INTM286430 - Foreign Permanent Establishments of UK Companies: anti-diversion rule: Diverted Profits Gateway Approach: Example 1.
This applies for relevant accounting periods beginning on or after 1 January 2013.
Example 1
A UK company (Company X) has total profits of 100.
This includes profits of 30 which are attributed to a foreign PE, in accordance with the appropriate treaty principles.
An election is made under CTA09/Part 2/Ch3A for those foreign PE profits to be exempt.
The adjusted relevant profits amount for the UK company is 30.
This is the starting point for the application of the anti-diversion rule in CTA09/Part 2/CH3A/S18G.
Diverted Profits.
S18H determines the “diverted profits” by taking the following approach:
Assume that the UK company (Company X) is a CFC resident in the same territory as the foreign PE (territory X) and that the UK company’s accounting period is that CFC’s accounting period (period X), and that the total profits of the UK company are the assumed total profits of that CFC.
These assumptions do not extend to any assumption that there is a change to the location of the activities of Company X.
On the basis of those assumptions, apply the CFC Charge Gateway, (which for the purposes of the foreign PE anti-diversion rules is called the Diverted Profits Gateway).
Example 1 continued.
For the purposes of S18H, the assumed total profits of company X are taken to be 100.
S18H then operates by applying the various conditions within Chapters 3,4,5,6,7 and 9 (modified where necessary ) in order to ascertain whether any of that profit of 100 passes through the Diverted Profits Gateway.
If, having applied the detailed conditions of S18HA-E, it is determined that, of Company X’s assumed total profits of 100, trading profits of 20 fall within Chapter 4, then the conditions of S18G(1) will apply.
S18G(1) applies if the adjusted relevant profits amount includes any diverted profits. In this case, the adjusted relevant profits amount is 30, and, per S18H, the diverted profits amount is 20.
None of the exemptions in S18I (the entity exemptions) apply, so S18G(1)(c), which excludes amounts that fall within entity exemptions from the diverted profits gateway, is not applicable.
S18G(3) determines that the diverted profits of 20 are to be left out of the adjusted relevant profits amount of 30.
After the application of the anti-diversion rule in S18G, the adjusted relevant profits amount of the foreign PE is 10.
The UK company will be taxable on the rest of its profits of 90.
Note that the application of the anti-diversion rule can only produce a reduction in the adjusted relevant profits amount (the profits exempt under foreign PE exemption). The application of the rule does not generate a CFC charge it simply uses the mechanics of the CFC regime to ascertain whether there needs to be any restriction of the foreign PE exempt amount.