Foreign branch exemption—anti-diversion after 1 January 2013
Produced in partnership with Robert O'Hare and Jeremy Cape of Squire Patton Boggs (UK) LLP
Foreign branch exemption—anti-diversion after 1 January 2013

The following Tax guidance note Produced in partnership with Robert O'Hare and Jeremy Cape of Squire Patton Boggs (UK) LLP provides comprehensive and up to date legal information covering:

  • Foreign branch exemption—anti-diversion after 1 January 2013
  • Purpose of the foreign branch exemption anti-diversion rule
  • Scope and effect of the anti-diversion rule
  • What are diverted profits?
  • Diverted profits gateway
  • Exemptions from the anti-diversion rule

This note only deals with the foreign branch exemption anti-diversion rules that apply to accounting periods commencing on or after 1 January 2013.

For a description of the anti-diversion rules that applied in relation to periods commencing before that date, and now of largely historic interest only, see Practice Note: Foreign branch exemption—anti-diversion before 1 January 2013 [Archived].

Purpose of the foreign branch exemption anti-diversion rule

The availability of the foreign branch exemption is subject to an anti-avoidance rule aimed at preventing a UK resident company from diverting profits away from the UK—ie a UK company is prevented from making arrangements to ensure that its profits arise in a foreign permanent establishment (PE) in respect of which it has elected for the foreign branch exemption to apply (where the profits will be exempt from tax) rather than in the UK (where they would be taxable).

This anti-avoidance rule is known as the foreign branch exemption anti-diversion rule.

The anti-diversion rule is broadly based on, and aligned with, the UK’s CFC rules and incorporates many of the same principles and terms. In the same way that the CFC regime is designed to prevent the diversion of corporate profits from the UK into low tax territories, the foreign branch exemption anti-diversion rule is designed to prevent the diversion of profits through an exempt PE.

For an