UK: Consultation on draft legislation to reform transfer pricing, PE, and DPT rules
Comments are due by July 7, 2025.
HM Revenue and Customs (HMRC) on April 28, 2025, published draft legislation for consultation to reform the UK’s transfer pricing, permanent establishment (PE), and diverted profits tax (DPT) rules.
The proposals follow an initial consultation in mid-2023 that was generally well-received, with some reservations in specific areas. The proposals are aimed at simplifying and updating the UK’s international tax rules and aligning them more closely with the UK’s obligations under its income tax treaties. The legislation would become effective no earlier than January 1, 2026.
Some of the key proposals include:
- Transfer pricing
- Broaden the definition of “associated enterprises”
- Exempt narrowly defined category of transactions between UK resident companies
- Better align UK rules with OECD principles relating to financial transactions
- Value transfers of intangible fixed assets under the arm’s length principle
- Bring exchange gains and losses on loan relationships and derivative contracts into scope of the rules
- DPT
- Replace with simpler unassessed transfer pricing profits
- Replace “insufficient economic substance condition” with simplified “tax design condition”
- Remove notification requirements for taxpayers
- PEs
- Align PE definition more closely with OECD Model Tax Convention (MTC) definition
- Attribute profits to PEs based on Article 7 of the MTC and the authorized OECD approach (i.e., intra-entity royalties, interest, and mark-ups on services would no longer be disallowed)
- Broaden and simplify the investment manager exemption
Comments on the draft legislation are due by July 7, 2025.
Read a May 2025 report prepared by the KPMG member firm in the UK