INTM554040 - Hybrids: transfers by UK permanent establishment of a multinational company (Chapter 6): conditions to be satisfied: condition B

Condition B of s259FA TIOPA 2010 requires there to be a PE deduction.

A PE deduction is defined as an amount that

• may (in substance) be deducted from income in calculating the profits of the company that are chargeable to corporation tax in the UK, and
• is in respect of a transfer of money or money’s worth to the company in the parent jurisdiction - that transfer must either be made, or be (in substance) treated as made, for the purposes of UK corporation tax
• and is not in respect of a deduction arising by way of a capital attribution tax adjustment which the PE is assumed to have by virtue of s21(2) Corporation Tax Act 2009

For the purposes of s259FA, ‘the PE deduction’ does not include 259FA(4A)

• (a) a debit in respect of amortisation brought into account under s.729 or 731 CTA 2009 or
• (b) an amount deductible in respect of amortisation under an equivalent law of a territory outside the UK

Note that this exemption is restricted to amortisation and does not extend to impairment.

Some allocations of an amount between parties do not reflect a transfer from the PE to the parent jurisdiction. An example of this is a head office recharge. Some of the expenditure incurred by the company will be attributable to the PE. The simple attribution of this expenditure to the PE does not represent a deduction in the PE that is in respect of a transfer of money or money’s worth to the parent jurisdiction. In substance, the counterparty to the deduction attributed to the PE is the provider of the goods or services that gave rise to the original expense.

If, however, the head office recharge includes an element representing value provided by the head office to the PE, then this element may be caught. An example would be where it is appropriate to reward the head office for negotiating bulk discounts by coordinating all the acquisitions of the group. In substance, the counterparty to this transaction resulting in the deduction would be the head office.

However, if a PE is permitted a deduction for an item of expenditure attributed to it, but the head office is also able to claim a deduction for the same amount, then the rules within Chapter 10 (Dual Territory Double Deduction Cases) may be at point, as it may constitute a double deduction mismatch within the scope of that Chapter.

A capital attribution tax adjustment (CATA) may represent a transfer of money’s worth from the UK company to the company in the parent jurisdiction that – 259FA(4)(b)(ii) is (in substance) treated as being made for CT purposes.