INTM284030 - Foreign Permanent Establishments of UK Companies: transition to exemption provisions: transitional rule: matching

Matching of opening negative amount

The opening negative amount (see INTM284020) has to be matched by profits of the foreign permanent establishment in the periods starting with the first period for which the election for exemption has been made. The period during which those amounts are being matched is the transitional period. The matching rules are unaffected by the way that PE losses were actually set-off against profits.

While the negative amounts described above are being matched by profits of the foreign PEs, those profits remain chargeable to corporation tax. Any foreign tax paid in respect of those profits is set against that corporation tax under the credit relief rules. Until the opening negative amount is fully matched by profits of the PEs, the PE profits are not exempt (but see below regarding streaming of negative amounts).

However, any losses that arise in a foreign PE after the start of the first accounting period for which an election for exemption has been made are not relievable against profits chargeable to corporation tax.

Note that profits and losses within a foreign PE are always set against one another for the purposes of the transitional rule. Hence it is only an aggregate PE profit that may be matched with a negative opening amount.

Losses that arise in the transitional period do not increase the opening negative amount.

It is likely that completion of the matching process will occur part way through an accounting period, in which case the company can specify in its tax return for that period which part of its foreign PE profits will be matched with the remaining opening amount. This will enable the company to maximise the tax credit relief available in respect of the taxable profits.