(a) the reduction in the bank’s assets under sub-paragraph (5) is to be
ignored, but

(b) 15the amount of the permanent establishment’s net settlement assets is
to be reduced by Z%.

(7) For this purpose, “Z%” is the proportion by which the bank’s net settlement
assets are reduced under sub-paragraph (5).

(8) In determining the amount of the bank’s chargeable equity and liabilities at
20Step 3 in paragraph 24(1), the amount of the bank’s net settlement liabilities
is to be reduced (but not below nil) by the amount of the bank’s net
settlement assets (ignoring the reduction under sub-paragraph (5)).

(9) The bank’s “net settlement liabilities” are the bank’s liabilities so far as
they—

(a) 25are covered by the provision mentioned in sub-paragraph (1)(c), and

(b) are not excluded liabilities.

(10) The bank’s “net settlement assets” are its assets so far as corresponding to
N’s net settlement liabilities.

(11) “N’s net settlement liabilities” means N’s liabilities so far as they are covered
30by the provision mentioned in sub-paragraph (1)(c).

(12) The permanent establishment’s “net settlement assets” are its assets so far as
they are part of the bank’s net settlement assets.

(13) If the bank’s net settlement liabilities exceed the bank’s net settlement assets
(ignoring the reduction under sub-paragraph (5)), and a proportion (A%) of
35those liabilities is long term liabilities and a proportion (B%) of those
liabilities is short term liabilities, under sub-paragraph (8)—

(a) the long term liabilities are reduced by A% of the bank’s net
settlement assets, and

(b) the short term liabilities are reduced by B% of those assets.

26 (1) 40This paragraph applies for the purposes of Step 2 in paragraph 24(1).

(2) The assets of the permanent establishment are those which it would have
were it a distinct and separate enterprise which—

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

(b) 45dealt wholly independently with the relevant foreign bank.

(3) For this purpose, any relevant provisions of sections 21 to 28 of CTA 2009 are
to be applied as they would be applied in determining profits attributable to
the permanent establishment for corporation tax purposes.

(4) But where paragraph 24(1) is being applied in determining the UK allocated
5equity and liabilities of a relevant foreign bank for the purposes of
paragraph 17(17) or 19(17), any assets within sub-paragraph (5) are to be left
out.

(5) The assets within this sub-paragraph are any assets of the permanent
establishment (as otherwise determined under this paragraph) representing
10an excluded loan relationship.

(6) A loan relationship is “excluded” if—

(a) the relevant foreign bank is the creditor,

(b) the debtor (“D”) is a UK resident bank or another relevant foreign
bank—

(i) 15which is a member of the relevant group, and

(ii) whose activities include the relevant regulated activity
described in the provision mentioned in paragraph 78(a),

(c) the money which is the subject of the transaction giving rise to D’s
debt is money borrowed by the relevant foreign bank from another
20entity, and

(d) in borrowing that money the relevant foreign bank was acting as the
agent or intermediary of D.

(7) Section 302(1) of CTA 2009 (definition of “loan relationship”) applies for the
purposes of sub-paragraphs (5) and (6) as it applies for corporation tax
25purposes.

27 (1) This paragraph applies for the purposes of Step 3 in paragraph 24(1).

(2) To determine the amount of the relevant foreign bank’s chargeable equity
and liabilities—

(a) determine the amount of the bank’s equity and liabilities (other than
30excluded equity and liabilities) as at the end of the chargeable period,

(b) adjust that amount in accordance with sub-paragraph (5) and
paragraphs 25(8) and 43 (so far as applicable), and

(c) finally, reduce that amount (but not below nil) by—

(i) the amount of the entity’s high quality liquid assets as the
35end of that period, other than any asset which for the
purposes of an adjustment under paragraph (b) is an asset to
which paragraph 25(8) applies, and

(ii) where sub-paragraph (4) applies, the amount determined
under that sub-paragraph.

(3) 40Sub-paragraph (4) applies where—

(a) as at the end of the chargeable period, the assets of the relevant
foreign bank include a financial asset in respect of an advance of cash
made by the bank,

(b) that financial asset is not an asset which, for the purposes of an
45adjustment under sub-paragraph (2)(b), is an asset to which
paragraph 25(8) applies, and

(c) underlying that asset, as collateral, is an item (“the collateral”) owned
by the bank which would form part of the bank’s high quality liquid

assets as at the end of that period were the collateral, rather than the
financial asset, an asset of the bank.

(4) The amount within sub-paragraph (2)(c)(ii) is—

(a) the amount of the financial asset as at the end of that period or, if
5lower, an amount equal to the fair value of the collateral as at that
time, or

(b) if this sub-paragraph applies in relation to more than one financial
asset, the total of the amounts determined under paragraph (a) in
respect of each of those assets.

(5) 10Where paragraph 24(1) is being applied in determining the UK allocated
equity and liabilities of a relevant foreign bank for the purposes of
paragraph 17(17) or 19(17), the following liabilities are to be left out—

(a) any liabilities to a relevant member as defined in paragraph 18(2) or
20(2) (as the case may be), or

(b) 15any liabilities to another relevant foreign bank covered by paragraph
17(17) or 19(17) (as the case may be) so far as the other bank’s assets
corresponding to the liabilities are assets of the permanent
establishment through which the other bank carries on a trade in the
United Kingdom as determined at Step 2 in paragraph 24(1).

(6) 20In reducing any amount of equity or liabilities under sub-paragraph (2)(c),
long term equity and liabilities are to be reduced before short term liabilities.

“Excluded” equity and liabilities

28 (1) Equity or liabilities are “excluded” so far as they consist of equity or
liabilities which are specified to be excluded—

(a) 25by any of paragraphs 29 to 39, or

(b) by an order made by the Treasury.

(2) The Treasury may also by order add to, repeal or otherwise amend any of
paragraphs 29 to 39.

(3) An order under this paragraph may make consequential amendments of
30paragraph 75 (“long term” liabilities: non-protected deposits).

(4) An order under this paragraph may have retrospective effect in relation to—

(a) any chargeable period in which the order is made, or

(b) in the case of an order made on or before 31 December 2011, any
chargeable period ending on or after 1 January 2011.

(5) 35Orders under this paragraph are to be made by statutory instrument.

(6) A statutory instrument containing an order under this paragraph may not
be made unless a draft has been laid before, and approved by a resolution
of, the House of Commons.

29 (1) Liabilities representing protected deposits are excluded.

(2) 40A deposit is “protected” so far as it is covered by the Financial Services
Compensation Scheme under section 213 of FISMA 2000 (“the FSCS”).

(3) A deposit is “protected” so far as it is covered by a scheme which—

(a) operates outside the United Kingdom, and

(b) is comparable to the FSCS.