GIM10220 - Non-resident insurers: the scope of UK taxing rights: accounting periods beginning on or after 1 January 2003: section 11 ICTA & Article 7 OECD Model: changes in FA 2003: “independent enterprise”
For all non-resident companies, section 11AA(2) (inserted by
FA03/S149) sets out the “independent enterprise”
hypothesis in Article 7(2) as a provision of UK law. Section
11AA(3) explains how the assumption is that the hypothesis should
be applied where the question arises, as it does in particular for
banks, whether, given a level of liabilities which bear interest
and liabilities which do not (“equity capital”), 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.
Section 11AA(5) provides for a power to make regulations to
apply section 11AA(2) to insurance companies. The Non-resident
Insurance Companies Regulations 2003 (SI2003 No.2714) came into
force on 13 November 2003 and have effect in relation to accounting
periods beginning on or after 1 January 2003. Section 11AA(5)
recognises that with an insurance company, it is not a question of
determining what proportions of the given total capital of a PE are
equity and loan capital respectively, but more a question of
determining, given a level of liabilities in the main technical
provisions, what amount and type of assets an independent
enterprise would hold.
Where unusually an insurance company’s PE has loan
capital attributed to it, then section 11AA(3) will be applied to
the PE’s capital in the same way as it is for any other
company, and here credit rating may be relevant.
Regulation 3 of SI2003/2714 sets out the way that the
independent enterprise hypothesis is to be applied to an insurance
company. The hypothesis that the profits of the PE are those which
an independent enterprise would have requires it to be assumed that
the PE has free assets of the same amount that an independent
enterprise engaged in the same or similar activities under the same
or similar conditions, dealing wholly independently with the
non-resident company, would have.
