Finance (No. 2) Act 2023

Allocation of covered taxes U.K.

177 Permanent establishments U.K.

(1) Any amount of qualifying current tax expense included in the underlying profits accounts of a member of a multinational group that is in respect of profits of a permanent establishment is to be allocated to the permanent establishment [F1 (and is to be regarded as qualifying current tax expense of the permanent establishment for the purposes of applying section 175(2)(a))].

(2) Where profits of a permanent establishment are treated as income of the main entity as a result of section 160(5), covered taxes on those profits are to be allocated to the main entity.

(3) But the amount allocated in accordance with subsection (2) is not to exceed the amount given by multiplying the amount of those profits by the highest corporate tax rate on ordinary income in the territory where the main entity is located.

(4) Any deferred tax asset with respect to a loss arising in the territory of a permanent establishment that is treated as an expense of the main entity as a result of section 160(2) is to be ignored in determining the covered tax balance of either the main entity or the permanent establishment.

Textual Amendments

F1 Words in s. 177(1) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(1)

178 Reallocation of tax expense U.K.

(1) Where—

(a) profits have been allocated to a member of a multinational group (“O”) under section 167 or 168 (allocation of profits of hybrid, transparent and reverse hybrid entities), and

(b) the member from whom the profits have been allocated has an amount of qualifying current tax expense in respect of those profits,

that qualifying [F2 current] tax expense is to be allocated to O.

[F3 (1A) Where—

(a) a member of a multinational group has an amount of qualifying current tax expense,

(b) that amount is in respect of profits not included in the member’s underlying profits, and

(c) if those profits had been included in the member’s underlying profits, a corresponding amount of adjusted profits would have been allocated to another member of the group (“O”) under section 167 or 168,

that qualifying current tax expense is to be allocated to O (and is to be regarded as qualifying current tax expense of O for the purposes of applying section 175(2)(a)).

(1B) Section 175(2)(a) (exclusion of amounts relating to income or gains not included in adjusted profits) applies to an amount of qualifying current tax expense allocated in accordance with subsection (1) as if—

(a) the reference to the member’s adjusted profits were to the adjusted profits of the member from whom the amount of qualifying current tax expense was allocated, and

(b) profits allocated from that member to O under section 167 or 168 were not excluded from the adjusted profits of that member.]

(2) But the amount of qualifying current tax expense in respect of mobile income allocated to O [F4 (under subsections (1) and (1A))] is not to exceed the amount given by taking the following steps—

• Step 1

  Determine the effective tax rate of the members of the multinational group in the territory of O for the accounting period to which the qualifying current tax expense relates, ignoring that expense.

• Step 2

  Subtract the result of Step 1 from 15%.

• Step 3

  Multiply the result of Step 2 by the amount of mobile income to which the qualifying tax expense relates.

(3) For the purposes of this section and section 179, “mobile income” means income of a type mentioned in subsection (4) in respect of which a member of a multinational group is subject to tax—

(a) under a controlled foreign company tax regime (see section 179(4)), or

(b) as a result of an ownership interest in an entity regarded as tax transparent in the territory the member is located in but not so regarded in the territory in which that entity is located.

(4) Those types of income are—

(a) dividends or dividend equivalents,

(b) interest or interest equivalent,

(c) rent,

(d) a royalty,

(e) an annuity, or

(f) net gains from property of a type that produces income described in paragraphs (a) to (e).

[F5 (5) Where an amount of qualifying current tax expense would have been allocated to O, but the amount allocated is limited as a result of subsection (2) the amount not allocated remains with the member from whom it otherwise would have been allocated.

(6) But if an amount would, ignoring this subsection, remain with the member from whom it would have otherwise been allocated, and that amount relates to income or gains that are not included in the adjusted profits of O, that amount is to be excluded from the covered tax balance of both the member and O.]

Textual Amendments

F2 Word in s. 178(1) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(3)

F3 S. 178(1A)(1B) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(4)

F4 Words in s. 178(2) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(5)

F5 S. 178(5)(6) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(6)

179 Controlled foreign company tax regimes U.K.

(1) Where—

(a) a member of a multinational group (“C”) is subject to a controlled foreign company tax regime, and

(b) C has an ownership interest in another member of the group (“F”) that is a [F6 CFC entity] in relation to C,

any amount of qualifying current tax expense included in C’s underlying profits accounts with respect to tax on C’s share of the profits of F are to be allocated to F (to the extent it has not already been allocated as a result of another provision of this Part).

[F7 (1A) Qualifying current tax expense allocated to F is to be regarded as qualifying current tax expense of F for the purposes of applying section 175(2)(a).]

(2) But the amount of qualifying current tax expense in respect of mobile income allocated to F is not to exceed the amount given by taking the following steps—

• Step 1

  Determine the effective tax rate of the members of the multinational group in the territory of F for the accounting period to which the qualifying current tax expense relates, ignoring that expense.

• Step 2

  Subtract the result of Step 1 from 15%.

• Step 3

  Multiply the result of Step 2 by the amount of mobile income to which the qualifying current tax expense relates.

(3) Subsection (1) does not apply to a controlled foreign company tax regime that is a blended CFC regime in accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.

[F8 (3A) Where an amount of qualifying current tax expense would have been allocated to F but the amount allocated is limited as a result of subsection (2), the amount not allocated remains with C.

(3B) But if an amount would, ignoring this subsection, remain with C and that amount relates to income or gains that are not included in the adjusted profits of F, that amount is to be excluded from the covered tax balance of both C and F.]

(4) In this Part—

• “controlled foreign company tax regime” means a set of tax rules (other than multinational top-up tax or any tax equivalent to multinational top-up tax) under which an entity with an ownership interest in another entity located in a different territory (“the controlled foreign company”) is subject to current taxation on its share of part or all of the income earned by the controlled foreign company, irrespective of whether that income is distributed currently to it;

• [F9 “CFC entity”, in relation to a member of a multinational group who is subject to a controlled foreign company tax regime, means—

  (a)

  a controlled foreign company in relation to that member,

  (b)

  a permanent establishment of such a controlled foreign company, or

  (c)

  an entity whose profits are treated, for the purposes of the regime, as the profits of such a controlled foreign company;]

• “blended CFC regime” means a controlled foreign company tax regime—

  (a)

  under which the income, losses and creditable taxes of all of the controlled foreign companies of the entity with ownership interests in them are aggregated for the purposes of calculating the entity’s tax liability under the regime,

  (b)

  that does not take into account the income of the entity, or members of a consolidated group of which the entity is a member, that arises in the location of the entity, apart from to the extent the entity may use its losses arising in that location to reduce its liability under the regime, and

  (c)

  which operates by reference to a rate which reflects a threshold for low taxation.

Textual Amendments

F6 Words in s. 179(1)(b) substituted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 18(2)

F7 S. 179(1A) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(7)(a)

F8 S. 179(3A)(3B) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 17(7)(b)

F9 Words in s. 179(4) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 18(3)

180 Blended CFC regimes U.K.

(1) This section applies to accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.

(2) Subsection (3) applies where—

(a) a member of a multinational group (“C”) is subject to a blended CFC regime in an accounting period (“the relevant period”),

(b) C has an ownership interest in an entity (“F”) that is a F10 ... CFC entity in relation to C, and

(c) the blended CFC allocation key of F is greater than nil.

(3) The appropriate proportion of tax charged to C under that regime (after all deductions and use of any losses) is—

(a) where F is a member of the same multinational group as C, to be allocated to F, or

(b) where F is not a member of that group, to be excluded from the covered tax balance of C.

(4) The appropriate proportion is the proportion given by dividing the blended CFC allocation key for F for the relevant period by the sum of all blended CFC allocation keys for that period of F11 ... CFC entities in which C has an ownership interest.

(5) The blended CFC allocation key for the relevant period of a F12 ... CFC entity that C has an ownership interest in is the amount given by multiplying—

(a) the attributable income of C [F13 in relation to the CFC entity], by

(b) the percentage given by subtracting the applicable effective tax rate of the F14 ... CFC entity for the relevant period from the applicable CFC rate for that period.

(6) But where—

(a) the result of subsection (5)(b) in relation to a F15 ... CFC entity is less than nil, or

(b) the applicable effective tax rate of that entity is greater than 15%,

the blended CFC allocation key for that entity is to be treated as nil.

(7) The attributable income of C [F16 in relation to a CFC entity in which C has an ownership interest] means C’s share of the income of [F17 the entity] for the relevant period determined as it would be determined for the purposes of the blended CFC regime.

(8) The applicable effective tax rate of a F18 ... CFC entity for the relevant period is—

(a) where it is located in a territory in which the effective tax rate of members of the multinational group of which C is a member is calculated for that period, that effective tax rate as it would be calculated if—

(i) any tax arising under a blended CFC regime were ignored, and

(ii) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax, or

(b) where it is not located in such a territory, the effective tax rate that would be calculated for the relevant period for the F19 ... CFC entities located in that territory in which C has an ownership interest if—

(i) those entities were members of a multinational group whose ultimate parent’s accounting period is the same as the relevant period,

[F20 (ii) the result of Step 2 in section 132(1) for those entities were the aggregate of their profits (and losses) before tax as shown in their financial accounts,

(iia) the combined covered tax balance for those entities were the aggregate of the taxes shown in their financial accounts,]

(iii) any tax arising under a blended CFC regime were ignored, and

(iv) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax.

(9) The applicable CFC rate for the relevant period means the rate which reflects the threshold for low taxation by reference to which the blended CFC regime is generally operated, taking into account any credit for foreign taxes available under the regime.

F21 (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F10 Word in s. 180(2)(b) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(a)

F11 Word in s. 180(4) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(b)

F12 Word in s. 180(5) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(c)(i)

F13 Words in s. 180(5)(a) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 19(2)

F14 Word in s. 180(5)(b) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(c)(ii)

F15 Word in s. 180(6)(a) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(d)

F16 Words in s. 180(7) inserted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 19(3)(a)

F17 Words in s. 180(7) substituted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 19(3)(b)

F18 Word in s. 180(8) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(e)(i)

F19 Word in s. 180(8)(b) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(e)(ii)

F20 S. 180(8)(b)(ii)(iia) substituted for s. 180(8)(b)(ii) (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by Finance Act 2024 (c. 3), Sch. 12 para. 19(4)

F21 S. 180(10) omitted (22.2.2024 with effect for accounting periods beginning on or after 31.12.2023 in accordance with Sch. 12 para. 1(2) of the amending Act) by virtue of Finance Act 2024 (c. 3), Sch. 12 para. 18(4)(f)

181 Distributions from other members of a group U.K.

(1) Where qualifying current tax expense in respect of covered taxes accrued in an accounting period in the underlying profits accounts of a member of a multinational group (“R”) is in respect of a distribution received from another member of the group (“D”) in which R has a direct ownership interest, that expense is to be allocated to D.

(2) Reference in subsection (1) to a distribution received is to be treated as including deemed distributions taken account of for the purposes of taxes on a shareholder of an entity in respect of undistributed earnings or capital of the entity.