As we previously reported, on 28 April 2025 the UK government announced a technical consultation on draft legislation (the Draft Legislation) to reform the UK’s transfer pricing, permanent establishment (PE) and diverted profits tax (DPT) legislation. Responses can be submitted until 7 July 2025. This follows a policy consultation in summer 2023 (the 2023 Consultation).

The stated aims of the Draft Legislation are to improve fairness by ensuring equal treatment between multinationals and other businesses, simplify the existing legislation in these areas and support growth by improving tax certainty and continued access to treaty benefits. The expected impact of these changes on businesses currently in scope is negligible.

We have summarised some of the key changes proposed by the UK government below.

Transfer pricing

A key consideration of the 2023 Consultation was whether to limit the application of UK-to-UK transfer pricing to certain circumstances that presented tax arbitrage opportunities. The Draft Legislation proposes an exemption from transfer pricing between UK resident companies subject to UK corporate tax at the same rate. The removal of the burden presented by UK-to-UK transfer pricing is a welcome change, although it must be noted that this is subject to various exceptions, and HMRC can give a notice disapplying the exemption.

Another interesting change is the expansion of the “participation condition”. The Draft Legislation proposes a form of direct participation where the relevant persons are subject to an agreement for common management, an anti-avoidance provision applying to arrangements with a main purpose of securing that the participation condition was not met and a power allowing HMRC to issue a notice with the effect that the participation condition is to be treated as met where there is participation under paragraph 1 of Article 9 of the OECD Model Tax Convention but not otherwise under the UK rules.

The other changes proposed in the Draft Legislation include the application of a single valuation standard to transactions involving intangible fixed assets, a handful of alignments to the rules on financial transfer pricing (including in relation to guarantees and “implicit support”) with the OECD Model Tax Convention and Transfer Pricing Guidelines and the repeal of the requirement for HMRC to sanction transfer pricing determinations.

In light of the responses to the 2023 Consultation, the Draft Legislation does not, however, amend the definition of “provision” to align more generally with Article 9 of the OECD Model Tax Convention. The government has instead confirmed that it will issue further guidance to address any potential ambiguity.

Permanent Establishment (PE)

The Draft Legislation amends the statutory definition of a dependent agent PE to align with the 2017 OECD Model Tax Convention. In response to criticisms raised following the 2023 Consultation, the government has confirmed that this change is not intended to broaden the definition of a dependent agent PE. Under the Draft Legislation, a PE could be created through a person who “habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company”. The inclusion of “material” in this definition differs from the proposal in the 2023 Consultation but aligns with the OECD Model Tax Convention.

As a result of the responses to the 2023 Consultation as to how this change will affect the asset management industry, the Draft Legislation proposes a suite of amendments to the Investment Manager Exemption to clarify its operation and simplify its application. The government is also seeking comments on consequential amendments which are proposed to the government’s Statement of Practice 1/01, providing guidance on the interpretation of this exemption. 

The Draft Legislation also proposes to require that the rules on attribution of profits are to be interpreted in accordance with the relevant OECD documents. This includes, in particular, the 2010 OECD Report on the Attribution of Profits to Permanent Establishments (commonly called the AOA).

Diverted Profits Tax (DPT)

As we reported previously, the overarching proposal is the removal of DPT as a separate tax, with the creation of a new corporation tax charge on “unassessed transfer pricing profits” (UTPP). Corporation tax on UTPP will be charged at the underlying corporation tax rate plus 6%, therefore retaining the existing rate differential. One of the key benefits to this change is clearer access to treaty benefits, including access to the Mutual Agreement Procedure to remove double taxation, which has previously been an area of dispute between taxpayers, HMRC and other tax authorities.

The new regime retains the essential features of DPT. Broadly the same assessment process and framework apply (including preliminary notices, charging notices and a 15-month review period, with the tax to be paid upfront), and a UTPP charge arises only where two main gateways are met that are currently a feature of DPT: the effective tax mismatch outcome (ETMO) and the tax design condition (TDC), which replaces the “insufficient economic substance condition” or IESC. 

• ETMO: The existing ETMO condition has been simplified. This requirement is broadly satisfied in relation to a provision between a company and a related party if the amount of tax due and payable by that other party (and not refunded) is less than 80% of the corporation tax that would otherwise be charged. One notable change here is that, in the case of a transparent entity (such as a partnership), the Draft Legislation proposes to assume that the ETMO is met and provides an additional 30 days for the entity to make representations.
• TDC: The TDC is met where it is reasonable to assume that the structure of the provision (or arrangements of which the provision forms part) to which the UTPP relate are designed to have the effect of reducing, eliminating or delaying the liability of any person to pay any tax (including foreign tax). This is a significant departure from the IESC, which focussed specifically on the tax reduction arising from the ETMO (rather than reducing any tax liability more generally) and contained a safe harbour where it was reasonable to assume that the non-tax benefits of the arrangement would exceed the tax benefits. The government notes that the safe harbour provisions have been removed given comments in the previous responses that they were difficult to apply in practice.

The “avoided PE” DPT charge will not be replicated in the UTPP provisions and there will be no notification requirement where a company is potentially within scope of the UTPP provisions, as there currently is with DPT.