D2.707 Liability to DPT

Corporate tax
Corporate tax | Commentary

D2.707 Liability to DPT

Corporate tax | Commentary

D2.707 Liability to DPT

This rule targets companies which are considered to have diverted profits from the UK by involving entities or transactions lacking economic substance. It does not apply though where both parties to the transaction(s) are small or medium sized enterprises (D2.705)1.

The detailed conditions that must be met are listed in the legislation and broadly comprise the following2:


    (a)     the company (C) is UK resident, or a non-UK resident company trading in the UK through a PE such that if it were treated as UK resident standalone company it would meet conditions (b) to (e)


    (b)     provision has been made by means of a transaction(s)3 between C and another person (P), who may be resident or non-resident. HMRC guidance indicates that 'transaction' and 'series of transactions' have the meanings given in the transfer pricing rules (B4.122). Consequently, a series of transactions does not require that two persons are party to the same transaction; the guidance extends the phrase to include arrangements 'through a series of transactions some of which may involve third parties'4


    (c)     the participation condition is met


    (d)     there is an effective mismatch outcome between C and P that is not an excepted loan relationship outcome; and


    (e)     the insufficient economic substance condition is met

Due to concerns that in certain circumstances profits that are subject to DPT may also be subject to corporation tax (ie a double tax charge could arise), legislation was included in FA 2019 which explicitly states that corporation tax is not chargeable

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