What is the separate enterprise principle under Corporation Tax Act 2009 section 21?

The separate enterprise principle requires profits attributable to a UK permanent establishment of a non-UK resident company to be calculated as if the establishment were a distinct and independent business. It must be treated as dealing wholly independently with the non-UK resident company, carrying on the same or similar activities under the same or similar conditions.

What assumptions apply to a permanent establishment's credit rating and capital under section 21?

The permanent establishment is assumed to have the same credit rating as the non-UK resident company, as understood through commercial rating agencies such as Moody's or Standard and Poor's. It is also assumed to hold whatever equity and loan capital it could reasonably be expected to have if it genuinely were a separate enterprise.

How does the separate enterprise principle relate to other sections of the Corporation Tax Act 2009?

The separate enterprise principle established by section 21 underpins the detailed rules set out in sections 22 to 28 of the Act. Those sections address specific aspects including the arm's length treatment of transactions between the permanent establishment and the non-UK resident company, and how borrowing by the permanent establishment should be handled.

Where does the concept of a distinct and separate enterprise originate?

The term 'distinct and separate enterprise' originates from Article 7 of the OECD Model Tax Treaty. It is well understood from its longstanding use in double taxation conventions and ensures that transactions between a permanent establishment and its parent company are treated as if they were between unrelated parties at arm's length.

Corporation Tax Act 2009 section 21

The separate enterprise principle

Section 21 establishes the separate enterprise principle, which determines how profits attributable to a UK permanent establishment of a non-UK resident company should be calculated by treating the establishment as if it were an independent business.

Profits attributable to the permanent establishment are those it would have earned if it were a distinct and separate enterprise carrying on the same or similar activities under the same or similar conditions, dealing wholly independently with the non-UK resident company.
The permanent establishment is assumed to have the same credit rating as the non-UK resident company.
The permanent establishment is assumed to hold whatever equity and loan capital it could reasonably be expected to have in the circumstances of operating as such a separate enterprise.
This principle, known formally as the "separate enterprise principle", underpins the detailed rules set out in sections 22 to 28 of the Act.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member