111R Allocation of qualifying income or loss between main entity and permanent establishment

Summary

This section provides the rules to determine the amount of Financial Accounting Net Income or Loss that is to be allocated between the permanent establishment and Main Entity.

Details

Allocation of qualifying income or loss between a main entity and a permanent establishment

(1) This subsection sets out the method in which the qualifying income or loss should be allocated between a main entity and a permanent establishment.

(1)(a) Subject to subsection (2), where a constituent entity is a permanent establishment to which paragraph (a), (b) or (c) of the definition in section 111A(1) of permanent establishment applies, the financial accounting net income or loss of a permanent establishment shall be the net income or loss reflected in the separate financial accounts of that permanent establishment.

(1)(b) Where a constituent entity is a permanent establishment that does not have separate financial accounts, its financial accounting net income or loss shall be the amount that would have been reflected in its separate financial accounts if they had been prepared on a standalone basis and in accordance with the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity.

Adjustments required to the financial accounting net income or loss of a permanent establishment

(2) This subsection sets out the adjustments required to the financial accounting net income or loss of a permanent establishment:

(2)(a) The financial accounting net income or loss of a permanent establishment, to which paragraphs (a) or (b) of the definition of permanent establishment in section 111A(1) apply, shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with the applicable tax treaty or domestic law of the jurisdiction where it is located, regardless of the amount of income subject to tax and the amount of tax deductible expenses in that jurisdiction.

(2)(b) The financial accounting net income or loss of a permanent establishment, to which paragraph (c) of the definition of permanent establishment in section 111A(1) applies, shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with Article 7 of the OECD Model Tax Convention on Income and Capital.

(2)(c) The financial accounting net income or loss of a permanent establishment, to which in paragraph (d) of the definition of permanent establishment in section 111A(1) applies, shall be calculated based on:

• the amounts and items of income that are exempt from tax in the jurisdiction where the main entity is located and attributable to the operations conducted outside of that jurisdiction, and
• the amounts and items of expense that are not deducted for tax purposes in the jurisdiction where the main entity is located that are attributable to those operations.

(3) Subject to subsection (4), the financial accounting net income or loss of a permanent establishment shall not be taken into account in determining the qualifying income or loss of the main entity

Allocation of losses

(4) This subsection sets out the rules relating to the allocation of losses of a permanent establishment.

(4)(a) In so far as the main entity treats a qualifying loss of the permanent establishment as an expense in the calculation of its domestic taxable income in the jurisdiction it is located in and it is not set off against an item of the domestic taxable income that is subject to tax under the laws of both the jurisdiction of the main entity and the jurisdiction of the permanent establishment, then that loss shall be treated as an expense of the main entity for the purposes of calculating its qualifying income or loss.

(4)(b) Qualifying income subsequently earned by the permanent establishment, after the qualifying loss of the permanent establishment was treated as an expense of the main entity for the purposes of calculating the qualifying income or loss of the main entity, shall be treated as income of the main entity (and not of the permanent establishment) up to the amount of the qualifying loss that was previously treated as an expense of the main entity for the purposes of calculating the main entity’s qualifying income or loss.

Relevant Date: Finance Act 2024