not both small or medium-sized enterprises for that period.

2

“The mismatch condition” is that—

a

in connection with the supplies of services, goods or other property mentioned in subsection (1)(c) (or in connection with those supplies and other supplies), arrangements are in place as a result of which provision is made or imposed as between the foreign company and another person (“A”) by means of a transaction or series of transactions (“the material provision”),

b

the participation condition is met in relation to the foreign company and A (see section 106),

c

the material provision results in an effective tax mismatch outcome, for the accounting period, as between the foreign company and A (see sections 107 and 108),

d

the effective tax mismatch outcome is not an excepted loan relationship outcome (see section 109),

e

the insufficient economic substance condition is met (see section 110), and

f

the foreign company and A are not both small or medium-sized enterprises for the accounting period.

3

“The tax avoidance condition” is that, in connection with the supplies of services, goods or other property mentioned in subsection (1)(c) (or in connection with those supplies and other supplies), arrangements are in place the main purpose or one of the main purposes of which is to avoid or reduce a charge to corporation tax.

4

In subsection (1)(e) the reference to activity of the avoided PE or the foreign company includes any limitation which has been imposed or agreed in respect of that activity.

5

The avoided PE is “excepted” if—

a

activity of the avoided PE is such that, as a result of section 1142 or 1144 of CTA 2010, the foreign company would not be treated as carrying on a trade in the United Kingdom in the accounting period through a permanent establishment in the United Kingdom by reason of that activity, and

b

in a case where—

i

section 1142(1) of that Act applies, but

ii

the avoided PE is not regarded for the purposes of section 1142(1) of that Act as an agent of independent status by virtue of section 1145, 1146 or 1151 of that Act,

the foreign company and the avoided PE are not connected at any time in the accounting period.

6

Where the foreign company is a member of a partnership—

a

for the purposes of subsection (1)—

i

a trade carried on by the partnership is to be regarded as a trade carried on by the foreign company, and

ii

supplies made by the partnership in the course of that trade are to be regarded as supplies made by the foreign company in the course of that trade, and

b

for the purposes of subsection (2)(a) provision made or imposed as between the partnership and another person is to be regarded as made between the foreign company and that person.

7

In this section “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

87Exception for companies with limited UK-related sales or expenses

1

Section 86 does not apply to the foreign company for an accounting period if one or both of the following conditions is or are met.

2

The first condition is that, for the accounting period, the total of—

a

the UK-related sales revenues of the foreign company, and

b

the UK-related sales revenues of companies connected with the foreign company,

does not exceed £10,000,000.

3

The second condition is that the total of—

a

the UK-related expenses of the foreign company incurred in the accounting period, and

b

the UK-related expenses of companies connected with the foreign company incurred in that period,

does not exceed £1,000,000.

4

But if the accounting period is a period of less than 12 months, the amounts specified in subsections (2) and (3) are to be reduced proportionally.

5

In this section—

  • “the foreign company” has the same meaning as in section 86;

  • “UK activity” means activity carried on in the United Kingdom in connection with supplies of services, goods or other property made by the foreign company in the course of the trade mentioned in section 86(1)(b);

  • “UK-related expenses”, of a company, means the expenses of that company which relate to UK activity;

  • “UK-related sales revenues” means—

    1. a

      in the case of the foreign company, the sales revenues of that company from UK-related supplies, and

    2. b

      in the case of a company connected with the foreign company, the sales revenues of the first mentioned company to the extent that they—

      1. i

        are from UK-related supplies, and

      2. ii

        are trading receipts which are not taken into account in calculating the profits of that company which are chargeable to corporation tax;

  • “UK-related supplies” means supplies of services, goods or other property which are made—

    1. a

      by the foreign company or a company connected with the foreign company, and

    2. b

      relate to UK activity.

6

For the purposes of this section “revenues” or “expenses” of a company, in the relevant accounting period, are amounts which, in accordance with generally accepted accounting practice (“GAAP”), are recognised as revenue or (as the case may be) expenses in the company’s profit and loss account or income statement for that period.

7

Where a company does not draw up accounts for the relevant accounting period in accordance with GAAP, the reference in subsection (6) to any amounts which in accordance with GAAP are recognised as revenue or expenses in the company’s profit and loss account or income statement for the relevant accounting period is to be read as a reference to any amounts which would be so recognised if the company had drawn up such accounts for the relevant accounting period.

8

“Generally accepted accounting practice” is to be construed in accordance with section 1127 of CTA 2010.

9

The Treasury may by regulations, made by statutory instrument, substitute a different figure for the figure for the time being specified in subsection (2) or (3).

10

Regulations under this section are subject to annulment in pursuance of a resolution of the House of Commons.