Income and Corporation Taxes Act 1988

Part 2 U.K. General provisions

Transactions treated as taking place at arm’s length U.K.

2 In accordance with the separate enterprise principle, transactions between the permanent establishment and any other part of the non-resident company are treated as taking place on such terms as would have been agreed between parties dealing at arm’s length.

Application of general provision as to allowable deductions U.K.

3 (1) Section 11AA(4) (general provision as to allowable deductions) applies whether or not the expenses are incurred by, or reimbursed by, the permanent establishment.

(2) The amount of expenses to be taken into account under section 11AA(4) is the actual cost to the non-resident company.

Prohibition of deductions for payments in respect of intangible assets U.K.

4 (1) No deduction is allowed in respect of royalties paid, or other similar payments made, by the permanent establishment to any other part of the non-resident company in respect of the use of intangible assets held by the company.

(2) This does not prevent a deduction in respect of any contribution by the permanent establishment to the costs of creation of an intangible asset.

(3) In this paragraph “intangible asset” has the meaning it has for accounting purposes, and includes any intellectual property (as defined in paragraph 2(2) of Schedule 29 to the Finance Act 2002).

Prohibition of deductions for interest or other financing costs U.K.

5 (1) No deduction is allowed in respect of payments of interest or other financing costs by the permanent establishment to any other part of the non-resident company, except as provided by sub-paragraph (2).

(2) The restriction in sub-paragraph (1) above does not apply to interest or other costs of financing that are payable in respect of borrowing by the permanent establishment in the ordinary course of a financial business carried on by it.

(3) In sub-paragraph (2) “financial business” means any of the following—

(a) banking, deposit-taking, money-lending or debt-factoring, or a business similar to any of those;

(b) dealing in commodity or financial futures.

Provision of goods or services for permanent establishment U.K.

6 (1) This paragraph applies where the non-resident company provides the permanent establishment with goods or services.

(2) If the goods or services are of a kind that the company supplies, in the ordinary course of its business, to third parties dealing with it at arm’s length, the matter is dealt with as a transaction to which the separate enterprise principle applies.

(3) If not, the matter is dealt with as an expense incurred by the non-resident company for the purposes of the permanent establishment.