INTM489660 - Diverted Profits Tax: application of Diverted Profits Tax: legislation – Finance Act 2015 – core provisions: section 86 exceptions – independent agents, etc.
Section 86(5)(a) provides an exception from a charge under section 86 where the activity of the ‘avoided PE’ is within either:
- section 1142 CTA 2010 – agent of independent status (INTM264080), subject to the qualification described below, or
- section 1144 CTA 2010 – alternative finance arrangements
so that the foreign company would not be regarded as having a PE in the UK. This recognises that activity may be designed to some extent so as to ensure that these provisions apply, which might create uncertainty as to the potential application of section 86. If, absent the contrivance put in place to avoid a UK PE, the UK entity would have been an agent of independent status then section 86 will not apply.
The exception will only apply where an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in accordance with section 1141 (1)(b) CTA 2010. Subject to the following paragraph it only applies if the foreign company and the avoided PE are not connected, within the meaning of section 1122 CTA 2010 at any time within the accounting period.
However, section 86(5)(b) extends the exception at section 86(5)(a) to connected parties where the ‘avoided PE’ is regarded as an agent of independent status within section 1142(1) CTA 2010 because it meets the conditions at section 1145 CTA 2010 (Independent Broker), section 1146 CTA 2010 (“investment manager exemption” (IME)) or section 1151 CTA 2010 (Lloyd’s agents) (INTM269010).
For investment managers the exception will only apply where the arrangements fall within section 1142 / 1144 CTA 2010 and the foreign company is not connected with ‘the avoided PE’, or where the IME applies. The application of the IME at section 1146 CTA 2010 is itself subject to there being an investment transaction carried out on behalf of a non-UK resident company.
HMRC is aware that there will be many cases where a foreign company appoints a connected investment adviser in the UK that cannot fall within the IME because the terms of the appointment do not include discretionary authority to execute business on behalf of the foreign company. In these circumstances section 86(5)(b) will not apply to give the comfort of exception from section 86.
Such an arrangement is not likely to give rise to a DPT charge under section 86 if it is reasonable to assume that the relationship between the foreign company and the investment adviser would have met the IME conditions had discretionary authority been given. Where that was the case it would be unlikely that the relevant activity could be regarded as designed so as to ensure that the foreign company does not carry on its trade in the UK for the purpose of corporation tax, as is required by section 86(1)(e) in order for section 86 to apply.
On a wider point in relation to the financial sector, a foreign company may appoint a UK manager/adviser whose activities are restricted because of regulatory constraints - most obviously a lack of regulatory authority to carry out transactions. As a result it is not uncommon for services agreements to explicitly acknowledge that the manager/adviser is not authorised to do business on behalf of the foreign company or hold itself out as being able to do so.
Where a company is unable to obtain regulatory authority to perform certain activities and this directly leads to limitations imposed or agreed this should normally be regarded as pointing away from those limitations constituting design to ensure that the foreign company does not carry on its trade in the UK for the purpose of corporation tax.