Global Daily Tax News, UK To Amend International Tax Rules From January, (Dec 3, 2025)

Alongside the 2025 Budget, the UK Government has proposed legislative amendments to the UK's rules on transfer pricing, permanent establishment, and Diverted Profits Tax.

The changes to the transfer pricing regime are intended to simplify the rules in a number of areas, including the participation condition, intangibles, commissioners' sanctions, UK-to-UK transfer pricing, interpretation in accordance with OECD principles, and financial transactions.

Meanwhile, the change to the rules regarding permanent establishment are intended to bring the UK's rules into line with the latest international consensus on both the definition of a permanent establishment and the attribution of profits to a permanent establishment.

The permanent establishment changes will also clarify which supporting guidance and materials can be used in conjunction with UK legislation, and will update the legislation and Statement of Practice on the Investment Manager Exemption.

A new mechanism is also being introduced for a UK-resident company to claim relief when a transfer pricing adjustment is made to a connected foreign company that relates to a UK permanent establishment.

Finally, the Government is proposing a new charging provision for Unassessed Transfer Pricing Profits within Corporation Tax, in place of the current Diverted Profits Tax regime, to simplify the UK's international tax regime.

The changes will apply for accounting periods beginning on or after January 1, 2026.

In relation to transfer pricing, the amendments made to "guarantees", "position of guarantor of affected person's liabilities under a security issued by the person", and "other references to securities" will be subject to transitional rules. The transitional rules are such that the reformed rules will apply to both:

• new financing arrangements that are entered into on or after January 1, 2026;

• all financing arrangements, for accounting periods commencing on or after January 1, 2028, or any earlier periods commencing on or after January 1, 2026, if a person makes an election in relation to the arrangements.

The amendments made in relation to the treatment of exchange gains and losses will be subject to transitional provisions such that the reformed rules will apply to accounting periods beginning on or after January 1, 2026. This rule is subject to provision that an accounting period beginning before and ending on or after January 1, 2026, is to be treated as if so much of the period as falls before the date, and so much of the period that falls on or after the date, were separate accounting periods.