CTM80325 - Groups: group relief: UK permanent establishment of non-resident company: tax relief in a foreign jurisdiction: credit and exemption countries

ICTA88/S403D (1)(c)

There can be no surrender as group relief, of a loss or other amount of a UK permanent establishment of a non-resident company, if tax relief may be given in a foreign jurisdiction for any part of the loss etc. ( CTM80315).

In operating this rule, whether the foreign country operates a credit system or an exemption system for overseas permanent establishment income is relevant.

Broadly, a credit system is one like that of the UK, where the world income, including income of overseas permanent establishments, of residents is subject to tax in the country of residence, and double taxation credit relief is given for the overseas tax paid on the permanent establishment income. An exemption system, on the other hand, is one where the country of residence exempts the income from overseas permanent establishments from tax.

Companies in jurisdictions which operate a credit system in relation to UK permanent establishment income and which allow UK permanent establishment losses to reduce the companies total taxable profits, or to carry them forward for relief against future profits, will not generally be able to surrender the losses as group relief. For an exception to this where it is clear that the permanent establishment losses can never be relieved in the foreign jurisdiction see the penultimate paragraph of CTM80320.

Generally, group relief is available where the company is resident in a jurisdiction that operates an exemption system. However this will not apply where:

• the overseas jurisdiction allows consolidation of the losses of the UK permanent establishment with profits of a parent or other group members and such consolidation takes place, or
• the overseas jurisdiction gives relief for overseas permanent establishment losses, but that relief is subject to subsequent recoupment against future permanent establishment profits; no surrender of the losses as group relief is possible, even if the foreign jurisdiction later recoups the losses.

Some overseas jurisdictions give relief for UK permanent establishment losses only to the extent that they exceed non-taxable other income of the company. For instance, foreign permanent establishment losses may first have to be set off against non-taxable foreign permanent establishment income before any set-off is allowed against the company’s taxable profits. In such a case, whether the UK permanent establishment loss can be surrendered as group relief will depend on whether any part of the UK permanent establishment loss is set off against taxable profits in the overseas jurisdiction. If so (for instance because the UK permanent establishment losses exceed non-taxable foreign permanent establishment income) the loss cannot be surrendered.

TB49 contains an article with information about various countries as at October 2000. Note that information may be superseded by later legislation of the country concerned, and it is known that the information about Germany is obsolete. Losses of a UK permanent establishment of a German company are not generally deductible from the company’s profits for the purposes of German Federal tax. So such losses will be available for group relief unless any tax at a provincial or municipal level ( CTM80335) takes account of the UK permanent establishment losses, or those losses have been included in a consolidated group tax computation (Organschaft) for German tax purposes.