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Finance Bill
Schedule 25 — Determination of profits attributable to permanent establishment: supplementary provisions

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202B(1) to (6) of that Act (receipts basis of assessment for Schedule

E)”.

          (3)      In relation to any such time, sections 43(11)(a) and 44(9)(a) of the Finance Act

1989 (c. 26) have effect with the omission of the words “or benefits” and “, or

held by an intermediary,”.

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          (4)      In relation to a period beginning before 1st January 2003, the reference in

paragraph 8(g) to a deduction allowable under Schedule 23 to this Act shall

be read as a reference to a deduction allowable to a company for that period

in respect of a person—

              (a)             acquiring shares that are qualifying shares within the meaning of

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that Schedule, or

              (b)             having a right to acquire such shares,

                   whether in that period or subsequently, by reason of his or another’s

employment with the company.

Schedule 25

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Section 149(3)

 

Determination of profits attributable to permanent establishment:

supplementary provisions

                                                                 The Schedule inserted in the Taxes Act 1988 as Schedule A1 is as follows—

“Schedule A1

Determination of profits attributable to permanent establishment:

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supplementary provisions

Part 1

Introduction

Introduction

          1                (1)               The provisions of this Schedule have effect for supplementing

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section 11AA as regards the determination of the profits

attributable to a permanent establishment in the United Kingdom

of a company that is not resident in the United Kingdom (“the

non-resident company”).

                           (2)               In this Schedule “the separate enterprise principle” means the

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principle in section 11AA(2) (read with subsection (3) of that

section).

Part 2

General provisions

Transactions treated as taking place at arm’s length

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          2                 In accordance with the separate enterprise principle, transactions

between the permanent establishment and any other part of the

 

 

Finance Bill
Schedule 25 — Determination of profits attributable to permanent establishment: supplementary provisions

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non-resident company are treated as taking place on such terms as

would have been agreed between parties dealing at arm’s length.

Application of general provision as to allowable deductions

          3                (1)               Section 11AA(4) (general provision as to allowable deductions)

applies whether or not the expenses are incurred by, or

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reimbursed by, the permanent establishment.

                           (2)               The amount of expenses to be taken into account under section

11AA(4) is the actual cost to the non-resident company.

Prohibition of deductions for payments in respect of intangible assets

          4                (1)               No deduction is allowed in respect of royalties paid, or other

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similar payments made, by the permanent establishment to any

other part of the non-resident company in respect of the use of

intangible assets held by the company.

                           (2)               This does not prevent a deduction in respect of any contribution

by the permanent establishment to the costs of creation of an

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intangible asset.

                           (3)               In this paragraph “intangible asset” has the meaning it has for

accounting purposes, and includes any intellectual property (as

defined in paragraph 2(2) of Schedule 29 to the Finance Act 2002).

Prohibition of deductions for interest or other financing costs

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          5                (1)               No deduction is allowed in respect of payments of interest or other

financing costs by the permanent establishment to any other part

of the non-resident company, except as provided by sub-

paragraph (2).

                           (2)               The restriction in sub-paragraph (1) above does not apply to

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interest or other costs of financing that are payable in respect of

borrowing by the permanent establishment in the ordinary course

of a financial business carried on by it.

                           (3)               In sub-paragraph (2) “financial business” means any of the

following—

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                      (a)                     banking, deposit-taking, money-lending or debt-factoring,

or a business similar to any of those;

                      (b)                     dealing in commodity or financial futures.

Provision of goods or services for permanent establishment

          6                (1)               This paragraph applies where the non-resident company provides

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the permanent establishment with goods or services.

                           (2)               If the goods or services are of a kind that the company supplies, in

the ordinary course of its business, to third parties dealing with it

at arm’s length, the matter is dealt with as a transaction to which

the separate enterprise principle applies.

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                           (3)               If not, the matter is dealt with as an expense incurred by the non-

resident company for the purposes of the permanent

establishment.

 

 

Finance Bill
Schedule 25 — Determination of profits attributable to permanent establishment: supplementary provisions

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Part 3

Provisions applicable to non-resident banks

Application of this Part

          7                (1)               The provisions of this Part of this Schedule have effect where the

non-resident company is a bank.

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                                             “Bank” for this purpose has the meaning given by section 840A.

                           (2)               Nothing in this Part of this Schedule shall be read as preventing

the application of principles similar to those provided for in this

Part in applying the separate enterprise principle to a non-resident

company that is not a bank.

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Non-resident banks: transfer of financial assets

          8                (1)               In accordance with the separate enterprise principle, transfers of

loans and other financial assets between the permanent

establishment and any other part of the company are recognised

only if they would have taken place between independent

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enterprises.

                           (2)               Such a transfer is not recognised where it cannot reasonably be

considered that it is carried out for valid commercial reasons.

                                             For this purpose the obtaining of a tax advantage is not a valid

commercial reason.

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Loans by non-resident banks: attribution of financial assets and profits arising

          9                (1)               In accordance with the separate enterprise principle, loans and

other financial assets, and profits arising from them, are attributed

to a permanent establishment to the extent that they can

reasonably be regarded as having been generated by the activities

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of the permanent establishment.

                           (2)               The following provisions have effect as regards the factors to be

taken into account.

                           (3)               Particular account shall be taken of the extent to which the

permanent establishment is responsible for—

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                      (a)                     obtaining the offer of new business;

                      (b)                     establishing the potential borrower’s credit rating and the

risk involved in providing credit;

                      (c)                     negotiating the terms of the loan with the borrower;

                      (d)                     deciding whether, and if so on what conditions, to make or

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extend the loan.

                           (4)               Account may also be taken of the extent to which the permanent

establishment is responsible for—

                      (a)                     concluding the loan agreement and disbursing the

proceeds of the loan;

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                      (b)                     administering the loan (including handling and

monitoring the service of it) and holding and controlling

any securities pledged.

 

 

Finance Bill
Schedule 26 — Non-resident companies: transactions through broker, investment manager or Lloyd’s agent

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                           (5)               References in this paragraph to a financial asset include any

financial risk in relation to a loan, or potential loan, that is capable

of giving rise to fees or other receipts and for which the holding of

capital is required (or would be required if the transaction were

between parties at arm’s length).

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Borrowing by non-resident banks: permanent establishment acting as agent or

intermediary

          10               (1)               This paragraph applies where a permanent establishment—

                      (a)                     borrows funds for the purposes of another part of the non-

resident company, and

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                      (b)                     in relation to that borrowing acts only as an agent or

intermediary.

                           (2)               In such a case, in accordance with the separate enterprise

principle—

                      (a)                     the profits attributable to the permanent establishment,

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and

                      (b)                     the capital attributable to the permanent establishment

under section 11AA(3),

                                             shall be that appropriate in the case of an agent acting at arm’s

length, taking into account the risks and costs borne by the

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establishment.”.

Schedule 26

Section 152

 

Non-resident companies: transactions through broker, investment

manager or Lloyd’s agent

Introduction

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  1       (1)      This Schedule makes provision about transactions carried out on behalf of a

company that is not resident in the United Kingdom (a “non-resident

company”), in the course of that company’s trade, by a person in the United

Kingdom acting as—

              (a)             a broker (paragraph 2),

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              (b)             an investment manager (paragraphs 3 to 5), or

              (c)             a members’ or managing agent at Lloyd’s (paragraph 6).

          (2)      The provisions of this Schedule supplement—

              (a)             section 148(3) (meaning of “permanent establishment”: not to

include independent agent), and

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              (b)             section 151(2)(c) (limit on income tax chargeable on non-resident

company: income arising from transactions carried out through

independent agent).

Brokers

  2       (1)      In relation to a transaction carried out on behalf of a non-resident company,

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a broker is regarded as an agent of independent status acting in the ordinary

course of his business if, and only if, the following conditions are met.

 

 

Finance Bill
Schedule 26 — Non-resident companies: transactions through broker, investment manager or Lloyd’s agent

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          (2)      The conditions are—

              (a)             that at the time of the transaction he is carrying on the business of a

broker;

              (b)             that the transaction is carried out by him in the ordinary course of

that business;

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              (c)             that the remuneration he receives in respect of the transaction for the

provision of the services of a broker to the non-resident company is

not less than is customary for that class of business; and

              (d)             that he does not fall to be treated as a permanent establishment of the

non-resident company in relation to any other transaction carried

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out in the same accounting period.

Investment managers

  3       (1)      In relation to an investment transaction carried out on behalf of a non-

resident company by a person providing investment management services

(an “investment manager”), the investment manager is regarded as an agent

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of independent status acting in the ordinary course of his business if, and

only if, the following conditions are met.

          (2)      The conditions are—

              (a)             that at the time of the transaction he is carrying on a business of

providing investment management services;

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              (b)             that the transaction is carried out in the ordinary course of that

business;

              (c)             that he acts on behalf of the non-resident company in relation to the

transaction in an independent capacity;

              (d)             that the requirements of the 20% rule are met (see paragraph 4);

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              (e)             that the remuneration he receives in respect of the transaction for the

provision to the non-resident company of investment management

services is not less than is customary for that class of business; and

              (f)             that he does not fall to be treated as a permanent establishment of the

company in relation to any other transaction carried out in the same

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accounting period.

          (3)      In sub-paragraph (1) “investment transaction” means—

              (a)             transactions in shares, stock, futures contracts, options contracts or

securities of any description not mentioned in this paragraph, but

excluding futures contracts or options contracts relating to land,

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              (b)             transactions consisting in the buying or selling of any foreign

currency or in the placing of money at interest, and

              (c)             such other transactions as the Treasury may by regulations designate

for the purposes of this Schedule.

                   Regulations for the purposes of paragraph (c) shall be made by statutory

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instrument which shall be subject to annulment in pursuance of a resolution

of the House of Commons.

          (4)      For the purposes of sub-paragraph (3) a contract is not prevented from being

a futures contract or an options contract by the fact that any party is or may

be entitled to receive or liable to make, or entitled to receive and liable to

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make, only a payment of a sum (as opposed to a transfer of assets other than

money) in full settlement of all obligations.

 

 

Finance Bill
Schedule 26 — Non-resident companies: transactions through broker, investment manager or Lloyd’s agent

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Investment managers: the 20% rule

  4       (1)      The requirements of the 20% rule are—

              (a)             that in relation to a qualifying period (see sub-paragraph (2)) it has

been or is the intention of the investment manager and the persons

connected with him that the company’s relevant excluded income

5

(see sub-paragraph (3)) should, as to at least 80%, consist of amounts

to which neither he nor any such person has a beneficial entitlement

(see sub-paragraph (4)), and

              (b)             to the extent that there is a failure to fulfil that intention, that

failure—

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                    (i)                   is attributable (directly or indirectly) to matters outside the

control of the investment manager and persons connected

with him, and

                    (ii)                  does not result from a failure by him or any of those persons

to take such steps as may be reasonable for mitigating the

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effect of those matters in relation to the fulfilment of that

intention.

          (2)      A “qualifying period” means—

              (a)             the accounting period in which the transaction in question is carried

out, or

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              (b)             a period of not more than five years comprising two or more

complete accounting periods including that one.

          (3)      The “relevant excluded income” of a non-resident company for a qualifying

period is the aggregate of such of the chargeable profits of the company for

the accounting periods comprised in the qualifying period as derive from

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transactions carried out by the investment manager on the company’s behalf

in relation to which the manager does not (apart from the requirements of

the 20% rule) fall to be treated as a permanent establishment of the company.

          (4)      A person has a “beneficial entitlement” to relevant excluded income if he has

or may acquire a beneficial entitlement by virtue of—

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              (a)             an interest of his (whether or not an interest giving a right to an

immediate payment of a share in the profits or gains) in property in

which the whole or any part of that income is represented, or

              (b)             an interest of his in or other rights in relation to the non-resident

company,

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                   that is or would be attributable to that income.

          (5)      In the case of a transaction in relation to which the conditions in paragraph

3 are met except for the requirements of the 20% rule, this Schedule has effect

as if the requirements of that rule were met in relation to so much of the

chargeable profits of the non-resident company deriving from the

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transaction as do not represent relevant excluded income of the company to

which the investment manager or a person connected with him has or has

had any beneficial entitlement.

Investment managers: application of 20% rule to collective investment schemes

  5       (1)      This paragraph applies where amounts arise or accrue to the non-resident

45

company as a participant in a collective investment scheme.

 

 

Finance Bill
Schedule 26 — Non-resident companies: transactions through broker, investment manager or Lloyd’s agent

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          (2)      The requirements of the 20% rule need not be met in relation to a transaction

carried out for the purposes of the scheme if the scheme is such that, if the

following assumptions applied—

              (a)             that all transactions carried out for the purposes of the scheme were

carried out on behalf of a company constituted for the purposes of

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the scheme and resident outside the United Kingdom, and

              (b)             that the participants did not have any rights in respect of the

amounts arising or accruing in respect of those transactions other

than the rights that, if they held shares in the company on whose

behalf the transactions are assumed to be carried out, would be their

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rights as shareholders,

                   the assumed company would not, in relation to the accounting period in

which the transaction was carried out, be regarded for tax purposes as

carrying on a trade in the United Kingdom.

          (3)      Where on those assumptions the assumed company would be regarded for

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tax purposes as carrying on a trade in the United Kingdom, paragraph 4 has

effect with the following modifications in relation to a transaction carried

out for the purposes of the scheme—

              (a)             for references to the non-resident company substitute references to

the assumed company;

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              (b)             for references to the non-resident company’s relevant excluded

income substitute references to the aggregate of the amounts that

would, for accounting periods comprised in the qualifying period, be

chargeable to tax on the assumed company as profits deriving from

the transactions carried out by the investment manager and assumed

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to be carried out on behalf of the company.

          (4)      In this paragraph “collective investment scheme” has the meaning given by

section 235 of the Financial Services and Markets Act 2000 (c. 8), and

“participant”, in relation to such a scheme, shall be construed in accordance

with that section.

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Lloyd’s agents

  6       (1)      Where a non-resident company is a member of Lloyd’s and the transaction

is carried out in the course of the company’s underwriting business, a

person who acts on behalf of the company in relation to the transaction is

regarded as an independent agent acting in the ordinary course of his

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business if he acts as members’ agent or as managing agent of the syndicate

in question.

          (2)      In sub-paragraph (1)—

              (a)             the reference to the non-resident company being a member of

Lloyd’s is to its being a corporate member within the meaning of

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Chapter 5 of Part 4 of the Finance Act 1994 (c. 9); and

              (b)             the references to a members’ agent and to a managing agent shall be

construed in accordance with section 230 of that Act.

General supplementary provisions

  7       (1)      For the purposes of this Schedule a person is regarded as carrying out a

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transaction on behalf of another where he undertakes the transaction

himself, whether on behalf of or to the account of that other, and also where

he gives instructions for it to be so carried out by another.

 

 

 
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