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Finance (No. 3) BillPage 220

to the company for the accounting period in which it is
paid,.

(4) After subsection (5) insert—

(5A) But a UK resident is not a United Kingdom recipient if—

(a) 5it is a UK resident company which receives the manufactured
dividend for the purposes of a trade carried on by the
recipient through a permanent establishment in a territory
outside the United Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
10for the accounting period in which it is received.

21 In section 919 (manufactured interest on UK securities: payments by UK
residents etc), after subsection (1) insert—

(1A) But this section does not apply if—

(a) the manufactured interest is paid by a UK resident company
15in the course of a trade carried on through a permanent
establishment in a territory outside the United Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
for the accounting period in which it is paid.

22 (1) Section 920 (foreign payers of manufactured interest: the reverse charge) is
20amended as follows.

(2) After subsection (1) insert—

(1A) This section also applies if—

(a) a UK resident company pays manufactured interest in the
course of a trade carried on through a permanent
25establishment in a territory outside the United Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
for the accounting period in which it is paid.

(3) After subsection (2) insert—

(2A) But this section does not apply if—

(a) 30the recipient is a UK resident company which receives the
manufactured interest for the purposes of a trade carried on
by the recipient through a permanent establishment in a
territory outside the United Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
35for the accounting period in which it is received.

(4) In subsection (3), insert at the end “and section 919(1A) did not apply.”

23 In section 922 (manufactured overseas dividends: payments by UK residents
etc), after subsection (1) insert—

(1A) But this section does not apply if—

(a) 40the manufactured overseas dividend is paid by a UK resident
company in the course of a trade carried on through a
permanent establishment in a territory outside the United
Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
45for the accounting period in which it is paid.

Finance (No. 3) BillPage 221

24 (1) Section 923 (foreign payers of manufactured overseas dividends: the reverse
charge) is amended as follows.

(2) After subsection (1) insert—

(1A) This section also applies if—

(a) 5a UK resident company pays a manufactured overseas
dividend in the course of a trade carried on through a
permanent establishment in a territory outside the United
Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
10for the accounting period in which it is paid.

(3) After subsection (2) insert—

(2A) But this section does not apply if—

(a) the recipient is a UK resident company which receives the
manufactured overseas dividend for the purposes of a trade
15carried on by the recipient through a permanent
establishment in a territory outside the United Kingdom, and

(b) section 18A of CTA 2009 has effect in relation to the company
for the accounting period in which it is received.

(4) In subsection (3), insert at the end “and section 922(1A) did not apply.”

20TIOPA 2010

25 TIOPA 2010 is amended as follows.

26 In section 18 (entitlement to credit for foreign tax reduces UK tax by amount
of credit), after subsection (3) insert—

(3A) References in subsection (3) to tax payable under the law of a
25territory outside the United Kingdom do not include tax paid by a
company in relation to which an election under section 18A of CTA
2009 (exemption for profits or losses of overseas permanent
establishments) has effect in respect of a relevant profits amount or
relevant losses amount within the meaning of that section.

27 30For section 43 substitute—

43 Profits attributable to permanent establishments for purposes of
section 42(2)

(1) This section applies in determining for the purposes of section 42(2)
the amount of the profits of a UK resident company on which
35corporation tax is or would be chargeable that is attributable to a
permanent establishment of the company in a territory outside the
United Kingdom.

(2) The amount of the profits of the company that is attributable to the
permanent establishment is the amount that the permanent
40establishment would have made if it were a distinct and separate
enterprise which—

(a) engaged in the same or similar activities under the same or
similar conditions, and

(b) dealt wholly independently with the company.

Finance (No. 3) BillPage 222

(3) In applying subsection (2) assume that—

(a) the permanent establishment has the same credit rating as the
company, and

(b) (subject to subsection (5)) the permanent establishment has
5such equity and loan capital as it could reasonably be
expected to have if the equity and loan capital of the
company were allocated in accordance with subsection (4).

(4) The allocation is one made on a just and equitable basis between the
permanent establishments in territories outside the United Kingdom
10through which the company carries on business and the entity that
the company would consist of if each such permanent establishment
were an entity distinct and separate from the company.

(5) If the permanent establishment is in a full treaty territory (within the
meaning of Chapter 3A of Part 2 of CTA 2009) subsection (3)(b) has
15effect subject to the double taxation arrangements having effect in
relation to the territory.

(6) Subsections (3)(b) to (5) prevail over any allotment of equity or loan
capital to the permanent establishment made by the company.

(7) If the company is an insurance company (within the meaning given
20by section 431(2) of ICTA), in applying subsection (2) assume that the
permanent establishment has such free assets as it would have in the
circumstances described in that subsection.

(8) The Commissioners for Her Majesty’s Revenue and Customs may by
regulations make provision as to the meaning of “free assets” in
25subsection (7).

28 (1) Section 78 (meaning of “overseas permanent establishment”) is amended as
follows.

(2) In subsection (2)—

(a) in paragraph (a), for “and define the expression” substitute “which
30contain a relevant non-discrimination provision”, and

(b) in paragraph (b)—

(i) for “but do not define the expression” substitute “which do
not contain a relevant non-discrimination provision”, and

(ii) for “is to be read in accordance with Chapter 2 of Part 24 of
35CTA 2010.” substitute “has the meaning given by the Model
Tax Convention on Income and on Capital published by the
Organisation for Economic Co-operation and Development
in July 2010 (“the OECD”) or such other document published
by the OECD in place of it as is designated from time to time
40by order made by the Treasury.”

(3) After that subsection insert—

(3) In subsection (2) “relevant non-discrimination provision” means a
provision to the effect that the taxation on a permanent
establishment of an enterprise of a state which is party to the
45arrangements (a “contracting state”) is not to be less favourably
levied in any other contracting state than the taxation levied on
enterprises of that other contracting state carrying on the same
activities.

Finance (No. 3) BillPage 223

29 In section 263 (tax treatment of financing costs and income: net debt of a
company), after subsection (4) insert—

(4A) For the purposes of subsections (3) and (4), if the company is one in
relation to which an election under section 18A of CTA 2009 has
5effect anything that would otherwise form part of the company’s
relevant liabilities or relevant assets does not do so if and to the
extent that amounts in respect of it are left out of account under that
section.

30 After section 317 insert—

317A 10 Companies with permanent establishments profits election

(1) This section applies if, apart from this section, an amount is a
financing expense amount or a financing income amount of a
company in relation to which an election under section 18A of CTA
2009 has effect.

(2) 15It is treated as not being a financing expense amount or a financing
income amount of the company if and to the extent that it is left out
of account under that section.

Part 3 Commencement and transitional provision

20Commencement

31 The amendments made by this Schedule come into force on the day on
which this Act is passed.

Condition B of motive test

32 (1) This paragraph applies in relation to a company carrying on business
25through a permanent establishment in an accounting period which is the
first relevant accounting period or an accounting period beginning less than
12 months after the beginning of the first relevant accounting period (an
“affected relevant accounting period”) if the company carried on the
business through the permanent establishment throughout the period of 12
30months ending with the day before that on which this Act is passed (“the
pre-commencement year”).

(2) Condition B in section 18H of CTA 2009 (as inserted by this Schedule) is
assumed to be met in relation to an affected relevant accounting period if—

(a) the gross income attributable to the permanent establishment for the
35affected relevant accounting period does not exceed by more than
10% the gross income attributable to the permanent establishment
for the period of 12 months ending immediately before the beginning
of the first relevant accounting period (or, if the affected relevant
accounting period is less than 12 months, such proportion of that
40gross income as the length of the affected relevant accounting period
bears to 12 months),

(b) there has been no major change in the nature or conduct of the
business carried on through the permanent establishment in the
period (“the relevant period”) beginning with the pre-

Finance (No. 3) BillPage 224

commencement year and ending with the end of the affected
relevant accounting period, and

(c) no asset attributable to the permanent establishment was previously
owned, and no part of the business carried on through the
5permanent establishment in the affected relevant accounting period
was previously carried on, by a company whose chargeable profits
and creditable tax (if any) for any accounting period ending within
the relevant period were (or, but for an agreement made or
undertaking given, would have been) apportioned under section
10747(3) of ICTA.

(3) For the purposes of sub-paragraph (2) “major change in the nature or
conduct of the business” includes—

(a) a major change in the type of property dealt in, or services or facilities
provided, in the business, and

(b) 15a major change in customers, outlets or markets of the business.

(4) A reference in sub-paragraph (3) to a change includes a change which is
achieved gradually as a result of a series of transfers.

33 (1) This paragraph applies in relation to a company (“company A”) carrying on
business through a permanent establishment in an accounting period which
20is the first relevant accounting period or an accounting period beginning less
than 12 months after the beginning of the first relevant accounting period
(an “affected relevant accounting period”) if a company which—

(a) was a non-UK resident company, and

(b) was controlled by company A,

25(“company B”) carried on the business throughout the period of 12 months
ending with the day before that on which this Act is passed (“the pre-
commencement year”).

(2) Condition B in section 18H of CTA 2009 (as inserted by this Schedule) is
assumed to be met in relation to an affected relevant accounting period if—

(a) 30the gross income attributable to the permanent establishment for the
affected relevant accounting period does not exceed by more than
10% the gross income of the business for the period of 12 months
ending immediately before the beginning of the first relevant
accounting period of the company (or, if the affected relevant
35accounting period is less than 12 months, such proportion of that
gross income as the length of the affected relevant accounting period
bears to 12 months),

(b) there has been no major change in the nature or conduct of the
business carried on through the permanent establishment in the
40period (“the relevant period”) beginning with the pre-
commencement year and ending with the end of the affected
relevant accounting period,

(c) company B was not a company whose chargeable profits and
creditable tax (if any) for any accounting period ending within the
45relevant period were (or, but for an agreement made or undertaking
given, would have been) apportioned under section 747(3) of ICTA,
and

(d) no asset attributable to the permanent establishment was previously
owned, and no part of the business carried on through the
50permanent establishment in the affected relevant accounting period
was previously carried on, by such a company.

Finance (No. 3) BillPage 225

(3) Sub-paragraphs (3) and (4) of paragraph 32 apply for the purposes of sub-
paragraph (2).

(4) Section 1124 of CTA 2010 (meaning of “control”) applies for the purposes of
this paragraph.

5Large pre-commencement losses

34 (1) This paragraph applies if—

(a) there is a relevant losses amount exceeding £50 million in the case of
a company in relation to any relevant foreign territory for any
accounting period beginning within the period of 6 years ending
10with the day before that on which this Act is passed,  and

(b) (apart from this paragraph) the accounting period would not be an
affected prior accounting period for the purposes of section 18J(2) of
CTA 2009 (as inserted by this Schedule).

(2) The accounting period, and every later accounting period of the company
15before the first relevant accounting period of the company which would not
otherwise be an affected prior accounting period for those purposes, is an
affected prior accounting period for those purposes.

35 (1) This paragraph applies if—

(a) section 18O of CTA 2009 (as inserted by this Schedule) applies in
20relation to a transfer of business, and

(b) (apart from this paragraph) the effect of subsection (4) of that section
would be that a relevant losses amount falling within paragraph
34(1)(a) would be ignored for the purposes of section 18J(2) of that
Act.

(2) 25There is to be added to the adjusted foreign permanent establishments
amount in relation to the accounting period of the transferee in which the
transfer took place a negative amount equal to that relevant losses amount.

Section 62A of CAA 2001

36 For the purposes of section 62A of CAA 2001 (as inserted by this Schedule)—

(a) 30where the qualifying expenditure in respect of the plant or
machinery, or of the group of assets of which it forms part, in
question does not exceed £50 million, an accounting period ending
more than 12 months before the day on which this Act is passed is
not a relevant preceding accounting period, and

(b) 35where it does, any accounting period beginning within the period of
6 years ending with the day before that on which this Act is passed
which (apart from this paragraph) would not be a relevant preceding
accounting period is such a period.

Section 43(8) of TIOPA 2010: free assets

37 40Until provision made under subsection (8) of section 43 of TIOPA 2010 (as
substituted by this Schedule) has effect, “free assets” in subsection (7) of that
section has the meaning given by regulation 3 of the Non-resident Insurance
Companies Regulations 2003 (S.I. 2003/2714S.I. 2003/2714).

Finance (No. 3) BillPage 226

Section 52

SCHEDULE 14 Furnished holiday lettings

Part 1 Income tax

5FA 2004

1 (1) In FA 2004, section 189 (relevant UK individual) is amended as follows.

(2) In subsection (2), omit the “and” at the end of paragraph (ba), and after that
paragraph insert—

(bb) income which is chargeable under Part 3 of ITTOIA 2005 and
10is immediately derived from the carrying on of an EEA
furnished holiday lettings business (whether individually or
as a partner acting personally in a partnership), and.

(3) After subsection (6) insert—

(6A) EEA furnished holiday lettings business” means an overseas
15property business so far as consisting of the commercial letting of
furnished holiday accommodation (within the meaning of Chapter 6
of Part 3 of ITTOIA 2005) in one or more EEA states.

(6B) If there is a letting of accommodation only part of which is holiday
accommodation, just and reasonable apportionments are to be made
20for the purpose of determining what is comprised in an EEA
furnished holiday lettings business.

ITTOIA 2005

2 (1) ITTOIA 2005 is amended as follows.

(2) In section 322 (introduction)—

(a) 25after subsection (2) insert—

(2A) It matters whether an overseas property business consists of
or includes the commercial letting of furnished holiday
accommodation in one or more EEA states for the purposes
of—

(a) 30section 312 (deduction for expenditure on energy-
saving items: see section 313(3)),

(b) certain provisions of TCGA 1992 (see section 241A of
that Act),

(c) CAA 2001 (see, for example, sections 250 and 250A of
35that Act),

(d) section 189(2)(bb) of FA 2004 (meaning of “relevant
UK earnings” for pension purposes),

(e) Part 4 of ITA 2007 (loss relief: see section 127ZA of
that Act), and

(f) 40section 836(3) of ITA 2007 (jointly held property: see
exception DA).,

(b) in subsection (3), for “the above provisions” substitute “the
provisions mentioned in subsection (2)”, and

Finance (No. 3) BillPage 227

(c) after subsection (3) insert—

(4) This Chapter also supplements the provisions mentioned in
subsection (2A) by providing in certain circumstances for the
profits of the EEA furnished holiday lettings part of an
5overseas property business to be calculated separately (see
sections 328A and 328B).

(3) In section 325 (meaning of “qualifying holiday accommodation”)—

(a) in subsection (2), for “140 days” substitute “210 days”, and

(b) in subsection (3), for “70 days” substitute “105 days”.

(4) 10In section 326 (under-used holiday accommodation)—

(a) in subsection (3), for “70” substitute “105”, and

(b) after subsection (6) insert—

(7) This section is to apply separately in relation to
accommodation in the United Kingdom and accommodation
15in EEA states other than the United Kingdom.

(5) After section 326 insert—

326A Under-used holiday accommodation: letting condition not met

(1) This section applies if—

(a) during a tax year a person lets qualifying holiday
20accommodation,

(b) the accommodation is let by the person—

(i) during the next tax year, or

(ii) during the next two tax years,

(c) the accommodation would (apart from this section) not be
25qualifying holiday accommodation—

(i) during the tax year mentioned in paragraph (b)(i), or

(ii) during both of the tax years mentioned in paragraph
(b)(ii),

only because of a failure to meet the letting condition (see
30section 325(3)), and

(d) there was a genuine intention to meet the letting condition for
the tax year within subsection (1)(c)(i) or each of the tax years
within subsection (1)(c)(ii) (as the case may be).

(2) If the person makes an election in respect of that accommodation for
35any tax year in respect of which the failure mentioned in subsection
(1)(c) occurs, the accommodation is to be treated as qualifying
holiday accommodation for that tax year.

(3) Subsection (2) does not apply for the purposes of section 326 or
subsection (1)(a).

(4) 40If an election is not made for the first of the tax years within
subsection (1)(c)(ii), an election may not be made for the second.

(5) An election for a tax year must be made on or before the first
anniversary of the normal self-assessment filing date for the tax year.

Finance (No. 3) BillPage 228

(6) References in subsection (1)(a) and (c) to qualifying holiday
accommodation include accommodation treated as such under
section 326.

(6) In section 327 (capital allowances and loss relief), in the heading, for “relief
5substitute “relief: UK property business”.

(7) In section 328 (relevant UK earnings for pension purposes), in the heading,
for “purposes” substitute “purposes: UK property business”.

(8) After section 328 insert—

328A Capital allowances and loss relief: overseas property business

(1) 10If an overseas property business consists of both—

(a) the commercial letting of furnished holiday accommodation
in one or more EEA states (“the EEA furnished holiday
lettings part”), and

(b) other businesses or transactions (“the other part”),

15this section requires separate calculations to be made of the profits of
the EEA furnished holiday lettings part and the other part.

(2) The calculations must be made if—

(a) section 250 or 250A of CAA 2001 (giving effect to allowances
and charges) applies to the EEA furnished holiday lettings
20part or the other part, or

(b) any provision of Part 4 of ITA 2007 (loss relief) applies in
relation to a loss made in either of those parts.

(3) If there is a letting of accommodation only part of which is holiday
accommodation, such apportionments are to be made for the
25purposes of this section as are just and reasonable.

328B Relevant UK earnings for pension purposes: overseas property
business

(1) If an overseas property business consists of both—

(a) the commercial letting of furnished holiday accommodation
30in one or more EEA states (“the EEA furnished holiday
lettings part”), and

(b) other businesses or transactions,

this section requires a separate calculation to be made of the profits
of the EEA furnished holiday lettings part.

(2) 35The calculation must be made if the profits of the EEA furnished
holiday lettings part are relevant UK earnings within section
189(2)(bb) of FA 2004.

(3) If there is a letting of accommodation only part of which is holiday
accommodation, such apportionments are to be made for the
40purposes of this section as are just and reasonable.

ITA 2007

3 (1) ITA 2007 is amended as follows.

Finance (No. 3) BillPage 229

(2) In section 117 (overview of Chapter), after subsection (2) insert—

(2A) This Chapter also makes provision for an overseas property business
which consists of, or so far as it includes, the commercial letting of
furnished holiday accommodation in one or more EEA states to be
5treated as a trade for the purposes of this Part (see section 127ZA).

(3) In section 127 (UK furnished holiday lettings business treated as trade), for
subsections (4) to (6) substitute—

(3A) Chapter 2 applies as if sections 64 to 82 and 89 to 95 were omitted.

(4) After section 127 insert—

127ZA 10 EEA furnished holiday lettings business treated as trade

(1) This section applies if, in a tax year, a person carries on an EEA
furnished holiday lettings business.

(2) EEA furnished holiday lettings business” means an overseas
property business which consists of, or so far as it includes, the
15commercial letting of furnished holiday accommodation (within the
meaning of Chapter 6 of Part 3 of ITTOIA 2005) in one or more EEA
states.

(3) For the purposes of this Part (but as modified below) the person is
treated instead as carrying on in the tax year a single trade—

(a) 20which consists of every commercial letting of furnished
holiday accommodation comprised in the person’s EEA
furnished holiday lettings business, and

(b) the profits of which are chargeable to income tax.

(4) Chapter 2 applies as if sections 64 to 82 and 89 to 95 were omitted.

(5) 25If there is a letting of accommodation only part of which is furnished
holiday accommodation, just and reasonable apportionments are to
be made for the purpose of determining what is comprised in the
trade treated as carried on.

(5) In section 836 (jointly held property), in subsection (3), after exception D
30insert—

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