The following Tax guidance note provides comprehensive and up to date legal information covering:
ARCHIVED: This Practice Note has been archived and is not maintained.
This note deals only with the anti-diversion rule that has effect for accounting periods beginning before 1 January 2013. For the rule that applies to periods after that date, see: Foreign branch exemption—anti-diversion after 1 January 2013
The foreign branch exemption is subject to an anti-avoidance rule aimed at preventing a UK resident company from diverting profits from the UK, ie to stop a UK company that tries to ensure that its profits arise in a foreign PE (and are therefore exempt) rather than in the UK (where they would be taxable). This rule is known as the anti-diversion rule.
The foreign branch exemption was introduced, alongside the interim improvements to the CFC regime, by schedule 13 to Finance Act 2011 (FA 2011). Because the foreign branch exemption was introduced during the progress of full CFC reform, the UK government considered the anti-diversion rules in the current version of the foreign branch exemption:
to be temporary, and
as a result, to be reduced in length and complexity
The fully revised anti-diversion rule is introduced by part 2 of Schedule 20 to Finance Act 2012, that has effect for accounting periods beginning on or after 1 January 2013. The broad outline of the new anti-diversion rule is:
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