OT19416 - PRT: Appendices

Tax treatment of illustrative agreement companies

OTA75/SCH3/PARA5 provides the machinery for charging PRT on a participator other than a licensee in the field. The licensee company is disregarded with all transactions, expenditure and incomings being dealt with on the X company. This provision was originally included in the 1975 Act at the behest of the substantial number of US companies with UK production operations conducted under illustrative or pass-through agreements. Certain changes in the US tax structure have reduced the attractiveness of these arrangements and since 1976 their use has declined in preference for dual residence by companies.

OTA75/SCH3/PARA5 applies to any agreement or arrangement which a participator in a field enters into whereby ownership of all or part of the participator’s share of oil from the field is transferred to the associated company, which in turn assumes all or part of the participator’s other rights, interests or obligations in the field or related licence. A participator is "associated" with another company if the participator controls or is controlled by that other company or if they are both under the control of the same person or persons. "Control" for this purpose has the meaning given to it by ICTA88/S840.

OTA75/SCH3/PARA5(2) provides that for any chargeable period in which a participator is a party to such an agreement or arrangement the X company (i.e. the other party) is to be treated for all PRT purposes (including the deduction given against CT under ICTA88/S500 for PRT paid) as having been a participator in the field whenever the participator himself was such, including times before the arrangement was made. OTA75/SCH3/PARA5(3) goes on to say that where this is the case anything done by or in relation to the licensee, together with any rights, interest or obligations of the licensee in connection with the fields or licence, are to be attributed for PRT purposes to the X company.

Failure to pay PRT - Para 5(4) Sch 3

Although OTA75/SCH3/PARA5 places the X company in the shoes of the licensee for all purposes of PRT (even where the licensee retains some residual rights or obligations e.g. the liability to pay royalties to the Secretary of State), there is a right of recourse to the licensee in the event of the X company failing to pay PRT (or related interest) within 30 days of its falling due.