INTM489725 | Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: the participation condition

Application of DPT in the first and second situations (described at INTM489595 and INTM489620) is subject to the participation condition being met in relation to the persons between which the material provision is made or imposed (“C” and “P”).

For the purposes of the third situation (“Avoidance of a UK Taxable Presence”) (INTM489655) there is no participation condition in section 86 between the foreign company and the avoided PE. However, there is a participation condition requirement between the foreign company and “A” (another person) in the mismatch condition (see INTM489675).

So for the purposes of applying the participation condition to the third situation (the section 86 mismatch condition) the “first party” is the foreign company and the second party “A”. For the purposes of applying the participation condition to the first and second situations (section 80 and therefore through the relevant adaptation, section 81) the “first party” is “C” and the second party “P”.

For the purpose of DPT, the participation condition is worded in a similar way to the condition in the transfer pricing rules at section 148 TIOPA 2010 (INTM412060). It therefore requires one of the persons to be directly or indirectly participating in the management, control or capital of the other, or a third person to be participating in the management, control or capital of both. There are separate conditions (A and B) relating to financing arrangements and provisions which are not financing arrangements.

Financing arrangements are defined widely as those made for providing or guaranteeing or otherwise in connection with any debt, capital or other form of finance. The condition in relation to financing arrangements considers not only the position at the time the material provision was made or imposed, but also for a six-month period from that time.

The first and second parties are “the relevant parties” for conditions A and B.