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The UK government has launched a major consultation that could fundamentally reshape how multinational companies and investment managers are taxed in the UK. Published on April 28, 2025, the proposals aim to reform transfer pricing (TP) and permanent establishment (PE) rules, overhaul the investment manager exemption (IME), and repeal the controversial Diverted Profits Tax (DPT) in favor of a new Unassessed Transfer Pricing Profits (UTPP) regime. These changes mark a significant realignment with the Organisation for Economic Co-operation and Development’s (OECD) 2017 Model Tax Convention and ongoing international efforts to curb aggressive tax planning.
Expanding the Definition of Permanent Establishment
At the core of the consultation is a revision of the UK’s domestic definition of a permanent establishment (PE). Under existing rules, a PE is generally identified where a non-resident company has a fixed place of business in the UK or operates through a dependent agent who has and habitually exercises authority to conduct business on the company’s behalf.
The proposed reforms shift the focus to whether a person acting on behalf of a company habitually concludes contracts, or plays a leading role in concluding contracts that are routinely finalized without significant modification by the company. This broader test, aligned with Article 5 of the OECD Model Tax Convention, lowers the threshold for creating a UK taxable presence by concentrating on actual contract conclusion rather than mere authority.
Moreover, the consultation narrows the exemption for independent agents, clarifying that agents who act “exclusively or almost exclusively” for a closely related party will no longer be considered independent. “Closely related” includes companies under common control or one company controlling another, further tightening the net on corporate structures seeking to avoid UK PE status.
This change will particularly impact businesses with UK-based sales agents, contract negotiators, or managers, potentially increasing their UK tax liabilities and compliance obligations.
Revising the Investment Manager Exemption
The Investment Manager Exemption (IME), designed to exempt certain investment managers from being treated as a UK PE, is also under review. Responding to concerns that the broader PE definition could threaten the IME’s effectiveness, the government proposes several key amendments:
- The IME will operate as a safe harbor rather than a mandatory statutory alternative, offering flexibility in its application.
- The definition of “investment transactions” eligible under the IME will be expanded, potentially allowing more fund activities to qualify.
- However, restrictions will limit the exemption to non-resident entities meeting a regulatory definition of “investment fund.”
- The removal of the “20 per cent test,” a threshold considered problematic by taxpayers, is also proposed.
Additionally, revisions to guidance on the IME include lowering the substantial services safe harbor threshold from 70% to 50%, aiming to ensure that only genuinely independent funds benefit from the exemption.
Together, these changes reflect a balancing act between preserving the UK’s attractiveness for investment management and curbing perceived abuses of the exemption.
Abolishing the Diverted Profits Tax (DPT) and Introducing the UTPP Charge
The UK government proposes to repeal the standalone Diverted Profits Tax (DPT) regime, known as the “Google Tax,” replacing it with a new Unassessed Transfer Pricing Profits (UTPP) charge integrated into the corporation tax framework.
The DPT was introduced to combat aggressive profit shifting by multinationals but has faced criticism for its complexity and high tax rate (31%). The UTPP charge retains many procedural elements of DPT but aims to simplify enforcement by requiring companies to pay the full tax liability before challenging assessments — a “pay to play” approach.
The UTPP will apply where two key tests, or “gateways,” are met:
- Effective Tax Mismatch Outcome (ETMO): This is triggered when related-party transactions are taxed abroad at less than 80% of the UK’s corporation tax rate on the relevant profits. Transactions with partnerships presume ETMO unless proven otherwise.
- Tax Design Condition (TDC): Replacing the DPT’s “insufficient economic substance” test, TDC applies if it is reasonable to assume that arrangements were designed to reduce, eliminate, or delay tax liabilities anywhere.
This shift reflects the UK’s move toward tighter, more integrated transfer pricing enforcement aligned with international tax transparency standards.
Transfer Pricing Reforms and UK-to-UK Exemptions
The government also proposes expanding the “participation condition” that determines whether two entities are “connected” for transfer pricing, now including entities under common management or acting jointly. This broadening increases the scope of transactions scrutinized for tax avoidance.
To reduce administrative burdens, a new exemption for intra-group UK-to-UK transactions will allow companies subject to the same corporation tax rate to elect to exclude these transactions from transfer pricing adjustments, though with exclusions to prevent tax arbitrage.
Further, the proposals codify the arm’s length principle in UK law, consistent with OECD guidelines, and incorporate specific rules on financial transactions such as intra-group guarantees and group support arrangements.
What Businesses Need to Know
If enacted, these reforms will lower the bar for establishing a UK taxable presence, exposing more companies to UK tax obligations. Businesses with UK-based agents, sales teams, or contract negotiators must carefully review their arrangements to avoid unintended PE status.
Investment managers and funds will need to assess their eligibility under the revised IME to ensure continued exemption from PE classification.
With the transition from DPT to the UTPP charge, companies engaged in cross-border related-party transactions should prepare for a new regime focused on effective tax mismatches and arrangement design.
The proposed changes also mean that transfer pricing policies and documentation will need updating, especially where group management structures or intra-group financing are involved.
Timeline and Next Steps
The consultation closes on July 7, 2025, with draft legislation expected to be included in the Finance Bill 2025–26 and take effect from January 1, 2026.
Companies operating in or through the UK should begin reviewing their structures, agency arrangements, and transfer pricing policies now to manage the evolving UK tax landscape and minimize risk of unexpected liabilities.
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