DPT ― avoidance of UK permanent establishment

Produced by Tolley in association with Paul Bowes

The following Corporation Tax guidance note Produced by Tolley in association with Paul Bowes provides comprehensive and up to date tax information covering:

  • DPT ― avoidance of UK permanent establishment
  • The key conditions ― FA 2015, s 86
  • Definition of key terms
  • The mismatch condition
  • The tax avoidance condition
  • The exemptions
  • Limited UK-related sales or expenses ― FA 2015, s 86(1)(d)
  • Excepted PE ― FA 2015, s 86(1)(g))
  • Exemption for SMEs ― FA 2015, s 86(1)(h)
  • Finance Act 2016 amendments
  • More...

DPT ― avoidance of UK permanent establishment

This guidance note sets out the circumstances in which a charge to diverted profits tax (DPT) can arise in the context of a non-UK company that avoids creating a UK permanent establishment (PE), under the provisions of FA 2015, s 86. There are a number of significant underlying legal and direct tax issues that need to be considered in analysing what constitutes a PE for this purpose. Please refer to the Permanent establishment guidance note for further details.

To summarise, the main purpose of FA 2015, s 86 is to challenge certain artificial arrangements and to bring them into charge to UK tax. In order to bring the profits arising from such arrangements into charge, FA 2015, s 86 deems there to be a notional PE of the non-resident company in the UK, in the form of the company or person with a UK presence providing related services or generally undertaking related UK activity (referred to as the ‘avoided PE’ under FA 2015, s 86). HMRC must demonstrate that the arrangements were in fact designed to avoid a PE in the UK, and that avoidance of UK corporation tax was a main purpose. This is explained in further detail below.

Broadly speaking, however, a charge to DPT arising under FA 2015, s 86 is limited to cases where there is a substantial level of economic activity in the UK. Consequently, there are three key exemptions which mean that a charge to DPT will not arise under FA 2015, s 86 where:

  1. the foreign company’s total UK-related sales revenues in a 12-month accounting period do not exceed £10 million, and / or the foreign company’s total UK related expenses in a 12-month period do not exceed £1 million (these amounts are proportionately reduced for short accounting periods

  2. the avoided PE is ‘excepted’

  3. both the avoided PE and the foreign company are small or medium-sized enterprises, and the tax avoidance condition is

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