Income and Corporation Taxes Act 1988

Part 3 U.K. Provisions applicable to non-resident banks

Application of this Part U.K.

7 (1) The provisions of this Part of this Schedule have effect where the non-resident company is a bank.

• “Bank” for this purpose has the meaning given by section 840A.

(2) Nothing in this Part of this Schedule shall be read as preventing the application of principles similar to those provided for in this Part in applying the separate enterprise principle to a non-resident company that is not a bank.

Non-resident banks: transfer of financial assets U.K.

8 (1) In accordance with the separate enterprise principle, transfers of loans and other financial assets between the permanent establishment and any other part of the company are recognised only if they would have taken place between independent enterprises.

(2) Such a transfer is not recognised where it cannot reasonably be considered that it is carried out for valid commercial reasons. For this purpose the obtaining of a tax advantage is not a valid commercial reason.

Loans by non-resident banks: attribution of financial assets and profits arising U.K.

9 (1) In accordance with the separate enterprise principle, loans and other financial assets, and profits arising from them, are attributed to a permanent establishment to the extent that they can reasonably be regarded as having been generated by the activities of the permanent establishment.

(2) The following provisions have effect as regards the factors to be taken into account.

(3) Particular account shall be taken of the extent to which the permanent establishment is responsible for—

(a) obtaining the offer of new business;

(b) establishing the potential borrower’s credit rating and the risk involved in providing credit;

(c) negotiating the terms of the loan with the borrower;

(d) deciding whether, and if so on what conditions, to make or extend the loan.

(4) Account may also be taken of the extent to which the permanent establishment is responsible for—

(a) concluding the loan agreement and disbursing the proceeds of the loan;

(b) administering the loan (including handling and monitoring the service of it) and holding and controlling any securities pledged.

(5) References in this paragraph to a financial asset include any financial risk in relation to a loan, or potential loan, that is capable of giving rise to fees or other receipts and for which the holding of capital is required (or would be required if the transaction were between parties at arm’s length).

Borrowing by non-resident banks: permanent establishment acting as agent or intermediary U.K.

10 (1) This paragraph applies where a permanent establishment—

(a) borrows funds for the purposes of another part of the non-resident company, and

(b) in relation to that borrowing acts only as an agent or intermediary.

(2) In such a case, in accordance with the separate enterprise principle—

(a) the profits attributable to the permanent establishment, and

(b) the capital attributable to the permanent establishment under section 11AA(3),

shall be that appropriate in the case of an agent acting at arm’s length, taking into account the risks and costs borne by the establishment.