No deductions should normally be allowed for notional interest
or royalties charged by the enterprise to the permanent
establishment, in respect of loans made to, or patent rights etc.
assigned to, the permanent establishment since such expenditure
will not have been incurred.
The argument is sometimes put to the Revenue that there
should be allowed in calculating the profits of the permanent
establishment a rent for a building which it occupies and which is
owned by the company being the rent which would have been paid to
the head office had branch and head office been independent. Such
arguments are wrong. The Article is concerned with the division of
the profits. There is one company and one profit. The company does
not pay a rent and notional expenses cannot be taken into account.
Similarly no deduction should be made for any notional management
fee or commission for services provided by the enterprise for its
permanent establishment.
A similar argument applies to interest paid. We do not allow
interest paid by the branch to its head office either in domestic
law or under the business profits Article. But if the company
itself has incurred an interest charge and some or all of the loan
on which the interest is paid has been used to fund the branch, we
would allow an appropriate part of the interest provided it
qualifies under the normal rules for relief for interest. We would
treat in the same way interest paid by the branch on a loan which
the branch itself had obtained for its own use. If however the
enterprise pays interest etc to a third party which is in part
attributable to the activities of the permanent establishment, then
a reasonable proportion of such interest can be deducted.
