INTM630510 - Royalty Withholding: UK Source: Interaction with Diverted Profits Tax: Overview

FA15/S86 sets out the circumstances in which there is an ‘avoided permanent establishment’ for the purposes of the Diverted Profits Tax (DPT) legislation. Where an avoided PE exists, then FA15/S88-91 contain the provisions for calculating the profits attributable to the avoided PE – the ‘notional PE profits’.

FA15/S88(5)(b) provides that notional PE profits include an amount equal to royalties paid by the foreign company during the period that avoid the application of ITA07/S906. FA15/S88(5A) determines that a payment has avoided the application of ITA07/S906 for these purposes if ITA07/S906 does not apply to the payment, but it would have applied if the payment had been made through an actual PE.

Banking surcharge profits

FA15/S79(6) provides that any amount included in notional PE profits by FA15/S88(5)(b) is not to be included in the calculation of profits that would have been within the banking surcharge. The effect is that such payments are charged at the DPT rate of 25% and not the 33% rate applicable to notional PE profits that would have been subject to the surcharge.