SolvedINTM254590 | Controlled Foreign Companies: exemptions - excluded countries: Application of non-local source income rules to permanent establishment income: examples
From HM Revenue & Customs · International Manual
It may help to have a copy of SI1998/3081 to hand when working through these examples.
Example 1
| - | Total Controlled Foreign Company income | - | PE income (included) | - |
|---|---|---|---|---|
| Sales | 500,000 | - | - | - |
| Purchases | 300,000 | - | - | - |
| Net Sales | - | 200,000 | - | 20,000 |
| Plus | - | - | - | - |
| Non-local interest | 50,000 | - | 2,000 | - |
| Non-local royalties | 25,000 | - | - | - |
| - | - | 275,000 | - | 22,000 |
| Less | - | - | - | - |
| Costs | 75,000 | - | 2,500 | - |
| - | - | 200,000 | - | 19,500 |
Regulation 6(3) does not apply. But non-local interest is greater than 10% of net permanent establishment profits.
The non-local source income for the controlled foreign company is therefore:
| - | Amount | Regulation |
|---|---|---|
| Interest | 48,000 | regulation 5(3)(b) |
| Royalties | 25,000 | regulation 5(3)(c) |
| PE | 2,000 | regulation 5(3)(e) |
Example 2
A company resident in territory A has a permanent establishment in territory B. Territory A operates an exemption method. The head office in A makes a loan to the permanent establishment in B on which B pays interest. The interest is liable to tax in territory A. The test is satisfied.
The facts are as above but territory A operates a credit method of taxation. The interest paid by the permanent establishment to the head office in territory A is not allowed as a deduction against the taxable profits of the company except to the extent that it represents interest paid by the company to another person. In computing the company’s profits for tax in territory A the interest paid by the permanent establishment is not therefore allowed. The test is satisfied.
Example 3
| - | Total Controlled Foreign Company income | - | PE income (included) | - |
|---|---|---|---|---|
| Sales | 500,000 | - | - | - |
| Purchases | 300,000 | - | - | - |
| Net Sales | - | 200,000 | - | 20,000 |
| Plus | - | - | - | - |
| Non-local interest | 50,000 | - | 10,000 | - |
| Non-local royalties | 25,000 | - | - | - |
| - | - | 275,000 | - | 30,000 |
| Less | - | - | - | - |
| Costs | 75,000 | - | 25,000 | - |
| - | - | 200,000 | - | 5,000 |
Under regulation 6(3), 10,000 gross interest exceeds 5,000 net permanent establishment profits and therefore 10,000 is substituted for 5,000 when looking at the controlled foreign company’s non-local source income.
The non-local source income for the controlled foreign company is therefore:
| - | Amount | Regulation |
|---|---|---|
| Interest | 40,000 | regulation 5(3)(b) |
| Royalties | 25,000 | regulation 5(3)(c) |
| PE | 10,000 | regulation 5(3)(e) |