The Non-resident Insurance Companies Regulations 2003 (SI2003/2714) introduced a new concept of ‘free assets’. It means the amount by which the fair value (the amount obtainable on a sale to an independent person) of a permanent establishment’s assets exceeds the aggregate of its technical provisions and loan capital. ‘Technical provisions’ means, for a general insurance company, its
but not its equalisation provisions.
Each of these terms takes its meaning from company law -
Liabilities Items C 1 to 4 and 6 in the balance sheet format set
out in section B of Schedule 3 to SI2008/410, together with notes
20, 22 and 25.
The effect is that if the permanent establishment’s
actual free assets (which may be nil) fall short of the free assets
given by
then the company is treated as having additional investment
return profits from the excess assets. Assets attributed to the
permanent establishment must be of a type and nature that an
independent enterprise would hold, and be assets that the company
actually does hold, even though not at, or directly attributable
to, the permanent establishment.
GIM10180 explains the traditional
methods used for this purpose. They are broadly consistent with
regulation 3 and ICTA88/S11AA (2) – Method 1 where the
activities of the permanent establishment are similar in kind to
the business of the entity as a whole, and Method 2 more generally.
GIM10210+ explains the position
following the adoption of Part IV the OECD Report on the
Attribution of Profits to Permanent Establishments.
Existing agreements reached on the calculation of
arm’s length investment return will not automatically be
disturbed on the basis of the OECD Report. But the risk assessment
process will have regard to the accuracy of existing approaches in
the light of the methods discussed there.
