Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 2 — Charge to corporation tax: basic provisions
Chapter 4 — Non-UK resident companies: chargeable profits
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(2)
For the purposes of the Corporation Tax Acts the company is—
(a)
resident outside the United Kingdom, and
(b)
non-UK resident.
(3)
Subsection (2) applies even if the company would otherwise be UK resident for
the purposes of the Corporation Tax Acts by virtue of section 14, 15, 16 or 17 or
5
another rule of law.
(4)
To decide whether a company is treated as mentioned in subsection (1)(a) and
(b) for the purposes of any double taxation arrangements, assume that—
(a)
the company has made a claim for relief under the arrangements, and
(b)
in consequence of the claim it falls to be decided whether the company
10
is to be treated as mentioned in subsection (1)(a) and (b) for the
purposes of the arrangements.
Chapter 4
Non-UK resident companies: chargeable profits
Chargeable profits
15
19
Chargeable profits
(1)
This section applies if a non-UK resident company carries on a trade in the
United Kingdom through a permanent establishment in the United Kingdom.
(2)
The company’s chargeable profits are its profits that are—
(a)
of a type mentioned in subsection (3), and
20
(b)
attributable to the permanent establishment in accordance with
sections 20 to 32.
(3)
The types of profits referred to in subsection (2)(a) are—
(a)
trading income arising directly or indirectly through or from the
establishment,
25
(b)
income from property or rights used by, or held by or for, the
establishment, and
(c)
chargeable gains falling within section 10B of TCGA 1992 (non-resident
company with United Kingdom permanent establishment)—
(i)
as a result of assets being used in or for the purposes of the trade
30
carried on by the company through the establishment, or
(ii)
as a result of assets being used or held for the purposes of the
establishment or being acquired for use by or for the purposes
of the establishment.
20
Profits attributable to permanent establishment: introduction
35
(1)
Sections 21 to 32 apply for the purpose of determining the amount of profits of
a non-UK resident company that are attributable to a permanent establishment
of the company in the United Kingdom.
(2)
Sections 21 to 28 contain provision about the separate enterprise principle.
(3)
See also paragraph 5A of Schedule 26 to FA 2003 (non-resident companies:
40
transactions through broker, investment manager or Lloyd’s agent), which

Corporation Tax Bill
Part 2 — Charge to corporation tax: basic provisions
Chapter 4 — Non-UK resident companies: chargeable profits
9

provides for profits of certain investment transactions to be disregarded in
determining the amount of profits attributable to a permanent establishment.
The separate enterprise principle
21
The separate enterprise principle
(1)
The profits of the non-UK resident company that are attributable to the
5
permanent establishment are those that the establishment 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 non-UK resident company.
10
(2)
In applying subsection (1) assume that—
(a)
the permanent establishment has the same credit rating as the non-UK
resident company, and
(b)
the permanent establishment has such equity and loan capital as it
could reasonably be expected to have in the circumstances specified in
15
that subsection.
(3)
In sections 22 to 28 the principle in subsection (1) (read with subsection (2)) is
called “the separate enterprise principle”.
22
Transactions treated as being on arm’s length terms
In accordance with the separate enterprise principle, transactions between the
20
permanent establishment and any other part of the non-UK resident company
are treated as taking place on such terms as would have been agreed between
parties dealing at arm’s length.
23
Provision of goods or services for permanent establishment
(1)
This section applies if the non-UK resident company provides the permanent
25
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.
(3)
If not, the matter is dealt with as an expense incurred by the non-UK resident
30
company for the purposes of the permanent establishment (see section 29).
24
Application to insurance companies
(1)
The Commissioners for Her Majesty’s Revenue and Customs may by
regulations make provision about the application of section 21(1) to insurance
companies.
35
(2)
The regulations may, in particular, make provision in place of section 21(2)(b)
as to the basis on which, in the case of insurance companies, capital is to be
attributed to a permanent establishment in the United Kingdom.
(3)
In this section “insurance company” has the meaning given by section 431(2) of
ICTA.
40

Corporation Tax Bill
Part 2 — Charge to corporation tax: basic provisions
Chapter 4 — Non-UK resident companies: chargeable profits
10

The separate enterprise principle: application to non-UK resident banks
25
Non-UK resident banks: introduction
(1)
Sections 26 to 28 contain provision in relation to the application of the separate
enterprise principle if the non-UK resident company is a bank.
(2)
Nothing in sections 26 to 28 is to be read as preventing similar principles to
5
those provided for in those sections from applying when the separate
enterprise principle is applied to a non-UK resident company that is not a
bank.
(3)
In this section and those sections “bank” has the meaning given by section
840A of ICTA.
10
26
Transfer of financial assets
(1)
This section applies if—
(a)
the non-UK resident company is a bank, and
(b)
there is a transfer of a loan or other financial asset between the
permanent establishment and any other part of the company.
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(2)
In accordance with the separate enterprise principle, the transfer is recognised
only if it would have taken place between independent enterprises.
(3)
The transfer is not recognised if it cannot reasonably be considered that it is
carried out for valid commercial reasons.
(4)
For this purpose the obtaining of a tax advantage is not a valid commercial
20
reason.
27
Loans: attribution of financial assets and profits arising
(1)
This section applies if the non-UK resident company—
(a)
is a bank, and
(b)
makes a loan or has another financial asset.
25
(2)
In accordance with the separate enterprise principle, the loan or other financial
asset, and profits arising from it, are attributed to the permanent establishment
so far as they can reasonably be regarded as having been generated by the
activities of the permanent establishment.
(3)
For the purposes of subsection (2), particular account is to be taken of the extent
30
to which the permanent establishment is responsible for—
(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, and
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(d)
deciding whether, and if so on what conditions, to make or extend the
loan.
(4)
For those purposes, 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,
40
and

Corporation Tax Bill
Part 2 — Charge to corporation tax: basic provisions
Chapter 4 — Non-UK resident companies: chargeable profits
11

(b)
administering the loan (including handling and monitoring the service
of it) and holding and controlling any securities pledged.
(5)
References in this section to a financial asset include any financial risk in
relation to a loan, or potential loan, if—
(a)
the financial risk is capable of giving rise to fees or other receipts, and
5
(b)
the holding of capital is required for the financial risk (or would be
required if the transaction were between parties at arm’s length).
28
Borrowing: permanent establishment acting as agent or intermediary
(1)
This section applies if—
(a)
the non-UK resident company is a bank, and
10
(b)
the permanent establishment borrows funds for the purposes of
another part of the company and (in relation to that borrowing) acts
only as an agent or intermediary.
(2)
In accordance with the separate enterprise principle—
(a)
the profits attributable to the permanent establishment, and
15
(b)
the capital attributable to the permanent establishment under section
21(2)(b),

are to be those appropriate in the case of an agent acting at arm’s length, taking
into account the risks and costs borne by the establishment.
Rules about deductions
20
29
Allowable deductions
(1)
A deduction is allowed for any allowable expenses incurred for the purposes
of the permanent establishment.
(2)
Expenses incurred for the purposes of the permanent establishment include
executive and general administrative expenses so incurred, whether in the
25
United Kingdom or elsewhere.
(3)
It does not matter whether the expenses are incurred by, or reimbursed by, the
permanent establishment.
(4)
The amount of expenses to be taken into account under subsection (1) is the
actual cost to the non-UK resident company.
30
(5)
“Allowable expenses” means expenses of a kind in respect of which a
deduction would be allowed for corporation tax purposes if incurred by a UK
resident company.
30
Restriction on deductions: costs
No deduction is allowed for costs in excess of those which would have been
35
incurred on the assumptions in section 21(2).
31
Restriction on deductions: payments in respect of intangible assets
(1)
No deduction is allowed for royalties paid, or other similar payments made, by
the permanent establishment to any other part of the non-UK resident
company in respect of the use of intangible assets held by the company.
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Corporation Tax Bill
Part 3 — Trading income
Chapter 1 — Introduction
12

(2)
This does not prevent a deduction for any contribution by the permanent
establishment to the costs of creation of an intangible asset.
(3)
In this section “intangible asset” has the meaning it has for accounting
purposes, and includes any intellectual property (as defined in section 712(3)).
32
Restriction on deductions: interest or other financing costs
5
(1)
No deduction is allowed for payments of interest or other financing costs by
the permanent establishment to any other part of the non-UK resident
company.
(2)
But the restriction in subsection (1) does not apply to interest or other financing
costs that are payable in respect of borrowing by the permanent establishment
10
in the ordinary course of a financial business carried on by it.
(3)
In subsection (2) “financial business” means any of the following—
(a)
banking, deposit-taking, money-lending or debt-factoring, or a
business similar to any of those, and
(b)
dealing in commodity or financial futures.
15
Chapter 5
Supplementary
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Trade includes office
In this Part, except in so far as the context otherwise requires—
(a)
references to a trade include an office, and
20
(b)
references to carrying on a trade include holding an office.
Part 3
Trading income
Chapter 1
Introduction
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34
Overview of Part
(1)
This Part applies the charge to corporation tax on income to—
(a)
the profits of a trade (see Chapter 2), and
(b)
post-cessation receipts arising from a trade (see Chapter 15).
(2)
Chapters 3 to 14 contain rules relevant to tax under this Part.
30
(3)
Chapter 16 contains rules that give priority to provisions outside this Part in
relation to certain matters that fall within it.
(4)
This Part needs to be read with Parts 19 (general exemptions) and 20 (general
calculation rules).

Corporation Tax Bill
Part 3 — Trading income
Chapter 2 — Income taxed as trade profits
13

Chapter 2
Income taxed as trade profits
Charge to tax on trade profits
35
Charge to tax on trade profits
The charge to corporation tax on income applies to the profits of a trade.
5
Trades and trade profits
36
Farming and market gardening
(1)
Farming or market gardening in the United Kingdom is treated for corporation
tax purposes as the carrying on of a trade or part of a trade (whether or not the
land is managed on a commercial basis and with a view to the realisation of
10
profits).
(2)
All farming in the United Kingdom carried on by a company, other than
farming carried on as part of another trade, is treated for corporation tax
purposes as one trade.
(3)
This section does not apply to farming or market gardening by an insurance
15
company on land which is an asset of the company’s long-term insurance fund.
(4)
In the case of farming carried on by a company as a member of a firm, this rule
is explained by section 1270(1).
37
Commercial occupation of woodlands
(1)
The commercial occupation of woodlands in the United Kingdom is not a trade
20
or part of a trade for any corporation tax purpose.
(2)
For this purpose the occupation of woodlands is commercial if the woodlands
are managed—
(a)
on a commercial basis, and
(b)
with a view to the realisation of profits.
25
(3)
See also sections 208 and 980 (which, when read with this section, secure that
profits or losses from the commercial occupation of woodlands in the United
Kingdom are ignored for corporation tax purposes).
38
Commercial occupation of land other than woodlands
(1)
The commercial occupation of land in the United Kingdom is treated for
30
corporation tax purposes as the carrying on of a trade or part of a trade.
(2)
For this purpose the occupation of land is commercial if the land is managed—
(a)
on a commercial basis, and
(b)
with a view to the realisation of profits.
(3)
This section does not apply—
35
(a)
to farming or market gardening (which is dealt with by section 36),
(b)
if the land is being prepared for forestry purposes,

Corporation Tax Bill
Part 3 — Trading income
Chapter 2 — Income taxed as trade profits
14

(c)
if the land comprises woodlands (which is dealt with by section 37), or
(d)
to the occupation by an insurance company of land which is an asset of
the company’s long-term insurance fund.
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Profits of mines, quarries and other concerns
(1)
Profits or losses arising out of land in the case of a concern to which this section
5
applies are calculated as if the concern were a trade.
(2)
Any profits arising out of the land are treated for the purposes of clause 35 as
profits of a trade.
(3)
Any losses arising out of the land are treated for the purposes of Chapters 2 and
4 of Part 10 of ICTA (loss relief and group relief) as losses of a trade carried on
10
in the United Kingdom.
(4)
The concerns to which this section applies are—
(a)
mines and quarries (including gravel pits, sand pits and brickfields),
(b)
ironworks, gasworks, salt springs or works, alum mines or works,
waterworks and streams of water,
15
(c)
canals, inland navigation, docks and drains or levels,
(d)
rights of fishing,
(e)
rights of markets and fairs, tolls, bridges and ferries,
(f)
railways and other kinds of way, and
(g)
a concern of the same kind as one specified in paragraph (b), (c), (d) or
20
(e).
(5)
But this section does not apply to a concern—
(a)
if it is carried on by an insurance company on land which is an asset of
the company’s long-term insurance fund, or
(b)
if section 38 (commercial occupation of land other than woodlands)
25
applies to the occupation of the land out of which the profits or losses
arise.
40
Credit unions
(1)
If a credit union—
(a)
makes loans to its members, or
30
(b)
invests its surplus funds (by placing them on deposit or otherwise),

that is not treated, in calculating the credit union’s income, as the carrying on
of a trade or part of a trade.
(2)
In this section “surplus funds” means funds not immediately required for the
credit union’s purposes.
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Starting and ceasing to trade
41
Effect of company starting or ceasing to be within charge to corporation tax
(1)
This section applies if a company starts or ceases to be within the charge to
corporation tax in respect of a trade.
(2)
The company is treated for the purposes of this Part—
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(a)
as starting to carry on the trade when it starts to be within the charge, or