Finance (No. 3) Bill (HC Bill 200)

(2) 10If an early termination event occurs after the relevant time but
before the time the exempt period would end under sub-
paragraph (1), the exempt period ends immediately before that
event.

(3) An early termination event occurs if and when—

(a) 15a relevant transaction occurs, whether or not the
transaction occurs pursuant to an agreement entered into
by X before that time, or

(b) where the exempt period began because Condition D was
met, X’s business does not consist wholly in the holding of
20shares of companies which X controls, together with
activities incidental to the holding of such shares.

15G Interpretation of Part 3A

(1) In this Part of this Schedule—

• “group” means a company and any other companies it
  25controls;

• “the relevant time” has the meaning given by paragraph 15B;

• “relevant transaction” has the meaning given by paragraph
  15E;

• “relevant UK corporate investor in X” has the meaning given
  30by paragraph 15B(2);

• “X” is to be construed in accordance with paragraph 15B.

(2) For the purposes of this Part of this Schedule a person is “related”
to X at a particular time if—

(a) the person is connected or associated with X at that time,

(b) 35the person has a 25 per cent assessable interest in X in the
case of the accounting period in which that time falls
(within the meaning of paragraph 6(4C)), or

(c) if X is a controlled foreign company in the accounting
period in which that time falls by virtue of subsection (1A)
40of section 747, the person is connected or associated with
either or both of the two persons mentioned in that
subsection.”

Part 4 Holding companies: extension of transitional provision

9 (1) Part 2 of Schedule 16 to FA 2009 (controlled foreign companies: amendment
of exempt activities exemption) is amended as follows.

(2) 5In paragraph 12 (commencement), in sub-paragraph (2)(b) for “2011”
substitute “2012”.

(3) In paragraph 15 (qualifying holding companies: periods straddling 1 July
2011)—

(a) in sub-paragraph (1)(a) for “2011” substitute “2012”,

(b) 10in sub-paragraph (2)(a) for “2011” substitute “2012”, and

(c) accordingly, in the heading for “2011” substitute “2012”.

(4) In paragraph 16 (qualifying holding companies: definition of “relevant
accounting period”), in paragraph (b) for “2011” substitute “2012”.

(5) In the italic heading before paragraph 17 for “two years before 1 July 2011”
15substitute “three years before 1 July 2012”.

Part 5 Minor and consequential amendments

10 In the following provisions of ICTA for “or 751AA” substitute “, 751AA,
751AB or 751AC”—

(a) 20section 747(3A) and (5A) (imputation of chargeable profits and
creditable tax of controlled foreign companies),

(b) section 749(10) (residence),

(c) section 749A(9) (elections and designations under section 749:
supplementary provisions), and

(d) 25section 750(3)(ab) (territories with a lower level of taxation).

11 In section 751A of that Act (reduction in chargeable profits for certain
activities of EEA business establishments), for subsection (4) substitute—

“(4) The Commissioners may grant the application only if—

(a) they are satisfied that the specified amount does not exceed
30the amount (if any) equal to so much of those chargeable
profits as can reasonably be regarded as representing the net
economic value which—

(i) arises to the appropriate body of persons (taken as a
whole), and

(ii) 35is created directly by qualifying work, and

(b) they have not previously granted an application made by the
UK resident company in respect of the relevant accounting
period under section 751AB or 751AC.”

12 (1) Section 751B of that Act (sections 751A and 751AA: supplementary) is
40amended as follows.

(2) For “or 751AA” in subsections (1), (2), (3) (in each place) and (5) substitute “,
751AA, 751AB or 751AC”.

(3) In subsection (2), for paragraph (a) substitute—

“(a) may be made at any time before the end of the application
period, and”

(4) In subsection (8), omit the “and” before paragraph (b), and after that
5paragraph insert—

“(c) in the case of an appeal in respect of the refusal of an
application under section 751AB, has the meaning given by
subsection (6) of that section, and

(d) in the case of an appeal in respect of the refusal of an
10application under section 751AC, has the meaning given by
subsection (5) of that section.”

(5) For subsection (10) substitute—

“(10) In this section—

• “the application period” means—

  (a)

  15the period within which an amendment to the
  relevant company tax return may be made by virtue
  of paragraph 15(4) of Schedule 18 to the Finance Act
  1998 (disregarding any extension of that period
  provided by subsections (3) and (4) of this section or
  20any other enactment), or

  (b)

  if the relevant company tax return is amended under
  paragraph 34(2)(b) or (2A) of that Schedule as a
  consequence of the application of this Chapter—

  (i)

  the period of 30 days beginning when the
  25amendment was notified to the company, or

  (ii)

  if an appeal is brought against such an
  amendment, the period of 30 days beginning
  when that appeal is finally determined;

• “relevant company tax return”, in relation to a company, means
  30the return for the accounting period for which—

  (a)

  any sum is chargeable on the company under section
  747(4)(a), or

  (b)

  any sum would be so chargeable but for section 751A,
  751AA, 751AB or 751AC,

  35in respect of the chargeable profits of the company for the
  accounting period mentioned in section 751A, 751AA, 751AB
  or 751AC.”

(6) In the heading for “and 751AA” substitute “to 751AC”.

13 Omit the following provisions—

(a) 40in Schedule 17 to FA 1998, paragraph 3(7), and

(b) in Schedule 16 to FA 2009, paragraphs 22 and 24(3) and (5).

Part 6 Commencement and transitional provision

14 (1) The amendments made by paragraph 9 are treated as always having had
45effect.

(2) The other amendments made by this Schedule have effect in relation to
accounting periods of controlled foreign companies beginning on or after 1
January 2011.

Section 48

SCHEDULE 13 5Profits of foreign permanent establishments etc

Part 1 Amendments of CTA 2009

1 CTA 2009 is amended as follows.

2 In section 1(1)(c) (overview of Act), for “Chapter 4” substitute “Chapters 3A
10and 4”.

3 In section 5(1) (territorial scope), insert at the end “(but see Chapter 3A for
an exemption from charge in respect of profits of foreign permanent
establishments)”.

4 After section 18 insert—

“Chapter 3A

UK resident companies: profits of foreign permanent establishments

15Exemption

18A Exemption for profits or losses of foreign permanent establishments

(1) If a UK resident company makes an election under this section,
exemption adjustments are to be made at the appropriate stages in
calculating the taxable total profits of the company for each relevant
20accounting period.

(2) For that purpose “exemption adjustments” means any such
adjustments as are appropriate to secure that there are left out of
account any profits and losses taken into account in arriving at the
foreign permanent establishments amount in relation to any relevant
25accounting period.

(3) In this Chapter “relevant accounting period”, in relation to a
company by which an election is made under this section, means an
accounting period of the company to which the election applies (as
to which see section 18F).

(4) 30For the purposes of this Chapter the “foreign permanent
establishments amount”, in relation to an accounting period of a
company, is—

(a) the aggregate of the relevant profits amount in the case of
each relevant foreign territory in relation to which there is a
35relevant profits amount for the accounting period, less

(b) the aggregate of the relevant losses amount in the case of each
relevant foreign territory in relation to which there is a
relevant losses amount for the accounting period.

(5) In this Chapter “relevant foreign territory”, in relation to a company,
5means a territory outside the United Kingdom in which the company
carries on, or has carried on, business through a permanent
establishment.

(6) For the purposes of this Chapter “relevant profits amount”, in
relation to a relevant foreign territory and an accounting period of a
10company, means—

(a) in the case of a full treaty territory, profits which would be
taken to be attributable to the permanent establishment of the
company in the territory for the purpose of ascertaining the
amount of any credit to be allowed under TIOPA 2010 (in
15respect of tax paid under the law of the relevant foreign
territory) against corporation tax if the company were to be
liable to corporation tax for the accounting period (apart from
this Chapter), or

(b) in the case of any other territory, profits which would be
20taken to be so attributable for that purpose if the territory
were a full treaty territory and the double taxation
arrangements having effect in relation to the territory were in
the terms of the OECD model.

(7) For the purposes of this Chapter “relevant losses amount”, in relation
25to a relevant foreign territory and an accounting period of a
company, means—

(a) in the case of a full treaty territory, any losses which would
be taken to be attributable to the permanent establishment of
the company in the territory on the application of the same
30rules and principles as fall to be applied under subsection
(6)(a), and

(b) in the case of any other territory, any losses which would be
taken to be so attributable on that basis if it were a full treaty
territory and the double taxation arrangements having effect
35in relation to the relevant foreign territory were in the terms
of the OECD model.

(8) Subsection (9) applies if the amount of any credit to be allowed under
TIOPA 2010 in relation to a company in the case of a full treaty
territory does not depend on the profits taken to be attributable to the
40permanent establishment of the company in the territory because tax
under the law of the territory is charged, pursuant to the double
taxation arrangements having effect in relation to the territory,
otherwise than by reference to such profits (as an alternative to a
charge by reference to such profits).

(9) 45The reference in subsection (6)(a) to profits which would be taken to
be attributable to the permanent establishment of the company in the
territory is to the profits that would be so taken if tax under the law
of the territory were charged by reference to such profits; and
subsection (7)(a) is to be construed accordingly.

(10) For the purposes of subsections (6) and (7) if double taxation
arrangements having effect in relation to a relevant foreign territory
do not include provision for the credit to be allowed against tax to be
computed by reference to the same profits as those by reference to
5which the tax was computed under the law of the relevant foreign
territory, they are to be assumed to do so.

(11) This section is subject to the following provisions of this Chapter.

18B Chargeable gains etc

(1) The exemption adjustments required to be made by section 18A(1)
10include, in the case of any gains or losses on the disposal or
realisation of assets which are relevant in the calculation of the
taxable total profits of a company for a relevant accounting period,
adjustments to remove the effect of any gains or losses relating to the
assets taken into account in computing the foreign permanent
15establishments amount in relation to any relevant accounting period
(so that, in appropriate cases, a gain may be increased to reflect a loss
so taken into account or a loss increased to reflect a gain so taken into
account).

(2) The references in section 18A(6) to profits which would be taken to
20be attributable to the permanent establishment of a company in a
territory include any gains in respect of immoveable property which
has been used for the purposes of the business carried on by the
company through the permanent establishment in the territory (to
such extent as is appropriate having regard to the extent to which it
25has been so used); and the references to losses in section 18A(7) are
to be construed accordingly.

(3) The references in section 18A(6) to profits which would be taken, in
the case of a company in relation to which an election under section
18A has effect, to be attributable to the permanent establishment of
30the company in a territory (including as extended by subsection (2))
do not include any gains which would be taken to be so attributable
for the purposes of ascertaining credit to be allowed in respect of tax
payable under the law of the territory before the election has effect;
and the references to losses in section 18A(7) are to be construed
35accordingly.

18C Capital allowances etc

(1) Any allowance under Part 2 of CAA 2001 which, but for section 18A
and for section 15(2A)(b) of CAA 2001, could be claimed under
section 3(1) of that Act in respect of assets provided for the purposes
40of a permanent establishment in a territory outside the United
Kingdom through which business is or has been carried on by a
company in relation to which an election under section 18A has effect
(and any charge in connection with any such allowance) is to be
made automatically and reflected in any calculation for any relevant
45accounting period of the company of the profits or losses attributable
to business carried on by the company through such a permanent
establishment.

(2) In the application of section 13 of CAA 2001 by virtue of subsection
(1) on the taking effect of the election under section 18A, references
50to “market value” have effect as references to “transition value”

within the meaning of section 62A of that Act in relation to any plant
or machinery in the case of which that is the disposal value under
section 61 of that Act.

(3) In determining any relevant profits amount or relevant losses
5amount under section 18A(6) or (7) in relation to a company there are
to be left out of account any profits or losses arising from a plant or
machinery lease under which the company is a lessor if an allowance
under CAA 2001 has been made to the company or a connected
company in respect of expenditure on the provision of any plant or
10machinery subject to the lease (otherwise than in accordance with
this section).

(4) Section 70K of that Act (meaning of “plant or machinery lease” and
“lessor”) applies for the purposes of subsection (3).

(5) In determining for the purposes of section 18A the amount of any
15credit to be allowed under TIOPA 2010 in respect of tax under the
law of a relevant foreign territory in the case of a company, it is to be
assumed that the company made any claim or election (other than a
claim for allowances under Part 2 of CAA 2001) which would reduce
any relevant profits amount, or increase the relevant losses amount,
20by any means, and within any time limit, applicable to it.

18D Payments subject to deduction

(1) In determining any relevant profits amount or relevant losses
amount under section 18A(6) or (7) in relation to a company there are
to be left out of account profits or losses referable to any transaction
25between a person who is UK resident and a permanent
establishment in a territory outside the United Kingdom through
which the company carries on, or has carried on, business (“the
foreign territory in question”) if the condition in subsection (2) is met.

(2) That condition is that the UK resident would be obliged under Part
3015 of ITA 2007 to deduct income tax that is not repayable from
payments in respect of the transaction if the payments were made to
a company resident in the foreign territory in question (taking
account of any double taxation arrangements having effect in
relation to the foreign territory in question).

(3) 35But subsection (1) does not apply if the company is a bank unless the
transaction forms part of arrangements the main purpose, or one of
the main purposes, of which is the avoidance of an obligation under
Part 15 of ITA 2007 to deduct income tax from any payments.

(4) Section 1120 of CTA 2010 (meaning of “bank”) applies for the
40purposes of subsection (3).

18E Employee share acquisitions

(1) Any relief which would be given under Chapter 2 or 3 of Part 12 is to
be taken into account in determining any relevant profits amount or
relevant losses amount in the case of a company under section 18A(6)
45or (7) in relation to a relevant foreign territory in so far as it is linked
to the business carried on by the company through a permanent
establishment in the territory.

(2) The extent to which any such relief is so linked is to be determined
on a just and reasonable basis having regard to the extent to which
the work of the employees concerned contributes to the purposes of
the business so carried on.

18F 5Effect of election

(1) An election made by a company under section 18A—

(a) (subject to subsection (2)) is irrevocable, and

(b) applies to all accounting periods of the company following
that in which it is made.

(2) 10The election can be revoked at any time before the first accounting
period of the company for which the election would have effect.

Anti-diversion rule

18G Anti-diversion rule

(1) This section applies for the purposes of this Chapter if the lower level
15of tax test is met for any relevant accounting period of a company in
relation to any permanent establishment through which the
company carries on, or has carried on, business in a territory outside
the United Kingdom.

(2) If there is an adjusted relevant profits amount in relation to the
20territory for the relevant accounting period, that amount is to be
taken to be nil (but this is subject to section 18I).

(3) For the purposes of this Chapter “adjusted”, in relation to a relevant
profits amount, is what the relevant profits amount would be if it
were determined without reference to gains and losses which are
25chargeable gains or allowable losses for the purposes of corporation
tax.

(4) The lower level of tax test is met for a relevant accounting period in
relation to a permanent establishment in a territory if—

(a) the amount of tax paid under the law of that territory in
30respect of the adjusted relevant profits amount in accordance
with a relevant treaty provision, is less than

(b) 75% of the amount of corporation tax that would be payable
in respect of that amount if it were subject in full to
corporation tax, ignoring any credit which would be allowed
35against it under section 18(3) of TIOPA 2010 and assuming,
where there is more than one rate of corporation tax
applicable to the relevant accounting period, that it were
chargeable at the average rate over the accounting period.

(5) In subsection (4)(a) “a relevant treaty provision” means—

(a) 40provision in double taxation arrangements having effect in
relation to the territory, or

(b) if no double taxation arrangements have effect in relation to
the territory, provision in the terms of the OECD model.

(6) This section does not apply if—

(a) 45the adjusted relevant profits amount in relation to the
territory for the relevant accounting period would (apart

from subsection (2)) be less than the entry limit (as to which
see subsection (7)), or

(b) the motive test is met (as to which see section 18H).

(7) “The entry limit” is—

(a) 5£200,000, or

(b) if the relevant accounting period is less than 12 months, a
proportionately reduced amount.

18H The motive test

(1) The motive test is met if conditions A and B are met.

(2) 10Condition A is that in so far as any relevant transaction, or two or
more transactions at least one of which was a relevant transaction
(taken together), achieved a reduction in United Kingdom tax
either—

(a) the reduction was minimal, or

(b) 15it was not the main purpose, or one of the main purposes, of
the transaction, or of those transactions taken together, to
achieve the reduction.

(3) In subsection (2) “relevant transaction” means a transaction the
results of which are reflected in such of the company’s profits in the
20accounting period as are attributable to the permanent
establishment.

(4) For the purposes of subsection (2) a transaction achieves (or
transactions achieve) a reduction in United Kingdom tax if, had the
transaction (or transactions) not been effected, any person—

(a) 25would (disregarding section 18G(2)) have been liable for
United Kingdom tax or for a greater amount of United
Kingdom tax, or

(b) would (disregarding that provision) not have been entitled to
a relief from, or repayment of, United Kingdom tax or would
30have been entitled to a smaller relief from, or repayment of,
United Kingdom tax.

(5) For the purposes of subsection (2) it is the main purpose, or one of
the main purposes, of a transaction (or of transactions taken
together) to achieve a reduction in United Kingdom tax if that is the
35main purpose, or one of the main purposes, of—

(a) the company, or

(b) a person who has an interest in the company at any time
during the relevant accounting period;

and section 749B of ICTA (persons who have an interest in a
40company) applies for the purposes of paragraph (b) as for the
purposes of Chapter 4 of Part 17 of that Act.

(6) Condition B is that it was not the main reason, or one of the main
reasons, for the company carrying on business through the
permanent establishment to achieve a reduction in United Kingdom
45tax by a diversion of profits from the United Kingdom.

(7) For the purposes of subsection (6) the fact that the company carries
on the business through the permanent establishment achieves a

reduction in United Kingdom tax by a diversion of profits from the
United Kingdom if it is reasonable to make the supposition in
subsection (8).

(8) That supposition is that, if the company did not carry on business
5through any permanent establishment and there were no related
companies—

(a) the whole or a substantial part of the receipts which are
reflected in the profits attributable to the permanent
establishment would have been received by the company
10otherwise than through the permanent establishment or by
another UK resident company which is a non-electing
company or an individual resident in the United Kingdom,
and

(b) the company, that other UK resident company, that
15individual resident in the United Kingdom or any other
person resident in the United Kingdom either—

(i) would (disregarding section 18G(2)) have been liable
for United Kingdom tax or for a greater amount of
United Kingdom tax, or

(ii) 20would (disregarding that provision) not have been
entitled to a relief from, or repayment of, United
Kingdom tax or would have been entitled to a smaller
relief from, or repayment of, United Kingdom tax.

(9) For the purposes of subsection (8) a company is “related” to the
25company if—

(a) either it is a UK resident company in relation to which an
election under section 18A has effect or it is not a UK resident
company,

(b) it is connected with, or is an associate of, the company, and

(c) 30it fulfils or could fulfil, directly or indirectly, the same
functions as those of the permanent establishment.

(10) Companies are associates for the purposes of subsection (9) if they
are associated for the purposes of Chapter 4 of Part 19 of CTA 2010
(see section 882).

(11) 35References in subsection (8) to a UK resident company include a
company which it is reasonable to assume would have been
established if the permanent establishment did not exist.

(12) For the purposes of subsection (8) a UK resident company is a non-
electing company if no election under section 18A has effect in
40relation to the company.

(13) In this section “United Kingdom tax” means corporation tax, income
tax or capital gains tax.

18I Proportionate reduction in certain cases

(1) This section applies if—

(a) 45condition A in section 18H is not met, but

(b) condition B in that section is met.

(2) If there is an adjusted relevant profits amount in relation to the
territory for the relevant accounting period, section 18G(2) has effect