Draft legislation has been published today (25 July 2002) to modernise the taxation of foreign companies operating in the UK through branches. Draft explanatory notes on the measure, announced in the Budget, have also been issued.
The change, to be introduced in the 2003 Finance Bill, will apply to foreign companies' accounting periods starting on or after 1 January 2003. It attributes capital to a UK branch for tax purposes, based on the capital the branch would need if it were an independent, free-standing company operating in the UK, in the same or similar conditions and circumstances as the branch. This will bring the UK closer into line with established international practice, ensuring a level playing field between foreign companies operating through UK branches (mainly banks) and their UK-based competitors.
The change also modernises the terminology used in the current legislation, by referring to "permanent establishments" (which is the internationally-recognised term, and the one used in the UK's double taxation agreements) rather than "branches".
As announced in the Budget ( REV BN 25 ) the legislation, in particular new Section11AA (2) - (5) to be inserted into the Taxes Act 1988, will be construed in accordance with OECD guidance to ensure that the UK is in accord with international consensus that reflects UK agreement. The intention is that this link to OECD guidance will be made explicit by means of regulations but we would welcome views on the best way to achieve this.
We are also considering the potential regulatory impact of this measure and comments on this would be welcome.
Comments on both the draft legislation and the potential regulatory impact should be sent, preferably by e-mail, to
or by post to
Linda Cooke
Revenue Policy, International
2nd Floor, Victory House
30-34 Kingsway
London
WC2B 6ES
to arrive not later than Friday 4th October 2002.
Responses received will be made available, on request, unless respondents
specifically ask for their comments to be treated as confidential.
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