INTM489145 - Unassessed Transfer Pricing Profits Conditions: TDC Examples
Source: gov.uk (2025-12-04)


UTPP will apply to accounting periods beginning on or after 1 January 2026. This guidance will be updated with detailed examples by 1 January 2026. For earlier accounting periods please use the diverted profits tax guidance at INTM489500 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm489500)

Example 1

Example 2 at INTM489135 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm489135) showed Company C in the UK making $100m of royalty payments to Company D, giving rise to $90m of unassessed transfer pricing profits. Country D does not charge corporation tax on Company D’s profits, and royalty payments from Country C to Country D are subject to withholding tax at 5%. The total tax reduction was $18m.

Company D has four part-time staff, two of whom are directors and the others are administrative staff. None of these staff perform DEMPE functions in relation to the IP or control the associated economically significant risks. The IP was developed by Company C which has over 100 staff, many of whom are experienced and highly rewarded.

It is clear from the facts and information provided that the functions or activities of Company D’s staff in the accounting period do not contribute economic or commercial value to the transaction. There are no significant non-tax benefits to holding the IP in Company D as opposed to Company C.

Based upon this information, it is reasonable to assume that the arrangements were designed to reduce Company C’s UK tax liability, so the TDC is met.

Example 2

This example is a continuation of the facts in Example 1.

In order to get round the imposition of withholding tax on the royalties, the same group sets up Company E in Country E.

Under the terms of the double taxation agreements, Country C does not impose withholding tax on royalty payments to Country E, and Country E does not impose withholding tax on royalty payments to Country D.

Company D then licenses the IP to Company E, which in turn enters into a sub-licence agreement with Company C. Company E retains a $250k difference between the $100m royalties it receives from Company C and what it pays to Company D, on which it pays corporation tax of $50k.

So, the $4.5m withholding tax liability in respect of the $90m unassessed transfer pricing profits has now been replaced with a $45k corporation tax liability.

Under the terms of the double taxation agreement between Countries C and E there is no obligation for Company C to deduct withholding tax from its royalty payments. As Country E does not impose withholding tax on the payments to Company D, the tax reduction is now increased from $18m to $22.46m.

This ETMO is still referable to the provision between Company C and Company D. The transactions between Company D and Company E form part of the series of transactions by which the provision is imposed. We therefore first need to ask whether:
- it is reasonable to assume that the series of transactions by which the provision between Company C and Company D was imposed were designed to secure a UK tax reduction, and/or
- it is reasonable to assume that the arrangements to which the series of transactions relate, were designed to secure the tax reduction.
There are no significant non-tax benefits from the introduction of Company E to the arrangements, and so in both cases these assumptions seem reasonable.

Example 3

A UK-based group decides to centralise its technical support activities which had always been carried out by each company on their own behalf. It considers various options for location, including the UK, before deciding on a European country with a corporate income tax rate that is less than 80% of the UK rate. UK companies in the group will be making payments to the new company for the services it provides and these payments will each give an ETMO.

The contractual arrangements between the new company and the UK companies are straightforward in that the latter pay the former for the services it provides based on standard terms and there are synergies from the centralisation.

Before the TDC test is applied, it is relevant to consider whether the transaction is priced on an arm’s length basis. If the transfer pricing is correct then UTPP will not apply, because there will be no unassessed transfer pricing profits.

If the transfer pricing is incorrect, for example because UK companies are actually performing the majority of the services which the new company is contracted to provide, then the TDC test may or may not be met depending on the facts of the case. Specifically, consideration should be given to the reasons why the price of the transaction is inconsistent with the substance of the commercial and financial relations between the parties. For example:
- It may always have been the intention that the UK companies would perform the majority of the services, but the structure of the contractual arrangements has been used to justify transfer pricing which does not reflect the commercial realities. If this is the case, then the TDC will be met.
- Alternatively, the transfer pricing may be the result of genuine error for example if there was a temporary arrangement due to recruitment issues in the new company, and the tax team were not informed of the change in circumstances. The company may be able to demonstrate that the original intentions behind the structure were non-tax motivated, by showing financial projections of the productivity and efficiency savings the group expected to achieve by co-locating all support activity in one location. In such a case, the TDC will not be met, and the transfer pricing error may be corrected through a corporation tax enquiry or discovery assessment.
Example 4

A UK company in a group funded and undertook the research and development of new products. Once the products receive regulatory approval the right to sell and manufacture the products is licensed to group entity Company F in Country F. Under the terms of the licence the UK company receives 25% of the profits and Company F receives 75%.

Company F manufactures the products and contracts with other group companies to successfully commercialise the products, in line with the licence agreement. As well as performing and controlling research and development activities, the UK company performs some functions relating to marketing and distribution in the UK and regional commercial and regulatory functions.

HMRC determine that the UK is under rewarded under the terms of the licence, and so there are unassessed transfer pricing profits.

It is not clear that the TDC is met in this case. The provision is held to encompass the process from product development to manufacture, to capture the relevant reward allocation for the entities. The location of manufacturing in Company F, and the fact that IP was licensed to the manufacturer is not in itself designed to secure a tax reduction. There was no evidence that the transaction and structure would have been different absent tax.

To conclude that the TDC is met it would be necessary to establish that the grant of the sub-license to Company F was not a commercial step. Since Company F manufactures the products and requires a license to sell them, further evidence is required for it to be reasonable to assume that the grant of a sub-license to Company F was not commercial.

Example 5

A global technology group creating bespoke systems had a UK company which catered to UK based customers, and Company G in Country G which catered to a small number of non-UK customers.

The UK entity employed 100 Customer Relationship Managers, and a corresponding number of support staff, who were responsible for introducing new customers, managing the customer relationships and ensuring that the products sold to customers met their needs. Company G employed ten Customer Relationship Managers and ten support staff.

Customer Relationship Managers employed by the UK entity also generated significant revenue streams for Company G through arranging for UK customers to acquire additional services provided by specialist staff who had been recruited and employed by Company G in response to customer demand. Company G provided access to its specialists, but Customer Relationship Managers employed by Company G were not involved in providing any other services to these customers. All of the revenue arising from these services was booked entirely in Company G.

The UK entity received an approximate 25% profit share while the remaining 75% was retained by Company G.

Again, HMRC considers that the UK entity may not be rewarded on an arm’s length basis as required by the transfer pricing requirement.

However, the TDC is unlikely to be met in this case because, on the information available there is no indication that the location of the specialists in Company G, or the route for UK customers to access their services was designed to secure a reduction in UK tax. In this case it is unlikely that absent a tax design the transaction would have been designed differently in respects other than pricing.