GIM7490 | Repeal of equalisation reserves tax legislation for accounting periods ending on or after 1 January 2016: Interaction with Double Taxation Relief: Examples

To calculate the correct branch apportionment of the equalisation reserve release in 2016, FA12/S28(3) requires the company to calculate the mean of each proportion found for each relevant period. The relevant periods are those falling within the period of 6 years ending with the day on which the last accounting period ended for which claims equalisation reserves were maintained and business was carried out through a permanent establishment (PE).

In each instance Company A has 12 month accounting periods ending on 31 December and a DTR claim is made in respect of the accounting period ending 31 December 2016.

Example 1

Company A has maintained equalisation reserves for many years and has had a PE in Germany for 10 years which has made some DTR claims. DTR claims are made for the APs ending 31 December 2016 and 31 December 2018.

As at 31 December 2015 Company A has equalisation reserves of £120m.

The proportion for each relevant period allocated to the German branch to reflect the average ratio of the relevant PEs premium income to the company’s total premium income is as follows. Further information on apportionment can be found at GIM7330 and GIM7340.

AP ended 31/12/10 20%

AP ended 31/12/11 20%

AP ended 31/12/12 15%

AP ended 31/12/13 20%

AP ended 31/12/14 15%

AP ended 31/12/15 15%

The mean of each proportion is therefore 105/6 which is 15%. This is the proportion of the receipt that must be allocated to the German branch in calculating DTR in 2016.

2016 Treatment

Company A is required under FA12/S26(4) to bring in a receipt of £20m (£120m/6) during the accounting period ended 31/12/2016. This represents the release of the equalisation reserve being spread over 6 years.

For the DTR calculation 15% of the £20m will need to be allocated to the German branch. This means that for the branch, the appropriate portion of the receipt under FA12/S28(3) is £3m. Only this amount will be taken into account when calculating double taxation relief.

2017 Treatment

No DTR claim is made and therefore the calculation is not required.

2018 treatment

As for 2016, the DTR calculation requires 15% of the £20m to be allocated to the German branch. The appropriate portion of the receipt for the branch is therefore £3m.

Example 2

The facts are as above but the company has only maintained equalisation reserves since 1 January 2012 and the relevant PE did not commence trading until 1 January 2013. In this case the relevant periods and their proportion of equalisation reserves are:

AP ended 31/12/13 20%

AP ended 31/12/14 15%

AP ended 31/12/15 20%

The accounting periods listed above are the only ones that meet all the relevant conditions of FA12/S28(5).

They give a mean proportion of 55/3 which is 18.3%

2016 treatment

Company A will therefore have a receipt of £20m as in example 1 with an amount of £3.66m allocated to the German branch for the purposes of their DTR claim (18.3% of £20m).

2017 treatment

There is no DTR claim and therefore the calculation is not required

2018 treatment

As for 2016, the DTR calculation requires 18.3% of the £20m to be allocated to the German branch. The appropriate portion of the receipt for the branch is therefore £3.66m.

Example 3

The facts are the same as in example 1 but the German PE did not commence trading until 1 January 2016. In this case none of the release will be apportioned to the German PE because it did not commence until after the implementation date of 1 January 2016 and the PE will have had no entitlement to a tax deductible equalisation reserve.

2016 and later years treatment

Company A will therefore have a receipt of £20m for each year with no proportion of the receipt being allocated to the DTR calculations.