On April 28, 2025, HM Revenue & Customs (HMRC) of the United Kingdom published draft legislation for consultation, proposing significant reforms to transfer pricing, permanent establishment, and Divested Profit Tax (DPT) rules. These reforms seek to simplify and modernize the UK’s international tax system, bringing it into line with OECD standards and international tax treaties.
Main reform proposals
1. Transfer Pricing
The proposed reforms include:
- Participating entity status: This is extended to include common management arrangements and an anti-avoidance provision is introduced to prevent structures designed to circumvent this condition.
- UK-UK transactions: Certain transactions between UK resident entities are exempt from transfer pricing rules, provided there is no risk of tax loss.
- Intangible assets: It is established that transfers of intangible assets will be valued according to the arm’s length principle.
- Financial transactions: The rules are aligned with the OECD guidelines, taking into account implicit support and explicit guarantees in the determination of interest rates.
2. Permanent establishment
It is proposed to align the definition of permanent establishment with Article 5 of the 2017 OECD Model Convention, including:
- Extension of the dependent agent threshold to include those who play a principal role in the conclusion of contracts.
- Revision of the Investment Manager Exemption, eliminating the “20% rule” and broadening its scope to cover a wider range of transactions.
3. Diverted Profits Tax (DPT)
It is proposed to repeal the DPT as a separate tax and replace it with a new provision for the taxation of transfer pricing profits not settled in corporate income tax, maintaining key features such as:
- Assessment based on transfer pricing principles.
- Access to mutual agreement procedures under tax treaties to avoid double taxation.
- Simplification of the conditions for application, replacing the insufficient economic substance condition with a “tax design condition.”
Implications for Businesses
These reforms aim to:
- Improve Fairness: Ensuring that multinationals pay taxes on profits generated by economic activities in the United Kingdom in a fair manner.
- Simplify existing rules: Developing simpler and easier-to-understand legislation.
- Promote growth: Improving tax certainty and continued access to treaty benefits, thereby promoting investment in the United Kingdom.
Participation in the consultation
The consultation will be open until July 7, 2025. HMRC invites businesses, tax advisors, and other interested parties to review and comment on the draft legislation. Consultation events, both in person and online, have been scheduled to facilitate participation.
Conclusion
The proposed reform represents a significant step toward modernizing the UK’s international tax system. Businesses should assess how these changes could affect their operations and tax structures.
How can TPC Group help?
At TPC Group, we have a team of transfer pricing experts.
Source: GOV.UK