Finance (No. 2) Act 2023 · Updated to 29 Dec 2023 · Chapter 5
167. Allocation of Income or Loss between a Main Entity and a Permanent Establishment
Feedback & supportThe Financial Accounting Net Income or Loss of
Financial Accounting Net Income or Loss
“Financial Accounting Net Income or Loss” means the net income or loss determined for a Constituent Entity before any consolidation adjustments eliminating intra-group transactions in preparing Consolidated Financial Statements of the Ultimate Parent Entity;
Constituent Entity that is a Permanent Establishment in accordance with paragraphs 157(1)(a) to (c) of the definition of “Permanent Establishment” is the net income or loss reflected in the separate financial accounts of the Permanent
Constituent Entity
“Constituent Entity” means— (a) any Entity that is included in a Group; or (b) any Permanent Establishment of a Main Entity that is within paragraph (a) and which is treated as separate from the Main Entity and any other Permanent Establishment of that Main Entity, but does not include an Excluded Entity;
Establishment.
Finance (No. 2)
If the Permanent Establishment does not have separate financial accounts, then the Financial Accounting Net Income or Loss is the amount that would have been reflected in its separate financial accounts if prepared on a stand alone basis and in accordance with the accounting standard used in the preparation of the Consolidated Financial Accounts of the
Permanent Establishment
“Permanent Establishment” means— (a) a place of business including a deemed place of business situated in a jurisdiction and treated as a permanent establishment in accordance with an applicable Tax Treaty in force provided that such jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 of the OECD Model Tax Convention; (b) if there is no applicable Tax Treaty in force, a place of business including a deemed place of business in respect of which a jurisdiction taxes under its domestic law the income attributable to such place of business on a net basis similar to the manner in which it taxes its own tax residents; (c) if a jurisdiction has no corporate income tax system, a place of business including a deemed place of business situated in that jurisdiction that would be treated as a permanent establishment in accordance Finance (No. 2) with the OECD Model Tax Convention provided that such jurisdiction would have had the right to tax the income attributable to it in accordance with Article 7 of that model; or (d) a place of business or a deemed place of business that is not already described in paragraphs (a) to (c) through which operations are conducted outside the jurisdiction where the Entity is located provided that such jurisdiction exempts the income attributable to such operations;
Ultimate Parent Entity.
Ultimate Parent Entity
“Ultimate Parent Entity” means either— (a) an Entity that— (i) owns directly or indirectly a Controlling Interest in any other Entity; and (ii) is not owned, with a Controlling Interest, directly or indirectly by another Entity; or (b) the Main Entity of a Group that is located in one jurisdiction and has one or more Permanent Establishments located in other jurisdictions provided that the Entity is not a part of another Group;
The Financial Accounting Net Income or Loss of a Permanent Establishment referred to in subsections (1) and (2)
shall be adjusted, if necessary—
in the case of a Permanent Establishment as defined in paragraphs 157(1)(a) and (b) of the definition of
“Permanent Establishment”, to reflect only the amounts and items of income and expense that are attributable to the Permanent Establishment 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 deductible expenses in that jurisdiction; or
in the case of a Permanent Establishment as defined in paragraph 157(1)(c) of the definition of “Permanent
Establishment”, to reflect only the amounts and items of income and expense that would have been attributed to it in accordance with Article 7 of the
OECD Model Tax Convention.
In the case of a Constituent Entity that is a Permanent
Establishment in accordance with paragraph 157(1)(d) of the definition of “Permanent Establishment”—
its income used for computing Financial Accounting
Net Income or Loss is the income being exempted in the jurisdiction where the Main Entity is located and attributable to the operations conducted outside that jurisdiction; and
its expenses used for computing Financial Accounting
Net Income or Loss are those that are not deducted for taxable purposes in the jurisdiction where the
Main Entity is located and that are attributable to such operations.
The Financial Accounting Net Income or Loss of a Permanent Establishment is not taken into account in determining the GloBE Income or Loss of the Main Entity, except as provided in subsections (6) and (7).
GloBE Income or Loss
“GloBE Income or Loss” means the Financial Accounting Net Income or Loss determined for the Constituent Entity for the Financial Year adjusted for the items described in sections 165 to 168 of each Constituent Entity;
A GloBE Loss of a Permanent Establishment shall be treated as an expense of the Main Entity and not of the Permanent
Main Entity
“Main Entity” means, in respect of a Permanent Establishment— (a) the Entity that includes the Financial Accounting Net Income or Loss of the Permanent Establishment in its financial statements; and (b) is deemed to have the Controlling Interests of its Permanent Establishment;
Establishment for the purpose of computing its GloBE
Income or Loss to the extent that the loss of the Permanent
Establishment is treated as an expense in the computation of the domestic taxable income of such Main Entity and is not set off against an item of income that is subject to tax under the laws of both the jurisdiction of the Main Entity and the jurisdiction of the Permanent Establishment.
GloBE Income subsequently arising in the Permanent
Establishment shall be treated as GloBE Income of the Main
Entity and not the Permanent Establishment up to the amount of the GloBE Loss that previously was treated as an expense for the purpose of computing the GloBE Income or Loss of the
Entity
“Entity” means— (a) any legal person (other than a natural person); or (b) an arrangement that prepares separate financial accounts, such as a partnership or trust;
Main Entity.