Finance Bill (HC Bill 47)

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CHAPTER 6 Deduction/non-inclusion mismatches relating to transfers by
permanent establishments
Introduction
259F Overview of Chapter

(1) 5This Chapter contains provision that counteracts certain excessive
deductions that arise in relation to transfers of money or money’s
worth made, or taken to be made, by a permanent establishment of a
multinational company to the company in the parent jurisdiction.

(2) The Chapter counteracts the deductions where the company is
10within the charge to corporation tax and does so by altering the
corporation tax treatment of the company.

(3) Section 259FA contains the conditions that must be met for this
Chapter to apply.

(4) Subsection (3) of that section defines “multinational company”, “the
15parent jurisdiction” and “the PE jurisdiction”.

(5) Subsection (8) of that section defines “the excessive PE deduction”.

(6) Section 259FB contains provision for the counteraction of the
excessive PE deduction where the United Kingdom is the PE
jurisdiction and the company is within the charge to corporation tax.

(7) 20Section 259FC contains provision for the counteraction of the
excessive PE deduction where the United Kingdom is the parent
jurisdiction and the company is within the charge to corporation tax.

(8) See also section 259BF for the meaning of “permanent
establishment”.

25Application of Chapter
259FA Circumstances in which the Chapter applies

(1) This Chapter applies if conditions A to D are met.

(2) Condition A is that a company is a multinational company.

(3) For the purposes of this Chapter, a company is a multinational
30company if—

(a) it is resident in a territory (“the parent jurisdiction”) for the
purposes of a tax charged under the law of that territory, and

(b) it is within the charge to a tax under the law of another
territory in which it is not resident (“the PE jurisdiction”)
35because it carries on a business in that territory through a
permanent establishment in that territory.

(4) Condition B is that, disregarding the provisions mentioned in
subsection (5), under the law of the PE jurisdiction, there is an
amount (“the PE deduction”) that—

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(a) may (in substance) be deducted from the company’s income
for the purposes of calculating the company’s taxable profits
for a taxable period (“the relevant PE period”), and

(b) is in respect of a transfer of money or money’s worth from the
5company in the PE jurisdiction to the company in the parent
jurisdiction that—

(i) is actually made, or

(ii) is (in substance) treated as being made for tax
purposes.

(5) 10The provisions are—

(a) this Chapter and Chapters 7 to 10, and

(b) any equivalent provision under the law of a territory outside
the United Kingdom.

(6) Condition C is that—

(a) 15the United Kingdom is either the PE jurisdiction or the parent
jurisdiction, and

(b) the company is within the charge to corporation tax—

(i) if the United Kingdom is the PE jurisdiction, for the
relevant PE period, or

(ii) 20if the United Kingdom is the parent jurisdiction, for
an accounting period some or all of which falls within
the relevant PE period.

(7) Condition D is that it is reasonable to suppose that, disregarding the
provisions mentioned in subsection (5)

(a) 25no ordinary income arises, as a result of the circumstances
giving rise to the PE deduction, to the company for a
permitted taxable period for the purposes of a tax charged
under the law of the parent jurisdiction, or

(b) the PE deduction exceeds the amount of ordinary income that
30arises, as a result of the circumstances giving rise to the PE
deduction, to the company for a permitted taxable period for
the purposes of a tax charged under the law of the parent
jurisdiction.

(8) In this Chapter “the excessive PE deduction” means—

(a) 35where paragraph (a) of subsection (7) applies, the PE
deduction, or

(b) where paragraph (b) of subsection (7) applies, the PE
deduction so far as it is reasonable to suppose that it exceeds
ordinary income as mentioned in that paragraph.

(9) 40For the purposes of subsection (7) a taxable period of the company,
for the purposes of a tax charged under the law of the parent
jurisdiction, is “permitted” if—

(a) the period begins before the end of 12 months after the end of
the relevant PE period, or

(b) 45where the period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to ordinary income arising from the
circumstances giving rise to the PE deduction, and

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(ii) it is just and reasonable for such ordinary income to
arise for that taxable period rather than an earlier
period.

(10) Sections 259FB (cases where the United Kingdom is the PE
5jurisdiction) and 259FC (cases where the United Kingdom is the
parent jurisdiction) contain provision for counteracting the excessive
PE deduction.

Counteraction
259FB Counteraction where the United Kingdom is the PE jurisdiction

(1) 10This section applies in relation to the company where the company
is within the charge to corporation tax for the relevant PE period.

(2) For corporation tax purposes, the excessive PE deduction may not be
deducted from the company’s income for the relevant PE period
unless it is deducted from dual inclusion income for that period.

(3) 15So much of the excessive PE deduction (if any) as, by virtue of
subsection (2), cannot be deducted from the company’s income for
the relevant PE period—

(a) is carried forward to subsequent accounting periods of the
company, and

(b) 20for corporation tax purposes, may be deducted from dual
inclusion income of the company for any such period (and
not from any other income), so far as it cannot be deducted
under this paragraph for an earlier period.

(4) In this section “dual inclusion income” means an amount that is
25both—

(a) ordinary income of the company for corporation tax
purposes, and

(b) ordinary income of the company for the purposes of a tax
charged under the law of the parent jurisdiction.

259FC 30 Counteraction where the United Kingdom is the parent jurisdiction

(1) This section applies in relation to the company where—

(a) the United Kingdom is the parent jurisdiction,

(b) the company is within the charge to corporation tax for an
accounting period some or all of which falls within the
35relevant PE period, and

(c) it is reasonable to suppose that—

(i) no provision under the law of the PE jurisdiction that
is equivalent to section 259FB applies, or

(ii) such a provision does apply, but does not fully
40counteract the excessive PE deduction.

(2) A provision of the law of the PE jurisdiction that is equivalent to
section 259FB does not fully counteract the excessive PE deduction if
(and only if) the amount that the provision prevents from being
deducted from ordinary income of the company, for the relevant PE
45period, other than dual inclusion income, is less than the excessive
PE deduction.

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(3) In this section “the relevant amount” is—

(a) in a case where subsection (1)(c)(i) applies, an amount equal
to the excessive PE deduction, or

(b) in a case where subsection (1)(c)(ii) applies, the amount by
5which the excessive PE deduction exceeds the amount that it
is reasonable to suppose the provision of the law of the PE
jurisdiction that is equivalent to section 259FB prevents from
being deducted from income of the company for the relevant
PE period that is not dual inclusion income.

(4) 10An amount equal to—

(a) the relevant amount, less

(b) any dual inclusion income of the company for the relevant PE
period,

is to be treated as income arising to the company for the
15counteraction period.

(5) An amount of income that is treated as arising under subsection (4)
is chargeable under Chapter 8 of Part 10 of CTA 2009 (income not
otherwise charged) (despite section 979(2) of that Act).

(6) In this section—

  • 20“counteraction period” means—

    (a)

    if an accounting period of the company coincides
    with the relevant PE period, that accounting period,
    or

    (b)

    otherwise, the first accounting period of the company
    25that is wholly or partly within the relevant PE period;

  • “dual inclusion income” means an amount that is both—

    (a)

    ordinary income of the company for corporation tax
    purposes, and

    (b)

    ordinary income of the company for the purposes of a
    30tax charged under the law of a territory outside the
    United Kingdom.

CHAPTER 7 Hybrid payee deduction/non-inclusion mismatches
Introduction
259G Overview of Chapter

(1) 35This Chapter contains provision that counteracts deduction/non-
inclusion mismatches that it is reasonable to suppose would
otherwise arise from payments or quasi-payments because a payee is
a hybrid entity.

(2) The Chapter counteracts mismatches by—

(a) 40altering the corporation tax treatment of the payer for the
payment period,

(b) treating income chargeable to corporation tax as arising to an
investor who is within the charge to corporation tax, or

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(c) treating income chargeable to corporation tax as arising to a
payee that is a hybrid entity and a limited liability
partnership.

(3) Section 259GA contains the conditions that must be met for this
5Chapter to apply.

(4) Section 259GB defines “hybrid payee deduction/non-inclusion
mismatch” and provides how the amount of the mismatch is to be
calculated.

(5) Section 259GC contains provision that counteracts the mismatch
10where the payer is within the charge to corporation tax for the
payment period.

(6) Section 259GD contains provision that counteracts the mismatch
where an investor in the payee is within the charge to corporation tax
and the mismatch is not fully counteracted by section 259GC or an
15equivalent provision under the law of a territory outside the United
Kingdom.

(7) Section 259GE contains provision that counteracts the mismatch
where a payee is a hybrid entity and limited liability partnership and
the mismatch is not otherwise fully counteracted.

(8) 20See also—

(a) section 259BB for the meaning of “payment”, “quasi-
payment”, “payment period”, “relevant deduction”, “payer”
and “payee”;

(b) section 259BE for the meaning of “hybrid entity”, “investor”
25and “investor jurisdiction”.

Application of Chapter
259GA Circumstances in which the Chapter applies

(1) This Chapter applies if conditions A to E are met.

(2) Condition A is that a payment or quasi-payment is made under, or
30in connection with, an arrangement.

(3) Condition B is that a payee is a hybrid entity (a “hybrid payee”).

(4) Condition C is that—

(a) the payer is within the charge to corporation tax for the
payment period,

(b) 35an investor in a hybrid payee is within the charge to
corporation tax for an accounting period some or all of which
falls within the payment period, or

(c) a hybrid payee is a limited liability partnership.

(5) Condition D is that it is reasonable to suppose that, disregarding the
40provisions mentioned in subsection (6), there would be a hybrid
payee deduction/non-inclusion mismatch in relation to the payment
or quasi-payment (see section 259GB).

(6) The provisions are—

(a) this Chapter and Chapters 8 to 10, and

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(b) any equivalent provision under the law of a territory outside
the United Kingdom.

(7) Condition E is that—

(a) it is a quasi-payment that is made as mentioned in subsection
5(2) and the payer is also a hybrid payee (see section 259BB(7)),

(b) the payer and a hybrid payee or an investor in a hybrid payee
are in the same control group (see section 259NA) at any time
in the period—

(i) beginning with the day on which the arrangement
10mentioned in subsection (2) is made, and

(ii) ending with the last day of the payment period, or

(c) that arrangement is a structured arrangement.

(8) The arrangement is “structured” if it is reasonable to suppose that—

(a) the arrangement is designed to secure a hybrid payee
15deduction/non-inclusion mismatch, or

(b) the terms of the arrangement share the economic benefit of
the mismatch between the parties to the arrangement or
otherwise reflect the fact that the mismatch is expected to
arise.

(9) 20The arrangement may be designed to secure a hybrid payee
deduction/non-inclusion mismatch despite also being designed to
secure any commercial or other objective.

(10) The following provisions contain provision for the counteraction of
the hybrid payee deduction/non-inclusion mismatch—

(a) 25section 259GC (cases where the payer is within the charge to
corporation tax for the payment period),

(b) section 259GD (cases where an investor in a hybrid payee is
within the charge to corporation tax), and

(c) section 259GE (cases where a hybrid payee is a limited
30liability partnership).

259GB Hybrid payee deduction/non-inclusion mismatches and their extent

(1) There is a “hybrid payee deduction/non-inclusion mismatch”, in
relation to a payment or quasi-payment, if—

(a) the relevant deduction exceeds the sum of the amounts of
35ordinary income that, by reason of the payment or quasi-
payment, arise to each payee for a permitted taxable period,
and

(b) all or part of that excess arises by reason of one or more
payees being hybrid entities.

(2) 40The extent of the hybrid payee deduction/non-inclusion mismatch is
equal to the excess that arises as mentioned in subsection (1)(b).

(3) For the purposes of subsection (1)(b)

(a) it does not matter whether the excess or part arises for
another reason as well (even if it would have arisen for that
45other reason regardless of whether any payees are hybrid
entities), and

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(b) an excess or part of an excess is to be taken to arise by reason
of one or more payees being hybrid entities (so far as would
not otherwise be the case) if, on making such of the relevant
assumptions in relation to each payee that is a hybrid entity
5as apply in relation to that payee (see subsection (4)), it could
arise by reason of one or more payees being hybrid entities.

(4) These are the “relevant assumptions”—

(a) where a payee is not within the charge to a tax under the law
of a payee jurisdiction because the payee benefits from an
10exclusion, immunity, exemption or relief (however
described) under that law, assume that the exclusion,
immunity, exemption or relief does not apply;

(b) where an amount of income is not included in the ordinary
income of a payee for the purposes of a tax charged under the
15law of a payee jurisdiction because the payment or quasi-
payment is not made in connection with a business carried on
by the payee in that jurisdiction, assume that the payment or
quasi-payment is made in connection with such a business;

(c) where a payee is not within the charge to a tax under the law
20of any territory because there is no territory where the payee
is—

(i) resident for the purposes of a tax charged under the
law of that territory, or

(ii) within the charge to a tax under the law of that
25territory as a result of having a permanent
establishment in that territory,

assume that the payee is a company that is resident for tax
purposes, and carries on a business in connection with which
the payment or quasi-payment is made, in the United
30Kingdom.

(5) A taxable period of a payee is “permitted” in relation to an amount
of ordinary income that arises as a result of the payment or quasi-
payment if—

(a) the period begins before the end of 12 months after the end of
35the payment period, or

(b) where the period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to the amount of ordinary income,
and

(ii) 40it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.

Counteraction
259GC Counteraction where the payer is within the charge to corporation tax
45for the payment period

(1) This section applies where the payer is within the charge to
corporation tax for the payment period.

(2) For corporation tax purposes, the relevant deduction that may be
deducted from the payer’s income for the payment period is reduced

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by an amount equal to the hybrid payee deduction/non-inclusion
mismatch mentioned in section 259GA(5).

259GD Counteraction where the investor is within the charge to corporation
tax

(1) 5This section applies in relation to an investor in a hybrid payee
where—

(a) the investor is within the charge to corporation tax for an
accounting period some or all of which falls within the
payment period, and

(b) 10it is reasonable to suppose that—

(i) neither section 259GC nor any equivalent provision
under the law of a territory outside the United
Kingdom applies, or

(ii) a provision of the law of a territory outside the United
15Kingdom that is equivalent to section 259GC applies,
but does not fully counteract the hybrid payee
deduction/non-inclusion mismatch mentioned in
section 259GA(5).

(2) A provision of the law of a territory outside the United Kingdom that
20is equivalent to section 259GC does not fully counteract that
mismatch if (and only if)—

(a) it does not reduce the relevant deduction by the full amount
of the mismatch, and

(b) the payer is still able to deduct some of the relevant
25deduction from income in calculating taxable profits.

(3) In this section “the relevant amount” is—

(a) in a case where subsection (1)(b)(i) applies, an amount equal
to the hybrid payee deduction/non-inclusion mismatch, or

(b) in a case where subsection (1)(b)(ii) applies, the lesser of—

(i) 30the amount by which that mismatch exceeds the
amount by which it is reasonable to suppose the
relevant deduction is reduced by a provision of the
law of a territory outside the United Kingdom that is
equivalent to section 259GC, and

(ii) 35the amount of the relevant deduction that may still be
deducted as mentioned in subsection (2)(b).

(4) If the investor is the only investor in the hybrid payee, the
appropriate proportion of the relevant amount is to be treated as
income arising to the investor for the counteraction period.

(5) 40If there is more than one investor in the hybrid payee, an amount
equal to the investor’s share of the appropriate proportion of the
relevant amount is to be treated as income arising to the investor for
the counteraction period.

(6) For the purposes of subsections (4) and (5) the “appropriate
45proportion of the relevant amount”—

(a) if the hybrid payee is the only hybrid payee, is all of the
relevant amount, or

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(b) if there is more than one hybrid payee, is the proportion of
the relevant amount apportioned to the hybrid payee upon
an apportionment of that amount between all the hybrid
payees on a just and reasonable basis having regard (in
5particular) to—

(i) any arrangements as to profit sharing that may exist
between some or all of the payees, and

(ii) the extent to which it is reasonable to suppose that the
hybrid payee deduction/non-inclusion mismatch
10mentioned in section 259GA(5) arises by reason of
each hybrid payee being a hybrid entity.

(7) The investor’s share of the appropriate proportion of the relevant
amount is to be determined by apportioning that proportion of that
amount between all the investors in the hybrid payee on a just and
15reasonable basis, having regard (in particular) to any arrangements
as to profit sharing that may exist between some or all of those
investors.

(8) An amount of income that is treated as arising under subsection (4)
or (5) is chargeable under Chapter 8 of Part 10 of CTA 2009 (income
20not otherwise charged) (despite section 979(23) of that Act).

(9) The “counteraction period” means—

(a) if an accounting period of the investor coincides with the
payment period, that accounting period, or

(b) otherwise, the first accounting period of the investor that is
25wholly or partly within the payment period.

259GE Counteraction where a hybrid payee is an LLP

(1) This section applies in relation to a hybrid payee where the hybrid
payee is a limited liability partnership and it is reasonable to suppose
that—

(a) 30none of the following provisions applies—

(i) section 259GC;

(ii) section 259GD;

(iii) any provision under the law of a territory outside the
United Kingdom that is equivalent to either of those
35sections, or

(b) one or more of those provisions apply, but the hybrid payee
deduction/non-inclusion mismatch mentioned in section
259GA(5) is not fully counteracted.

(2) The mismatch is not fully counteracted if (and only if), after the
40application of such of those provisions as apply—

(a) the relevant deduction is not reduced by the full amount of
the mismatch,

(b) the payer is still able to deduct some of the relevant
deduction from income in calculating taxable profits, and

(c) 45the lesser of—

(i) the difference between the amount of the mismatch
and the amount by which it is reasonable to suppose
the relevant deduction is reduced, and

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(ii) the amount of the relevant deduction that may still be
deducted,

exceeds the sum of any amounts of income treated as arising
under section 259GD or any equivalent provision under the
5law of a territory outside the United Kingdom.

(3) In this section “the relevant amount” is—

(a) in a case where subsection (1)(a) applies, an amount equal to
the hybrid payee deduction/non-inclusion mismatch
mentioned in section 259GA(5), or

(b) 10in a case where subsection (1)(b) applies, an amount equal to
the excess mentioned in subsection (2)(c).

(4) If the hybrid payee is the only hybrid payee, an amount equal to the
relevant amount is to be treated as income arising to the hybrid
payee on the last day of the payment period.

(5) 15If there is more than one hybrid payee, an amount equal to the
hybrid payee’s share of the relevant amount is to be treated as
income arising to the hybrid payee on the last day of the payment
period.

(6) The hybrid payee’s share of the relevant amount is to be determined
20by apportioning that amount between all the hybrid payees on a just
and reasonable basis, having regard (in particular) to—

(a) any arrangements as to profit sharing that may exist between
some or all of the payees, and

(b) the extent to which it is reasonable to suppose that the hybrid
25payee deduction/non-inclusion mismatch mentioned in
section 259GA(5) arises by reason of each hybrid payee being
a hybrid entity.

(7) An amount of income that is treated as arising under subsection (4)
or (5) is chargeable to corporation tax on the hybrid payee (as
30opposed to being chargeable to tax on any of its members) under
Chapter 8 of Part 10 of CTA 2009 (income not otherwise charged)
(despite section 979(2) of that Act).

(8) Section 863 of ITTOIA 2005 (treatment of certain limited liability
partnerships for income tax purposes) and section 1273 of CTA 2009
35(treatment of certain limited liability partnerships for corporation tax
purposes) are disapplied in relation to the hybrid payee to the extent
necessary for the purposes of subsection (7).

(9) This section is to be disregarded for the purposes of determining
whether the hybrid payee is within the charge to corporation tax for
40the purposes of any other provision of this Part, except section 259M
(anti-avoidance).