ICTA88/S11 and Article 7(2) of the OECD Model suggest that an amount of investment yield on assets over and above the minimum solvency margin (see GIM10150) should be attributed to a UK branch/permanent establishment. The yield on investment assets is within section 11, as trading income or profits. Circumstances where additional attribution may be needed include:
For enterprises such as banks the question is whether, comparing
liabilities which bear interest and equity capital which does not,
what proportion of each would a stand-alone enterprise hold. If the
amount of interest bearing capital is higher than would be held at
arm’s length, the costs associated with that loan capital are
disallowed as representing a return on equity.
For an insurer, the question is different. An insurer does not rely on loan capital. Its liabilities largely comprise technical provisions – often referred to as reserves – additions to which are deductible trading expenses. An insurer’s equivalent to equity capital is represented by the excess of its assets over liabilities – GIM10123. This excess consists of regulatory capital – the minimum solvency margin etc, and other economic capital – as required by both the regulator and exposure to the market. See General Reinsurance Co. Ltd v Tomlinson 48TC81, where it is stated, on the separate enterprise/arm’s length hypothesis required by the OECD Model, that
“…it would be necessary for [the non-resident company] to have a portfolio of investments inorder to carry on its business.’’
A successful insurer will strike the best balance between maintaining the capital necessary to sustain market confidence and to satisfy the regulator, and keeping capital service costs down.