INTM286470 | Foreign Permanent Establishments of UK Companies: anti-diversion rule: Application of the entity exemption approach

From HM Revenue & Customs · International Manual

This applies for relevant accounting periods beginning on or after 1 January 2013.

Application of the Entity Exemption approach

The second method of applying the CFC rules to foreign PEs is based on applying the CFC entity exemptions. The CFC entity exemptions exempt the whole of a CFC’s profits if the conditions of an entity exemption are satisfied. This is an alternative approach to the CFC Charge Gateway which identifies types of profit by applying the various charge gateway chapters and then determines whether those profits have been diverted from the UK. So the conditions of the entity exemptions act as a general proxy for the CFC Charge Gateway in that they are based on exempting low-risk situations in terms of activity or type of profit, source or amount of income arising in a CFC. To align the foreign PE rules with the CFC regime, these exemptions are also available for foreign PEs, subject to adaptation to allow for differences in legal structures. CTA09/Part 2/CH3A/S18G(1)(c) determines that there can only be a restriction of the adjusted relevant profits amount of a foreign PE if none of the exemptions in S18I apply.

S18I sets out how to apply the entity exemptions in Chapters 11 to 14 of the CFC regime. In order to do this the assumptions set out in Section 18I (3) are as follows:

that the PE is a separate company from Company X (INTM286320) which is resident in the same territory as that of the PE (territory X)
that the separate company is a CFC resident in territory X,
that Company X’s accounting periods (period X) are the same accounting periods of the deemed CFC.
that the deemed CFC’s assumed total profits for period X are the adjusted relevant profits amount of the PE.
that the deemed CFC’s assumed taxable total profits for period X are the same as the deemed CFC’s assumed total profits for period X.
that the deemed CFC is connected with Company X, and also connected or associated with any person with whom Company X is connected or associated.
that any person with an interest in Company X also has an interest in the deemed CFC.

The overall effect of these assumptions is to treat the foreign PE as a CFC, so that Chapters 11 to 14 of the CFC regime can be considered in relation to that foreign PE.

S18IA- 18ID modify Chapters 11 to 14 to ensure that they can be applied in the context of foreign PEs