• Part 8: Part 8: Transfer Pricing

    • Article 47 - Policy Statement on Transfer Pricing

      This Part provides rules for the treatment for tax purposes of income affected by transactions between Associated Persons.

    • Article 48 - Basic Rule

      (1) This Part applies when—
      (a) conditions ("the actual conditions") have been made or imposed between any two Associated Persons in their commercial or financial relations by means of a transaction or series of transactions; and
      (b) by reason of the actual conditions being made or imposed instead of the arm's length conditions there is, except for this Article, a reduction in the amount of the Chargeable Profits of a QFC Entity, being one of those Associated Persons ("the first taxpayer") for an Accounting Period.
      (2) The "arm's length conditions" are the conditions that would have been made or imposed if the Persons were not Associated with each other and the term includes the case where no conditions would have been made or imposed as between Persons who were not Associated with each other.
      (3) The Chargeable Profits of the first taxpayer shall be computed for tax purposes as if the arm's length conditions had been made or imposed as between the first taxpayer and the other Associated Person referred to in Article 48(1), instead of the actual conditions. A computation on that basis is referred to as a computation on the arm's length basis.
      (4) For the purposes of this Part—
      (a) references to a reduction in an amount of Chargeable Profits include references to a reduction to nil or to the accrual of a tax loss or an increased loss; and
      (b) references to an increase in Chargeable Profits include references to the reduction in a tax loss whether to a smaller amount or to nil.
      (5) This Part applies whenever the conditions in question were made or imposed, whether before, on or after these Regulations come into force.
      Amended (as from 18th June 2014)

    • Article 49 - Loans

      (1) This Article applies where the actual conditions imposed between two Associated Persons include the making of a loan, and the matters specified in Article 49(2) are relevant to the determination of the arm's length conditions for the purposes of Article 48.
      (2) Article 48(2) shall be construed as requiring account to be taken of all factors including—
      (a) the appropriate level or extent of the borrowing person's overall indebtedness;
      (b) whether the loan would have been made at all if the Persons had not been Associated;
      (c) the amount which the loan would have been if the Persons had not been Associated; and
      (d) the rate of interest and other terms which would have been agreed if the Persons had not been Associated,
      but is subject to the following provisions of this Article.
      (3) Where—
      (a) a Person makes a loan to an Associated Person; and
      (b) it is not part of the first Person's business to make loans generally, the fact that it is not part of the first Person's business to make loans generally shall be disregarded in construing Article 49(2).
      (4) Article 48(2) shall be construed as requiring no account to be taken, in the determination of any of the matters mentioned in Article 49(2), of (or any inference capable of being drawn from) any guarantee provided by a Person with which the borrowing person is Associated.
      (5) Any reference to a guarantee includes a reference to a surety and to any other relationship, arrangement, connection or understanding (whether formal or informal) such that the Person making the loan to the borrowing person has a reasonable expectation that in the event of a default by the borrowing person he will be paid by, or out of the assets of, one or more Persons.
      (6) For the purposes of this Article, "the borrowing person" means the Person which received the loan referred to in Article 49(1).
      Amended (as from 18th June 2014)

    • Article 50 - Guarantees

      (1) This Article applies where the actual conditions are made or imposed by means of a series of transactions which include—
      (a) the receipt of a loan by a Person which is one of the Associated Persons ("the borrowing person"); and
      (b) the provision of a guarantee by a Person which is the other of those Persons.
      (2) Article 48(2) shall be construed as requiring account to be taken of all factors including—
      (a) whether the guarantee would have been provided at all if the Persons had not been Associated;
      (b) the amount that would have been guaranteed if the Persons had not been Associated; and
      (c) the consideration for the guarantee and other terms which would have been agreed if the Persons had not been Associated,
      but is subject to the following provisions of this Article.
      (3) Where—
      (a) a Person provides a guarantee in respect of another Associated Person; and
      (b) it is not part of the first Person's business to provide guarantees generally, the fact that it is not part of the first Person's business to provide guarantees generally shall be disregarded in construing Article 50(2).
      (4) Article 48(2) shall be construed as requiring no account to be taken, in the determination of any of the matters mentioned in Article 50(5), of (or any inference capable of being drawn from) any guarantee provided by a Person with which the borrowing person is Associated.
      (5) The matters are—
      (a) the appropriate level or extent of the borrowing person's overall indebtedness;
      (b) whether it might be expected that the borrowing person and a particular Person would have become parties to a transaction involving the receipt of a loan by the borrowing person or the making of a loan, or a loan of a particular amount, to that Person; and
      (c) the rate of interest and other terms that might be expected to be applicable in any particular case to such a transaction.
      (6) Article 49(5) also applies for the purposes of this Article.
      Amended (as from 18th June 2014)

    • Article 51 - Compensating Adjustment Claims

      (1) If—
      (a) in an Accounting Period and by reason of the actual conditions, an amount of Chargeable Profits of that other Person Associated with the first taxpayer, in this Part referred to as the "second taxpayer", is increased;
      (b) that increase in Chargeable Profits corresponds to the reduction in Chargeable Profits of the first taxpayer referred to in Article 48(1)(b); and
      (c) a claim under this Article for a compensating adjustment has been made in writing by the second taxpayer to the Tax Department,
      the second taxpayer's Chargeable Profits shall be computed as if the arm's length conditions had been made or imposed instead of the actual conditions, and the computation must be consistent with the computation made on that basis in the case of the first taxpayer.
      (2) Article 51(1) shall not apply unless the amount of Chargeable Profits mentioned in Article 51(1)(a) would be taken into account in computing the amount of the second taxpayer's Chargeable Profits for an Accounting Period.
      (3) For the purposes of Article 51(2) in a case where no tax loss accrues or a smaller loss accrues, as mentioned in Article 48(4)(b), a Chargeable Profit shall instead be deemed to have accrued.
      (4) A claim by the second taxpayer under Article 51(1) shall not be made in relation to an Accounting Period unless—
      (a) the first taxpayer had made a return on an arm's length basis for the Accounting Period; or
      (b) a relevant notice given to the first taxpayer takes into account a determination in accordance with this Part of an amount falling to be brought into account for tax purposes on that basis for that Accounting Period; and
      (c) the claim is made within 3 years of the date on which that return is made or that notice is given, or such longer time as the Tax Department may allow.
      (5) Where—
      (a) a claim under Article 51(1) is made by the second taxpayer in relation to a return made on the arm's length basis as is mentioned in Article 51(4)(a); and
      (b) a relevant notice taking account of such a determination as is mentioned in Article 51(4)(b) is subsequently given to the first taxpayer,
      the second taxpayer shall be entitled, within the period mentioned in Article 51(4)(c), to make any such amendment of the claim as may be appropriate in consequence of the determination contained in that notice.
      Amended (as from 18th June 2014)

    • Article 52 - Compensating Adjustment for Guarantor

      (1) This Article applies in any case where—
      (a) a Person ("the borrowing person") has liabilities under the terms of a loan received by the Person;
      (b) those liabilities are to any extent the subject of a guarantee provided by a Person ("the guarantor person"); and
      (c) in computing the Chargeable Profits or tax losses of the borrowing person for the purposes of these Regulations, the amounts to be deducted in respect of interest or other amounts payable under the terms of the loan fall to be reduced (whether or not to nil) under Article 48(3) by virtue of Article 49.
      (2) On the making of a claim in writing to the Tax Department by the guarantor person in any such case, the guarantor person shall, to the extent of that reduction, be treated for all purposes of these Regulations as if it (and not the borrowing person)—
      (a) had received the loan;
      (b) owed the liabilities under the terms of the loan; and
      (c) had paid any interest or other amounts paid under the terms of the loan by the borrowing person.
      (3) Where the borrowing person's liabilities under the terms of the loan are the subject of two or more guarantees (whether or not provided by the same Person) the total of the amounts brought into account by the guarantor persons by virtue of Article 52(2) must not exceed the total amount of the reductions that fall within Article 52(1)(c).
      (4) Articles 51(4) and (5) shall apply in relation to a claim under Article 52(2) as they apply in relation to a claim under Article 51(1) by the second taxpayer but taking references in Article 48
      (a) to the first taxpayer, as references to the borrowing person; and
      (b) to the second taxpayer, as references to the guarantor person.
      (5) Article 49(5) also applies for the purposes of this Article.
      Amended (as from 18th June 2014)

    • Article 53 - Balancing Payments

      (1) This Article applies where—
      (a) the circumstances are as described in Articles 51(1)(a) and (b); and
      (b) one or more payments (the "balancing payments") are made to the first taxpayer by the second taxpayer; and
      (c) the sole or main reason for making those payments is that Article 48(3) applies.
      (2) To the extent that the balancing payments do not in aggregate exceed the amount of the available compensating adjustment, those payments shall not be taken into account in computing the Chargeable Profits or tax losses of either the first taxpayer or the second taxpayer.
      (3) In this Article the "available compensating adjustment" means the difference between—
      (a) the Chargeable Profits or tax losses of the second taxpayer computed on the basis of the actual conditions; and
      (b) the Chargeable Profits or tax losses of the second taxpayer as they fall or would fall to be computed on a claim under Article 51(1),
      for this purpose taking the amounts in subparagraphs (a) and (b) above as a positive amount if it is an amount of Chargeable Profit and as a negative amount if it is an amount of tax loss.
      Amended (as from 18th June 2014)

    • Article 54 - Balancing Payments by Guarantor

      (1) This Article applies where—
      (a) the circumstances are as described in Article 52(1);
      (b) one or more payments (the "balancing payments") are made by the guarantor person to the borrowing person; and
      (c) the sole or main reason for making those payments is that Article 48 applies by virtue of Article 50 or that Article 52 applies.
      (2) To the extent that the balancing payments by all the guarantor persons do not in aggregate exceed the total amount of the reductions as mentioned in Article 52(3), those payments shall not be taken into account in computing the Chargeable Profits or tax losses of the guarantor person or persons or the borrowing person.

    • Article 55 - Effect on Double Taxation Relief

      Where a claim under Article 51(1) or an amended claim under Article 51(5) is allowed and the claimant has been or may be given credit for overseas tax under a Double Taxation Agreement or under Article 38, in computing the amount of that credit—

      (a) the overseas tax to be taken into account as having been paid or as being payable by the claimant shall exclude any amount of overseas tax which would not have been paid or payable if the computation of the income to which the claim or amended claim relates, had, so far as it includes income to which the claim relates, been made on the arm's length basis; and
      (b) the amount of the income to be taken into account as having been received by the claimant and in respect of which the claimant is or may be given credit for overseas tax shall be determined, so far as it includes income to which the claim or amended claim relates, on the arm's length basis.
      Amended (as from 18th June 2014)

    • Article 56 - Associated Persons

      For the purposes of this Part, Persons are Associated with each other if one Controls the other, either directly or indirectly, or both are Controlled by the same Person or Persons.

    • Article 57 - Control

      (1) For the purposes of these Regulations, and subject to Article 57(2), "Control" in relation to a Company means the power of a Person to secure—
      (a) by means of the holding of shares or the possession of voting rights in or in relation to that Company; or
      (b) by virtue of any powers conferred by the articles of association or other document regulating that or any other Company,
      that the affairs of the first Company are conducted in accordance with the wishes of that Person, and in relation to a Partnership, means the right of a Person to a share of more than one-half of the assets, or of more than one-half of the income of that Partnership.
      (2) For the purposes of these Regulations, a Person who exercises Control, or is able to exercise or is entitled to acquire, direct or indirect, Control over the affairs of a Company or a Partnership shall be taken to have Control of that Company or that Partnership, as the case may be.
      (3) Without prejudice to the generality of Articles 57(1) and (2), a Person ("the potential controller") shall be taken to have indirect Control of a Company or a Partnership at a particular time if he would be taken to be directly Controlling that Company or that Partnership if the rights and powers attributed to him included the rights and powers of Persons with whom the potential controller is Connected.
      (4) For the purposes of this Article two Persons are Connected with each other if—
      (a) one of them is an individual and the other is his spouse, a relative of his or of his spouse, or the spouse of such a relative;
      (b) one ("the first Person") is in partnership with the other ("the second Person") or is the spouse or relative of the second Person; or
      (c) one of them is the trustee of a Settlement and the other is—
      (i) a Person who in relation to that Settlement is a Settlor; or
      (ii) a Person who is connected with a Person falling within subparagraph (i) above.
      (5) For the purposes of Article 57(4) "relative" means brother, sister, ancestor or lineal descendant including a step-child.
      Amended (as from 18th June 2014)

    • Article 58 - Transfer Pricing Appeals

      When the question in dispute on any appeal within Article 135 is or involves a determination of whether this Part has effect as respect any conditions made or imposed between any two Persons and the question relates to any conditions made or imposed between two Persons each of whom is within the charge to tax under these Regulations in respect of profits arising from the relevant activities, then—

      (a) each of the Persons as between whom the actual conditions were made or imposed shall be entitled to appear and be heard by The Regulatory Tribunal, or to make representations to them in writing;
      (b) The Regulatory Tribunal shall determine that question separately from any other questions in those proceedings; and
      (c) their determination on that question shall have effect as if made on an appeal to which each of those Persons was a party.
      Amended (as from 18th June 2014)

    • Article 59 - Supplementary Provisions

      (1) For the purposes of this Part—
      (a) "transaction" includes arrangements, understandings and mutual practices (whether or not they are, or are intended to be, legally enforceable);
      (b) "a series of transactions" includes references to a number of transactions each entered into (whether or not one after the other) in pursuance of, or in relation to, the same arrangement;
      (c) a series of transactions shall not be prevented by reason only of one or more of the matters mentioned in Article 59(1)(d) from being regarded as a series of transactions by means of which conditions have been made or imposed between any two Persons;
      (d) the matters are—
      (i) that there is no transaction to which both those Persons are parties;
      (ii) that the parties to any arrangement in pursuance of which the transactions in the series are entered into do not include one or both of those Persons; and
      (iii)that there is one or more of the transactions in the series to which neither of those is a party.
      (2) In this Article, "arrangement" means any scheme or arrangement of any kind (whether or not it is, or is intended to be, legally enforceable).
      (3) For the purposes of this Part, where conditions are made or imposed between Associated Persons in their commercial or financial relations by means of a transaction or series of transactions—
      (a) it shall be assumed, unless the contrary is shown to the satisfaction of the Tax Department, that different conditions or no conditions would have been imposed if the Persons were not Associated; and
      (b) where a claim is made under Article 51(1), it shall be for the claimant to show that the claim satisfies that paragraph.
      (4) Any adjustment required to be made by virtue of this Part may be made by way of discharge or repayment of tax by modification of any assessment or otherwise.
      (5) In this Part "relevant activities" in relation to any Person who is one of the Persons as between whom any conditions have been made or imposed, means such of his activities as—
      (a) comprise the activities in the course of which, or with respect to which, those conditions are made or imposed; and
      (b) are not activities carried on either separately from those activities or for the purposes of a different part of that Person's business.
      (6) In this Part "relevant notice" means—
      (a) a closure notice under Article 124 in relation to an enquiry into a return filed under Article 109, or into a return amended under Article 116, or into a Partnership return;
      (b) a notice of a discovery assessment under Article 128(1); or
      (c) a notice of a discovery determination under Article 128(2).
      Amended (as from 18th June 2014)