DPT ― avoidance of UK permanent establishment

By Tolley in association with Paul Bowes

The following Corporation Tax guidance note 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 exemptions
  • Finance Act 2016 amendments
  • Next steps
  • Interaction with withholding tax on royalty payments

This note has been updated in line with HMRC’s guidance  published in December 2018, which supersedes HMRC’s interim guidance published in March 2015 and updated in November 2015.

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:

  • the foreign company’s total UK-related sales revenues in a 12-month accounting period do not exceed £10 million,

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