Annex 1: Minor changes in the law Change 62: Meaning of permanent establishment: substitution of reference to income for reference to chargeable profits in paragraph 4(3) of Schedule 26 to FA 2003: section 1148
This change substitutes a reference to a non–UK resident company’s income in section 1148(3) for the reference to its chargeable profits in paragraph 4(3) of Schedule 26 to FA 2003.
This change is identical to the change made in rewriting paragraph 4(3) of Schedule 26 to FA 2003 in section 821(3) of ITA in relation to the limit on liability to income tax of non–UK resident companies under section 815 of that Act. See Change 121 in Annex 1 to the explanatory notes on ITA.
Paragraph 3 of Schedule 26 to FA 2003 sets out conditions relating to investment transactions carried out by a non–UK resident company (other than a company in the capacity of a trustee) through an investment manager in the United Kingdom.If the conditions in paragraph 3(2) are met, the investment manager is not a permanent establishment of the non–UK resident company in relation to the investment transactions. The non–UK resident company’s profit on those transactions are chargeable not to corporation tax but to income tax and then only to the extent provided by section 815 of ITA.
Paragraph 4 of Schedule 26 to FA 2003 sets out the requirements of “the 20% rule” referred to in paragraph 3(2)(d) of that Schedule. This rule relates to the percentage of “relevant excluded income” in which the investment manager and connected persons may have a beneficial interest. It is equivalent to section 127(5) of FA 1995 which prior to FA 2003 applied to all non–UK residents but which since the enactment of section 148 of, and Schedule 26 to, FA 2003 only applies where the non–UK resident is not a company (other than a company in the capacity of a trustee).
The basis on which the legislation in FA 2003 was prepared was that it was not to affect the law under FA 1995, except so far as required to adopt the concept of permanent establishment in place of branch or agency in relation to non–UK resident companies (other than companies in the capacity of trustees).
It is clear from the reference in the definition of “relevant excluded income” in section 127(5) of FA 1995 to “such of the profits and gains of the non–resident…as…for the purposes of Chapter 1 of Part 14 of the ITA(limits on liability to income tax of non–UK residents) would fall (apart from the requirements of section 819 of that Act) to be treated as disregarded income (see section 813 of that Act)” that the defined term in FA 1995 is limited to income and does not include gains. This is reflected in section 821(2) of ITA.
The reference to “the aggregate of such of the chargeable profits of the company” in paragraph 4(3) of Schedule 26 to FA 2003 is, therefore, in practice read as referring to income only.
Accordingly, section 1148(3) refers to “the total of the non–UK resident company’s income for the accounting periods” which derives from the relevant investment transactions.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.