Finance Act 2026

• (1) Sections 447, 449 to 451 and 694 of CTA 2009 are repealed (treatment of exchange gains and losses subject to Part 4 of TIOPA 2010).

• (2) In section 445 of CTA 2009 (disapplication of section 444 where Part 4 of TIOPA 2010 applies), in subsection (2), omit paragraph (b) (and the “and” before it).

• (3) In section 452 of that Act (exchange gains and losses where loan not on arm's length terms)—

• (a) in subsection (1) for subsection (a) substitute—

(a) a company would be treated as having a debtor relationship, or would be treated as borrowing more under an existing debtor relationship, in relation to an accounting period if— (i) an election were made under section 153B(2) of TIOPA 2010 in relation to that period, (ii) a claim were made under section 192(1) of that Act in relation to that period, or (iii) such an election and such a claim were made in relation to that period, and

• (b) in subsection (2), for “claim” substitute “election, claim or election and claim”,

• (c) in subsection (3)—

• (i) in the words before paragraph (a), for the words from “a claim” to the end substitute “one or more elections or claims made under section 153B(2) or 192(1) of TIOPA 2010 or assumed to have been made as a result of subsection (2)—”, and

• (ii) in paragraph (a), after “relationship” insert “, or is treated as borrowing more under an existing debtor relationship”,

• (d) in subsection (4)—

• (i) omit “under section 447”,

• (ii) for “issuing company” substitute “borrower”, and

• (iii) after “relationship”, in the second place it occurs, insert “as a result of Part 4 of TIOPA 2010”,

• (e) in subsection (5)—

• (i) omit “under section 447”,

• (ii) for “issuing company” substitute “borrower”, and

• (iii) after “relationship”, in the second place it occurs, insert “as a result of Part 4 of TIOPA 2010”, and

• (f) in subsection (5A) for “issuing company” substitute “borrower”.

• (4) In consequence of the amendments made by this paragraph—

• (a) in section 440(2) of CTA 2009, in paragraph (c), for “447 to” substitute “448 and”,

• (b) in section 444(6) of that Act, for “447 to” substitute “448 and”,

• (c) in section 164(2) of TIOPA 2010—

• (i) after “trades),” insert “and”, and

• (ii) omit from “section 447(5)” to the end, and

• (d) in section 174(4) of that Act—

• (i) after “relief),” insert “and”, and

• (ii) omit from “section 447(5)” to the end.

Designated currency elections

31

In section 9A of CTA 2010, after subsection (2) insert—

(2A) For the purposes of determining whether an election under this section takes effect, ignore the effect (if any) of Part 4 of TIOPA 2010 (transfer pricing).

Part 3 — Commencement

32

• (1) The amendments made by this Schedule have effect in relation to chargeable periods commencing on or after 1 January 2026.

• (2) But sub-paragraph (1) does not apply to the amendments made by—

• (a) paragraphs 4 to 11,

• (b) paragraphs 19 and 20, and

• (c) paragraphs 24 to 27.

• (3) And for the purposes of sub-paragraph (1) as it applies in relation to paragraphs 29 and 30, an accounting period beginning before and ending on or after 1 January 2026 is to be treated as if so much of the period as falls before that date, and so much of the period as falls on or after that date, were separate accounting periods (and see further sections 307 and 595 of CTA 2009).

Schedule 7 — Permanent establishments

Part 1 — Amendments to CTA 2009

Introduction

1

CTA 2009 (charge to corporation tax: basic provisions) is amended as follows.

References to Model Tax Convention

2

In section 18S (other interpretation), in the definition of “the OECD model”—

• (a) for “published by the Organisation for Economic Co-operation and Development in July 2010 (“the OECD”)” substitute “approved by the OECD Council on 18 November 2025”, and

• (b) for “or” to the end substitute “as it may be amended or replaced from time to time”.

Attribution of profits

3

In section 19 (chargeable profits)—

• (a) in subsection (2)(b), for “32” substitute “24”;

• (b) in subsection (5), for “32” substitute “24”.

4

In section 20 (profits attributable to permanent establishment: introduction), for subsections (1) and (2) substitute—

(1A) Sections 21 and 24— (a) apply for the purpose of determining the amount of profits of a non-UK resident company that are attributable to a permanent establishment of the company in the United Kingdom, and (b) contain provision about the separate enterprise principle. (1B) So far as provisions in those sections are in substantially the same terms as Article 7(2) of the Model Tax Convention on Income and on Capital approved by the OECD Council on 18 November 2025 they are to be read and given effect, so far as possible, in a way that is consistent with— (a) the 2010 Report on the Attribution of Profits to Permanent Establishments published by the OECD on 22 July 2010, (b) the OECD’s commentary on Article 7(2) approved by the OECD Council on 18 November 2025, (c) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, published by the OECD on 20 January 2022, and (d) the Additional Guidance on the Attribution of Profits to Permanent Establishments published by the OECD in March 2018. (1C) Any reference in subsection (1B) to a document published by the OECD, or approved by the OECD Council, is to that document as it may be amended or replaced from time to time. (1D) And any such document is to be read in accordance with any reservation, declaration or election made by the United Kingdom in relation to that document. (1E) The Treasury may by regulations make provision— (a) for subsection (1C) not to apply in relation to any specified amendment or replacement of a document referred to in subsection (1B), (b) about the effect of any provision of a document referred to in subsection (1B) that has been amended or replaced on or after 26 November 2025 where that provision is elective (however expressed), and (c) amending subsection (1B) to add a reference to a further document published by the OECD. “Specified” means specified in regulations.

5

• (1) Section 21 (the separate enterprise principle) is amended as follows.

• (2) In subsection (1)—

• (a) for “would have made” substitute “might be expected to make”, and

• (b) for the words from “distinct” to the end substitute “separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the non-UK resident company through the permanent establishment and through the other parts of the non-UK resident company”.

• (3) Omit subsection (3).

6

Omit—

• (a) section 22 (transactions treated as being at arm’s length);

• (b) section 23 (provision of goods or services for permanent establishment).

7

In section 24 (application to insurance companies)—

• (a) in subsection (2), in the words after paragraph (b), for the words from “distinct” to the end substitute “separate and independent enterprise acting as mentioned in that subsection”;

• (b) omit subsections (4), (5) and (6).

8

Omit—

• (a) section 25 (non-UK resident banks: introduction);

• (b) section 26 (transfer of financial assets);

• (c) section 27 (loans: attribution of financial assets and profits arising);

• (d) section 28 (borrowing: permanent establishment acting as agent or intermediary);

• (e) section 29 (allowable deductions);

• (f) section 30 (restriction on deductions: costs);

• (g) section 31 (restriction on deductions: payments in respect of intangible assets);

• (h) section 32 (restriction on deductions: interest or other financing costs).

Exclusion of income tax charge

9

• (1) In section 3 (exclusion of charge to income tax), in subsection (1)(b) for “for an exemption.” substitute “is not as a result of—

(i) an exemption, or (ii) the application of sections 1142 to 1144 of CTA 2010 (circumstances in which a company is not regarded as having a permanent establishment).

• (2) In consequence of the amendment made by sub-paragraph (1), in ITA 2007—

• (a) in section 816 (meaning of disregarded company income)—

• (i) in subsection (1), omit paragraphs (c) and (d), and

• (ii) omit subsection (2) to (4), and

• (b) in section 817 (the independent broker conditions)—

• (i) in subsection (1), for the words from “Kingdom” to the end substitute “Kingdom if conditions A to D are met.”, and

• (ii) omit subsection (6).

Part 2 — Amendments to CTA 2010

Introduction

10

CTA 2010 is amended as follows.

General interpretation

11

Before section 1141 (but after the heading “General”) insert—

(1140A) (1) This Chapter applies for the purpose of determining when a company has a permanent establishment in a territory for the purposes of the Corporation Tax Acts. (2) So far as provisions in this Chapter are in substantially the same terms as Article 5 of the Model Tax Convention on Income and on Capital approved by the OECD Council on 18 November 2025 they are to be read and given effect, so far as possible, in a way that is consistent with the OECD’s commentary on that Article, also approved by the OECD Council on that date. (3) Any reference in subsection (2) to a document approved by the OECD Council is to that document as it may be amended or replaced from time to time. (4) And any such document is to be read in accordance with any reservation, declaration or election made by the United Kingdom in relation to that document. (5) The Treasury may by regulations make provision— (a) for subsection (3) not to apply in relation to any specified amendment or replacement of a document referred to in subsection (2), (b) about the effect of any provision of a document referred to in subsection (2) that has been amended or replaced on or after 26 November 2025 where that provision is elective (however expressed), and (c) amending subsection (2) to add a reference to a further document published by the OECD. “Specified” means specified in regulations.

Dependent agents

12

In section 1141 (permanent establishment of companies), in subsection (1), for paragraph (b) substitute—

(b) a person acting on behalf of the company in the territory habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company, and the contracts are— (i) for the transfer of the ownership of, or for the granting of the right to use, property owned by the company or that the company has the right to use, or (ii) for the provision of services by the company.

Independent agents

13

• (1) Section 1142 (agent of independent status) is amended as follows.

• (2) After subsection (1) insert—

(1A) A person is not to be regarded for the purposes of subsection (1) as an agent of independent status in relation to a company where the person— (a) is closely related to the company, and (b) acts exclusively or almost exclusively on behalf of— (i) the company, or (ii) the company and other companies to which the person is closely related. (1B) In subsection (1A), “closely related” has the meaning that it has in section 1143 (see subsection (2CA) of that section).

• (3) In subsection (2)—

• (a) for “apply for the purpose of supplementing subsection (1)” substitute “modify the application of this section”;

• (b) at the end of paragraph (a) insert “or”;

• (c) omit paragraph (c) (and the “or” at the end of paragraph (b)).

Meaning of “closely related”

14

In section 1143 (preparatory or auxiliary activities), for subsection (2D) substitute—

(2CA) For the purposes of this section, one person (“A”) is closely related to another person (“B”) if, based on all the relevant facts and circumstances, A has control of B or A and B are under the control of the same persons, including if the 50% investment condition is met in relation to A and B.

Independent investment manager conditions not sole means of showing independent status

15

In section 1146 (the independent investment manager conditions), in subsection (2)—

• (a) after “transaction,” insert “the circumstances in which”, and

• (b) for “if”, in the first place it occurs, to the end substitute “include where each of the following conditions (the independent investment manager conditions) are met.”

Removal of the 20% rule

16

• (1) In section 1146, omit subsection (6).

• (2) In consequence of the amendment made by sub-paragraph (1)—

• (a) omit section 1147 (investment managers: the 20% rule),

• (b) omit section 1148 (interpretation of section 1147), and

• (c) omit section 1149 (application of 20% rule to collective investment schemes).

New definition of “investment transaction”

17

• (1) For section 1150 (meaning of investment manager and investment transaction) substitute—

(1150) (1) The following definitions apply for the purposes of this Chapter. (2) An “investment manager” means a person who provides investment management services (which may include or comprise the provision of investment advice). (3) An “investment transaction” means any transaction other than a transaction with an excluded subject matter. (4) The following are excluded subject matters— (a) land in the United Kingdom, and (b) any commodity or other physical asset. (5) But a transaction is to be treated as not having an excluded subject matter if— (a) it is a derivative contract whose subject matter is a commodity but which does not result in the physical delivery of the commodity, or (b) it is a derivative contract whose subject matter is an excluded subject matter only because it operates by reference to a qualifying index, provided that index is not maintained by a person who is connected to any of the parties to the transaction. (6) For the purposes of subsection (5) a “qualifying index” means an index relating to an excluded subject matter that— (a) is publicly available, and (b) is an index of a substantial number of assets.

• (2) In section 1171 (orders and regulations), in subsection (2)(g) omit sub-paragraph (ii).

• (3) In Schedule 4 (index of defined expressions)—

• (a) in the entry for “investment manager (in Chapter 5 of Part 8B)” for “1150(1)” substitute “1150”,

• (b) in the entry for “investment manager (in Chapter 2 of Part 24)” for “1150(1)” substitute “1150”, and

• (c) in the entry for “investment transaction (in Chapter 5 of Part 8B)” for “1150(1)” substitute “1150”.

Removal of disregard of certain chargeable profits attributable to permanent establishment represented by investment manager

18

• (1) Omit section 1152 (investment managers: disregard of certain chargeable profits).

• (2) In consequence of the amendment made by sub-paragraph (1), in section 20 of CTA 2009 (profits attributable to permanent establishment: introduction), omit subsection (3).

Lloyd’s agents

19

In section 1142 (agent of independent status), in subsection (2)—

• (a) in the words before paragraph (a) for “1151” substitute “1150”,

• (b) in paragraph (a), at the end insert “or”, and

• (c) omit paragraph (c) (and the “or” at the end of paragraph (b)).

20

Omit section 1151 (Lloyd’s agents).

Northern Ireland regional establishments

21

• (1) In section 357LD (the independent investment manager conditions)—

• (a) in subsection (2)—

• (i) after “transaction,” insert “the circumstances in which”, and

• (ii) for “if (and only if)” substitute “include where”, and

• (b) omit subsection (6).

• (2) Omit sections 357LE to 357LG (20% rule).

• (3) In section 357LH (meaning of investment manager and investment transaction), for “1150(1)” substitute “1150”.

• (4) Omit section 357LJ (disregard of certain chargeable profits).

Part 3 — Amendments to ITA 2007

Introduction

22

ITA 2007 is amended as follows.

Investment managers (removal of the 20% rule)

23

• (1) In section 818 (the independent investment manager conditions) omit subsection (5).

• (2) In section 835M (the independent investment manager conditions) omit subsection (5).

• (3) Omit sections 819 and 835N (investment managers: the 20% rule).

• (4) In consequence of the amendments made by sub-paragraph (3)—

• (a) omit sections 820 to 824,

• (b) omit sections 835O to 835Q, and

• (c) in Schedule 4 (index of defined expressions), in the table omit both entries relating to relevant disregarded income.

Meaning of investment transaction

24

• (1) In section 827 (meaning of investment manager and investment transaction)—

• (a) in subsection (1), after “services” insert “(which may include or comprise the provision of investment advice)”, and

• (b) for subsections (2) and (3) substitute—

(2) An “investment transaction” means any transaction other than a transaction with an excluded subject matter. (3) The following are excluded subject matters— (a) land in the United Kingdom, and (b) any commodity or other physical asset. (4) But a transaction is to be treated as not having an excluded subject matter if— (a) it is a derivative contract whose subject matter is a commodity but which does not result in the physical delivery of the commodity, or (b) it is a derivative contract whose subject matter is an excluded subject matter only because it operates by reference to a qualifying index, provided that index is not maintained by a person who is connected to any of the parties to the transaction. (5) For the purposes of subsection (4) a “qualifying index” means an index relating to an excluded subject matter that— (a) is publicly available, and (b) is an index of a substantial number of assets.

• (2) In section 835S (interpretation of Chapter 2B of Part 14)—

• (a) in subsection (3), for “has the same meaning” substitute “and “investment transaction” have the same meanings”, and

• (b) omit subsection (4).

Lloyd’s agents

25

In section 814 (meaning of “disregarded transaction income”) omit subsection (6).

26

In section 835E (branch or agency treated as UK representative), in subsection (5) for “835K” substitute “835J”.

27

Omit section 835K (Lloyd’s agents).

Part 4 — Amendments to TCGA 1992

28

• (1) TCGA 1992 is amended as follows.

• (2) In section 2B (territorial scope of charge to corporation tax on chargeable gains), in subsection (3)—

• (a) in paragraph (a) omit “that have a relevant connection to the company’s UK permanent establishment (see section 2C)”;

• (b) in paragraph (b), for “that permanent establishment” substitute “a UK permanent establishment (see section 2C)”;

• (c) in paragraph (c), for “to 32” substitute “and 24”.

• (3) In section 2C (non-UK resident company with UK permanent establishment) omit subsection (2).

Part 5 — Consequential amendments

FA 2011

29

In FA 2011, in Schedule 19 (the bank levy), in paragraph 26—

• (a) in sub-paragraph (2)—

• (i) for “would have” substitute “might be expected to have”, and

• (ii) for the words from “distinct” to the end substitute “separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the relevant foreign bank through the permanent establishment and through the other parts of the relevant foreign bank.”;

• (b) in sub-paragraph (3), for “to 28” substitute “and 24”.

Part 6 — Commencement

30

The amendments made by this Schedule have effect in relation to chargeable periods beginning on or after 1 January 2026.

Schedule 8 — Pillar Two

Introduction

1

F(No.2)A 2023 (multinational top-up tax) is amended in accordance with paragraphs 2 to 31 and 33 to 51 of this Schedule.

Application of the income inclusion rule to cases involving permanent establishments

2

In section 128 (responsible members), in each of subsections (4) and (6)—

• (a) omit the “and” at the end of paragraph (a);

• (b) at the end insert

, and (c) every permanent establishment of a member of the group it has an ownership interest in other than a permanent establishment located in the territory it is located in.

3

• (1) Section 237 (intermediate and partially-owned parent members) is amended as follows.

• (2) For subsection (1)(b) substitute—

(b) it has— (i) a direct or indirect ownership interest in another member of the group, or (ii) a permanent establishment, and

• (3) For subsection (2)(b) substitute—

(b) it has— (i) a direct or indirect ownership interest in another member of the group, or (ii) a permanent establishment.

Elective qualifying domestic top-up taxes

4

In section 128 (responsible members), after subsection (7) insert—

(7A) If for an accounting period— (a) the application in relation to an entity located in a territory of a tax equivalent to the IIR provisions of multinational top-up tax depends on the making by any person of an election or claim, and (b) the tax does not apply in relation to the entity because such an election or claim is or is not made, subsection (7)(b)(i) has effect in relation to the entity as though the tax were not in force in the territory for the period.

5

In Schedule 16A (qualifying domestic top-up tax safe harbour election), in paragraph 1, at the end insert—

(5) If for an accounting period— (a) the application of a qualifying domestic top-up tax in relation to the members of a multinational group located in a territory depends on the making by any person of an election or claim, and (b) the tax does not apply in relation to those members because such an election or claim is or is not made, sub-paragraph (3)(a) has effect in relation to the group as though the tax did not apply in the territory for the period.

Other provision about permanent establishments

6

In section 135 (underlying profits of permanent establishments), in subsection (1)—

• (a) in paragraph (a), after “financial accounts” insert “prepared in accordance with acceptable accounting standards”;

• (b) in paragraph (b), for “in accordance with section 159” substitute “on the same principles as those set out in section 159(1), (2) or (3) (as the case may be)”.

7

In section 159 (permanent establishment income and expense attribution), at the end insert—

(5) See also section 135(1)(b) (by virtue of which equivalent adjustments to those set out in subsections (1) to (3) will already be reflected in the underlying profits accounts of a permanent establishment that does not have separate financial accounts from the main entity prepared in accordance with acceptable accounting standards).

8

• (1) Section 232 (permanent establishments) is amended as follows.

• (2) In the heading, omit “treated as entities”.

• (3) In subsection (1)—

• (a) in the words before paragraph (a), omit “that”;

• (b) in paragraph (a), for “is located” substitute “that is situated”;

• (c) omit the “and” at the end of paragraph (a) and after that paragraph insert—

(aa) any profits in relation to which are reflected in the financial statements of the main entity, and

• (d) in paragraph (b), at the beginning insert “that”;

• (4) In subsection (2)—

• (a) in paragraphs (b) and (c), for “is in” substitute “is situated in”;

• (b) in paragraph (d), for paragraph (ii) substitute—

(ii) the income attributable to the place of business’s operations is exempted from tax by the territory of the main entity or, where the main entity is a flow-through entity, by the territory in which the reference entity (within the meaning of section 168) is located.

• (5) After subsection (2) insert—

(2A) For the purposes of subsection (1)(a)— (a) section 240(2) (flow-through entities treated as stateless) is to be disregarded, and (b) a flow-through entity that would otherwise be a stateless entity under section 240(2) is instead treated as located in the territory in which it is created.

• (6) At the end insert—

(6) See also section 232ZA (modifications that apply where legal main entity is distinct from main entity).

9

After section 232 insert—

(232ZA) (1) Where a permanent establishment has a legal main entity that is distinct from the main entity, this Part applies with the following modifications in relation to the permanent establishment. (2) In section 127 (excluded entities), in subsection (5)(a) (definition of qualifying non-profit subsidiary), the reference to the main entity is to be read as a reference to the main entity and each legal main entity. (3) In section 135 (underlying profits of permament establishments)— (a) in subsection (1)(b) (underlying profits of permanent establishment that does not have separate financial accounts), the reference to the main entity is to be read as a reference to whichever of the main entity and the legal main entities is relevant to the attribution exercise under section 159; (b) in subsection (3) (permanent establishments within section 232(2)(d)), the references to the main entity are to be read as references to the main entity or any legal main entity; (c) in subsection (4) (no double counting between permanent establishment and main entity), the reference to the main entity is to be read as a reference to the main entity or any legal main entity. (4) In section 159 (permanent establishment income and expense attribution), the references to the main entity are to be read as references to whichever of the main entity and the legal main entities is relevant to the attribution exercise under the subsection in question. (5) In section 198 (eligible payroll costs etc: permanent establishments), in subsection (5) (double counting), the references to the main entity are to be read as references to any of the main entity and the legal main entities. (6) In section 236 (investment funds and investment entities), in subsection (1)(f)(ii) (regulatory regime condition), the reference to the main entity is to be read as a reference to a legal main entity. (7) In section 253 (disqualified and qualified refundable imputation taxes), in subsection (2)(a)(ii), the reference to the main entity is to be read as a reference to a legal main entity. (8) For the purposes of this section a “legal main entity” in relation to a permanent establishment means— (a) in the case of a permanent establishment within section 232(2)(a), an entity of which it is regarded as being a permanent establishment in accordance with an applicable tax treaty; (b) in the case of a permanent establishment within section 232(2)(b), an entity of which it is regarded as being a permanent establishment under the domestic law of the territory in which the permanent establishment is situated; (c) in the case of a permanent establishment within section 232(2)(c), an entity of which it would be regarded as being a permanent establishment in accordance with Article 7 of the OECD tax model; (d) in the case of a permanent establishment within section 232(2)(d), any reference entity (within the meaning of section 168) by reference to which the condition in section 232(2)(d)(ii) is satisfied.

Intragroup accounting discrepancies

10

After section 150 insert—

(150A) If— (a) a member of a multinational group (“the holder”) holds an interest (of any description) in another member of the group (“the issuer”), and (b) the interest is accounted for as equity in the underlying profits accounts of one of the members and as debt in the underlying profits accounts of the other, the underlying profits of the holder are to be adjusted to what they would be if the interest were accounted for in the holder’s underlying profits accounts in the same way as it is accounted for in the issuer’s.

Tax-transparent investment entities: double counting

11

In section 168 (underlying profits of transparent entities), after subsection (10) insert—

(10ZA) Where M is treated as a flow-through entity by virtue of an election made in relation to R and M under section 213 (investment entity tax transparency election), the underlying profits of R are to be adjusted so as to exclude any gain, profit or loss— (a) that arises from changes in the fair value of, or from the impairment of, R’s interest in M, and (b) that is not an excluded equity gain or loss (taking into account any election under section 165), but the amount excluded under this subsection is not to exceed the amount of M’s underlying profits that is allocated to R under subsection (3).

Adjustments for ultimate parent that is a flow-through entity

12

• (1) Section 170 (adjustments for ultimate parent that is a flow-through entity) is amended as follows.

• (2) In subsection (1), in the words after paragraph (b), for “its profits” substitute “those profits”.

• (3) In subsection (2)—

• (a) in the words before paragraph (a), for “profits” substitute “those profits”;

• (b) in paragraph (a), for “the ultimate parent’s profits” substitute “those profits”.

• (4) For subsection (2A) substitute—

(2A) For the purposes of this section— (a) each holder of a direct ownership interest in the ultimate parent is treated as entitled as a result of that interest to a proportion of the ultimate parent’s adjusted profits (that is to say, its adjusted profits ignoring this section), and (b) the proportion of those adjusted profits to which each holder is treated as entitled is the proportion of those profits to which it would have been entitled had the actual amount of profits accruing to the ultimate parent been equal to its adjusted profits.

• (5) In subsection (3), in the words before paragraph (a), for “of the group” substitute “mentioned in subsection (1)(b)”.

• (6) After subsection (5) insert—

(5A) Subsections (5B) and (5C) apply where— (a) the holder of the ownership interest is not subject to tax on an amount of the ultimate parent’s profits for a taxable period that ends within 12 months of the accounting period mentioned in subsection (1)(b), and (b) the holder would be subject to tax on the amount for a taxable period ending within that 12-month period but for a difference which will be eliminated over time between— (i) the time when any income, expense, gain or loss is recognised in the ultimate parent’s financial statements, and (ii) the time when that income, expense, gain or loss is reflected in the profits of the ultimate parent on which the holder is subject to tax (“the holder’s taxable profits”). (5B) Condition A has effect, for each accounting period up to and including the period in which that timing difference is eliminated, as if the income, expense, gain or loss were instead reflected in the holder’s taxable profits in the taxable period in which it is recognised in the ultimate parent’s financial statements. (5C) In a period for which, under subsection (5B), the holder’s taxable profits of a particular type are treated for the purposes of condition A as greater or less than what they actually are, it is to be assumed— (a) that any excess is subject to tax at the same nominal rate at which the holder’s taxable profits of that type are actually subject to tax, (b) that the holder pays tax on any excess at that rate, (c) that any shortfall is not subject to tax, and (d) that the holder pays no tax on any shortfall.

Qualifying current tax expense

13

• (1) Section 174 (amount of covered tax balance) is amended as follows.

• (2) In subsection (5), in the definition of “qualifying current tax expense”, for “underlying profits” substitute “partially adjusted profits”.

• (3) At the end insert—

(6) For the purposes of the definition of “qualifying current tax expense” in subsection (5), the member’s “partially adjusted profits” are its underlying profits with the adjustments contained in the following sections applied— - section 137A (use of substituted values); - section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions); - section 140 (profits adjusted to be profits before certain purchase accounting adjustments).

14

In section 176 (amounts to be reflected in qualifying current tax expense), in subsection (2)(i), at the end insert “in accordance with this Part”.

15

• (1) Section 182 (total deferred tax adjustment amount) is amended as follows.

• (2) In subsection (1), from the words from “underlying profits” to the end substitute “partially adjusted profits, but with that deferred tax expense adjusted as follows”.

• (3) After subsection (2) insert—

(2A) The deferred tax expense is to be adjusted to include (so far as it would not already) any amount of deferred tax expense in respect of covered taxes within section 176(2)(g) or (h) (amounts reflected in other comprehensive income etc).

• (4) In subsection (8), at the appropriate place insert—

• “partially adjusted profits”, in relation to a member of a multinational group, means its underlying profits with the adjustments contained in the following sections applied—section 137A (use of substituted values);section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions);section 140 (profits adjusted to be profits before certain purchase accounting adjustments).

Intragroup transactions

16

In section 175 (amounts excluded from qualifying current tax expense), at the end insert—

(3) The reference in subsection (2)(a) to income or gains that are not included in the member’s adjusted profits does not include any income or gains that are not included in its adjusted profits solely because of an election under section 164 (intra-group transactions).

17

In section 182 (total deferred tax adjustment amount), in subsection (2)(a), at the end insert “(other than items that are not reflected solely because of an election under section 164 (intra-group transactions))”.

Tax equity partnerships: calculation of excess return for clawback

18

In section 176G (clawback of earlier qualifying flow-through tax benefits), for subsection (4) substitute—

(4) For the purposes of this section an investor has an “excess return” from an arrangement in an accounting period (“the current period”) if the total relevant return exceeds the amount of capital investment provided by the investor to the arrangement at its commencement. The amount of the excess return is the amount of the excess. (5) In subsection (4) “the total relevant return” means the sum of— (a) the amounts of the qualifying flow-through tax benefits provided to the investor under the arrangement that have been excluded under section 176D(1) in the current period or any earlier accounting period, (b) the amounts of any distributions made to the investor under the arrangement in the current period or any earlier accounting period, (c) the amounts received by the investor for the sale of any part of its investment in the arrangement in the current period or any earlier accounting period, and (d) the amounts of any qualifying refundable tax credits and marketable transferable tax credits made available to be used by the investor under the arrangement in the current period or any earlier accounting period, less the amount of any excess return that the investor had from the arrangement in any earlier accounting period.

Cross-border allocation of deferred tax assets and liabilities

19

In section 181B (cross-border allocation of deferred tax assets and liabilities), in subsection (5), at the end insert “(and accordingly no allocation of deferred tax assets or liabilities is to be made under this Chapter in cases to which the deferred taxes methodology applies).”

Deferred tax assets and liabilities: exclusions

20

• (1) Section 185 (inclusion of existing deferred tax assets and liabilities on entry into regime) is amended as follows.

• (2) In subsection (1), for “that is reflected” substitute “that are reflected”.

• (3) In subsection (6)—

• (a) in the words before paragraph (a) omit “qualifying”;

• (b) for paragraph (a) substitute—

(a) before the commencement of the first accounting period for which Pillar Two rules apply to the member and as a result of a transaction carried out after 30 November 2021, and

• (4) After subsection (7) insert—

(7A) Subsection (7D) applies to a deferred tax asset of a member of a multinational group that arises before the commencement of the first accounting period for which Pillar Two rules apply to the member and as a result of the occurrence of either of the following after 30 November 2021— (a) the making available of a tax credit, or other tax relief, by virtue of the exercise of a discretion in relation to a member of the group by a national, regional or local government or by a governmental entity; (b) the making (or modifying) of an election or of another choice by a member of the group where the effect of the election or choice is to change the tax treatment of an earlier transaction retrospectively. (7B) Subsection (7D) also applies to a deferred tax asset or a deferred tax liability of a member of a multinational group that arises— (a) after 30 November 2021 and before the commencement of the first accounting period for which Pillar Two rules apply to the member, (b) because of a difference between the value (or base cost) of an asset or liability for the purposes of a corporate income tax and its value for accounting purposes, and (c) in circumstances where the corporate income tax mentioned in paragraph (b) was introduced on or after 1 December 2021 in a territory that did not previously have a corporate income tax. (7C) Subsection (7D) also applies to a deferred tax asset of a member of a multinational group that arises before the commencement of the first accounting period for which Pillar Two rules apply to the member if— (a) where the member is located in a territory which did not have a corporate income tax before 1 December 2021 and in which one is introduced on or after that date, the deferred tax asset is attributable to a loss occurring before the fifth accounting period before the accounting period in which that corporate income tax came into force, or (b) the deferred tax asset arises in relation to non-economic expenses or losses (within the meaning of the Pillar Two rules) incurred after 30 November 2021. (7D) A deferred tax asset or deferred tax liability to which this subsection applies is to be ignored in determining the member’s deferred tax expense.

• (5) In subsection (8), omit “qualifying”.

21

• (1) Schedule 16 (transitional provision) is amended as follows.

• (2) In paragraph 2 (intra-group transfers before entry into regime), in sub-paragraph (3)—

• (a) omit the “and” after paragraph (a);

• (b) at the end insert

, and (c) a deferred tax asset is ignored if it is a deferred tax asset arising as described in section 185(7A) or (7B).

• (3) In paragraph 5 (general transitional safe harbour election: qualifying income tax expense)—

• (a) in sub-paragraph (1)—

• (i) omit the “and” after paragraph (a);

• (ii) at the end insert

, and (c) any amount that relates to a deferred tax asset arising as described in section 185(7A) or (7B) or that relates to a relevant pre-entry deferred tax liability.

• (4) At the end insert—

(14) (1) This paragraph applies in relation to an accounting period of a member of a multinational group if— (a) 21 July 2025 falls during the period (but is not the first day of the period), (b) the member has a relevant pre-entry deferred tax asset or a relevant pre-entry deferred tax liability, and (c) the asset or liability is reversed (to any extent) in the period. (2) Despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, an amount in respect of the reversal may be reflected in— (a) the member’s deferred tax expense for the purposes of this Part of this Act, or (b) the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule. (3) The amount that may be reflected in respect of the reversal is the pre-commencement proportion of the amount that could be so reflected if section 185(7D) or paragraph 2(3)(c) or 5(1)(c) of this Schedule (as the case may be) did not apply to the asset or liability. (4) In this paragraph “the pre-commencement proportion” means— (a) the number of days in the accounting period before 21 July 2025, divided by (b) the total number of days in the accounting period. (15) (1) This paragraph applies for an accounting period in relation to a relevant pre-entry deferred tax asset of a member of a multinational group if— (a) the accounting period falls within the applicable grace period, (b) the relevant pre-entry deferred tax asset is a deferred tax asset that arises as described in section 185(7A) or (7B), and (c) the action that results in the asset arising (that is to say, the action referred to in section 185(7A)(a) or (b) or (7B)) takes place on or before 18 November 2024. (2) If any relevant pre-entry deferred tax asset falling within a particular category is reversed, an amount in respect of that reversal may, despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, be reflected in— (a) the member’s deferred tax expense for the purposes of this Part of this Act, or (b) the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule, so far as it does not exceed the available grace period amount in relation to the category. (3) But an amount may not be reflected in respect of the reversal of a deferred tax asset so far as the reversal takes place as a result of (and would not have taken place but for) a change after 18 November 2024 to— (a) any law or election in effect in relation to the deferred tax asset, (b) the accounting methodology applicable to the deferred tax asset, or (c) the way in which a discretion of the kind mentioned in section 185(7A)(a) (government discretions) is exercised. (4) Take the following steps to find the “available grace period amount” (if any) in relation to a category of deferred tax asset for an accounting period. - Step 1Determine, in relation to each deferred tax asset of the member falling within the category, the carrying value of the asset as at the time when it was first reflected in the underlying profits of the member.For that purpose, determine the carrying value of the asset on the basis of the lower of—the nominal tax rate that applied in relation to it at that time, anda tax rate of 15%. - Step 2Find the sum of the values determined at Step 1. - Step 3Multiply the result of Step 2 by 20%. - Step 4Deduct any amount—that has been taken into account in determining the deferred tax expense of the member—in relation to assets falling within the category, andin an accounting period that falls within the applicable grace period, orthat would have been so taken into account in such a period had the Pillar Two rules applied to the member in question for that period. (5) For the purposes of this paragraph each of following is a “category” of relevant pre-entry deferred tax asset— (a) assets falling within section 185(7A)(a); (b) assets falling within section 185(7A)(b); (c) assets falling within section 185(7B). (6) For the purposes of this paragraph an accounting period “falls within the applicable grace period”— (a) in relation to the categories of asset mentioned in sub-paragraph (5)(a) and (b), if— (i) it begins on or after 1 January 2024 and before 1 January 2026, and (ii) it ends before 1 July 2027; (b) in relation to the category of asset mentioned in sub-paragraph (5)(c), if— (i) it begins on or after 1 January 2025 and before 1 January 2027, and (ii) it ends before 1 July 2028. (7) This paragraph is subject to paragraph 14 (and accordingly, that paragraph is to be applied in precedence to this in determining for the purposes of Step 4 in sub-paragraph (4) whether an amount has been taken into account in an accounting period in relation to a deferred tax asset). (16) (1) In this Schedule, in relation to a member of a multinational group— - “relevant pre-entry deferred tax asset” means a deferred tax asset that arises as described in section 185(7A), (7B) or (7C); - “relevant pre-entry deferred tax liability” means a deferred tax liability that arises as described in section 185(7B). (2) For the purposes of those definitions the references in section 185(7A) to (7C) to an accounting period for which Pillar Two rules apply to a member include an accounting period for which the Pillar Two rules would have applied to the member but for a transitional safe harbour election.

22

• (1) Schedule 16A (safe harbours) is amended as follows.

• (2) In paragraph 3 (disqualifying conditions)—

• (a) in sub-paragraph (1), for “Conditions A to D” substitute “The following conditions”;

• (b) at the end insert—

(7) Condition E is that— (a) a member of the group located in the territory has a relevant pre-entry deferred tax asset or relevant pre-entry deferred tax liability, and (b) the qualifying domestic top-up tax applying in the territory either— (i) does not make provision corresponding to section 185(7A) to (7D) (exclusion for deferred tax assets arising as a result of government arrangements etc) in relation to relevant pre-entry deferred tax assets and relevant pre-entry deferred tax liabilities, or (ii) makes such corresponding provision in a way that is inconsistent with the Pillar Two commentary in relation to relevant pre-entry deferred tax assets or relevant pre-entry deferred tax liabilities. (8) In subsection (7) “relevant pre-entry deferred tax asset” and “relevant pre-entry deferred tax liability” have the same meaning as in Schedule 16, but for that purpose the words “or (7C)” in the definition of “relevant pre-entry deferred tax asset” are to be disregarded.

• (3) In paragraph 4(1)—

• (a) omit paragraph (a);

• (b) in paragraph (b)—

• (i) for “after sub-paragraph (6), there were inserted” substitute “at the end there were inserted the following disqualifying condition”;

• (ii) the inserted sub-paragraph (7) becomes an inserted unnumbered sub-paragraph.

• (4) In paragraph 5(1)(b)—

• (a) omit sub-paragraph (i);

• (b) in sub-paragraph (ii)—

• (i) for “after sub-paragraph (6), there were inserted” substitute “at the end there were inserted the following disqualifying condition”;

• (ii) the inserted sub-paragraph (7) becomes an inserted unnumbered sub-paragraph.

Post-filing adjustments of covered taxes

23

• (1) Section 217 (post-filing adjustments of covered taxes) is amended as follows.

• (2) In subsections (2)(a) and (b) and (3), for “that liability” substitute “the relevant aggregate liability”.

• (3) In subsection (4), for “that increase or decrease” substitute “the increase or decrease referred to in subsection (1),”.

• (4) In subsection (5)(a), (b) and (c), after “the decrease” insert “referred to in subsection (3)”.

• (5) In subsection (8)(a), for “the aggregate covered tax balance of the standard members of the group in the territory of the member for the prior period” substitute “the relevant aggregate liability”.

• (6) At the end insert—

(9) In this section “the relevant aggregate liability”, in relation to the member referred to in subsection (1), means the aggregate liability to covered taxes of the standard members of the group in the territory of the member for the prior period.

Securitisation companies

24

In section 229C (UTPR: allocation of untaxed amounts to members), in subsection (3)—

• (a) omit the “or” after paragraph (a);

• (b) at the end insert

, or (c) a securitisation company within the meaning of the Taxation of Securitisation Companies Regulations 2006 (S.I. 2006/3296).

25

In Part 1 of Schedule 16A (qualifying domestic top-up tax safe harbour election), in paragraph 3, after subsection (8) (as inserted by paragraph 22 above) insert—

(9) Condition F is that the qualifying domestic top-up tax applying in the territory is not charged in respect of a member of the group located in the territory because of an exemption (however framed) or special regime relating to persons concerned in securitisation transactions.

Location of stateless entities

26

In section 239 (location of entities)—

• (a) in subsection (7), omit paragraph (a);

• (b) at the end insert—

(8) As regards stateless entities see also section 132(3)(b) (stateless member of group treated as located in its own nominal territory).

27

In Schedule 16A, in paragraph 7, at the end insert—

(6) For the purposes of this paragraph, “territory” does not include the nominal territory of a stateless member of a multinational group (see section 132(3)(b)).

Qualifying undertaxed profits tax

28

In section 241 (Pillar Two territories), omit subsection (4).

29

In section 256 (qualifying domestic top-up tax), omit subsection (5).

30

• (1) Section 257 (qualifying undertaxed profits tax) is amended as follows.

• (2) After subsection (1) insert—

(1A) Regulations under subsection (1)(b) may provide for the specification of a tax to be made by notice published by the Commissioners for His Majesty’s Revenue and Customs in accordance with the regulations.

• (3) In subsection (2), for “A tax may only be specified in regulations if the Treasury consider” substitute “A person may only specify a tax by virtue of this section if the person considers”.

31

In Schedule 16A (safe harbours), in paragraph 2 (accredited qualifying domestic top-up tax), omit sub-paragraphs (2) and (3).

32

• (1) For the purposes of Part 3 of F(No.2)A 2023, a tax is to be treated as a qualifying undertaxed profits tax for any accounting period that ends before the first regulations under section 257 of that Act have been made if—

• (a) it is a Qualified UTPR for that accounting period for the purposes of the Pillar Two rules, or

• (b) it is reasonable to conclude that it is likely to be a Qualified UTPR for that accounting period for the purposes of the Pillar Two rules.

• (2) In sub-paragraph (1) “Pillar Two rules” has the same meaning as in Part 3 of F(No.2)A 2023 (see section 255 of that Act).

Definition of “ownership interest”

33

In section 242 (ownership interests and controlling interests), in subsection (2), for paragraph (b) substitute—

(b) that interest is accounted for as equity in— (i) where B is a member of a consolidated group, the consolidated financial statements of the ultimate parent of the group (ignoring any requirement to consolidate the assets, liabilities, income, expenses and cash flows of B in those statements), or (ii) otherwise, B’s financial statements.

REITs: domestic top-up tax

34

In section 267 (DTT excluded entities), after subsection (1) insert—

(1A) A UK REIT is a DTT excluded entity (so far as would not already be the case by virtue of subsection (1)(b) or (c)).

Domestic top-up tax: exchange rates

35

In section 270 (domestic top-up tax: amount charged), at the end insert—

(4) The exchange rate to be used for a conversion to sterling required by Step 2 in subsection (A1) or Step 3 in subsection (1) is— (a) the average exchange rate published by the European Central Bank for the accounting period in question; (b) where no such rate is published by the European Central Bank, the average exchange rate published by the Bank of England for the accounting period in question; (c) where no such rate is published by either the European Central Bank or the Bank of England, such rate as appears, on a just and reasonable basis, to reflect the average exchange rate for the accounting period in question.

Domestic top-up tax: covered tax to include group relief payments

36

Section 272 (domestic top-up tax: determining top-up amounts of entity that is a member of a group) is amended as follows.

37

In subsection (8)—

• (a) after paragraph (a) insert—

(aa) section 138 (profits adjusted to be before tax) has effect as if at the end of subsection (2) there were inserted— (g) a group relief payment so far as excluded (and for that purpose “group relief payment” and “excluded” have the meaning given in section 173(3)). (ab) section 173 (covered taxes) has effect, subject to paragraph (f) below, as if (in addition to the modification made by subsection (4)(a))— (i) in subsection (1), the “and” after paragraph (c) were omitted and after paragraph (d) there were inserted , and (e) a group relief payment so far as it is not excluded. (ii) at the end there were inserted— (3) For the purposes of subsection (1)(e)— (a) “group relief payment” means a payment— (i) in relation to which section 183 or 188FA of CTA 2010 applies to the member, and (ii) that relates to group relief which the member claims under section 130 or 188CB of that Act by virtue of the group condition being met (see sections 132 and 188CE of that Act); (b) a group relief payment is “excluded” so far as it exceeds 15% of the agreed loss amounts (within the meaning of section 183 or 188FA of that Act, as the case may be) to which the group relief payment relates. (4) It follows from subsection (1)(e) that a group relief payment, so far as not excluded, operates to reduce the covered tax balance of the recipient.

• (b) at the end insert—

(f) section 239(4)(a) (location of entities: tie-breaker by reference to covered taxes) has effect without the modification made by paragraph (ab).

Domestic top-up tax: allocation of CFC mobile income

38

In section 272 (domestic top-up tax: determining top-up amounts of group member), in subsection (8), for paragraph (d) substitute—

(d) section 179 (controlled foreign companies) has effect as if for subsection (2) there were substituted— (2) But the amount of qualifying current tax expense in respect of mobile income allocated to F is not to exceed 15% of the adjusted profits of F.

Simplified calculations for non-material members

39

In Schedule 16A (safe harbours), at the end insert—