The next question was what the group was actually transferring

Why changes to contracts and commercial responsibilities require a separate analysis of the restructuring itself, alongside the allocation of future profits.

Angelo Chirulli FCA ADIT TEP | October 2026

In my previous article, I considered how changes in UK decision-making could affect a permanent-establishment attribution and the assumptions supporting an Advance Pricing Agreement.

The group needed to identify those changes before they undermined its tax analysis. Bringing Tax into the approval process exposed a further question.

Some proposals went beyond giving UK employees greater discretion. The group was considering moving selected customer contracts from the overseas principal to the UK subsidiary, together with responsibility for delivering those contracts.

The commercial objective was to place the relevant business closer to its customers. For this next stage of the illustrative case, assume that management has approved that direction, subject to implementation.

Before the revised profit allocation could begin, the group needed to establish whether the transition itself involved something for which independent parties would have required payment.

Start with the transaction being implemented

The project team described the proposal as a move to a UK operating model. That description was too broad to support a tax conclusion.

I would ask the team to take one important customer and explain what would happen to its existing contract. Would the overseas principal assign its rights, would the parties enter into a novation, or would the contract expire before the customer signed a new agreement with the UK subsidiary?

The review would then trace the associated obligations. Who would deliver outstanding work, honour warranties and bear exposure to customer claims? Would the UK company obtain access to systems or commercial know-how that it could not previously exploit for its own account?

These are different factual possibilities. The first task is to identify the actual transaction before selecting a price or valuation method.

A useful implementation schedule would name the parties, describe the rights and obligations affected, and record when each change takes effect.

A fall in expected profit does not establish the compensation

Suppose management forecasts that the overseas principal’s annual profit from the affected business will fall from £3 million to £1 million after the restructuring.

The £2 million difference identifies a question to investigate. It does not establish an annual compensation entitlement, a five-year payment of £10 million or the value of an asset.

The OECD distinguishes a reduction in expected future profits from a transfer of something valuable or a termination or substantial renegotiation that independent parties would compensate. The latter questions require their own analysis.

For this group, the finance forecast should therefore be supported by an explanation of what the principal is surrendering and what the UK subsidiary is obtaining. A forecast prepared solely to allocate future taxable profit will not answer that question.

Examine the arrangements being surrendered

An existing agreement may contain notice periods, exclusivity provisions or termination rights. These terms need to be read alongside the parties’ conduct and the applicable law.

The absence of an express indemnity clause does not, on its own, settle the arm’s length analysis. Equally, a group cannot establish a compensable right simply by inserting a payment into an implementation agreement.

The practical question is whether an independent enterprise in the relevant circumstances would have accepted the change without compensation, taking account of enforceable rights and commercially realistic alternatives.

For example, could the principal continue servicing the contracts until expiry? Could it retain the existing business while the UK subsidiary developed new customers? Would either course remain commercially feasible after the proposed operational changes?

I would want the board paper to explain why the chosen route makes sense for the affected companies, as well as for the group overall.

Confirm what happens to risk in practice

Moving a contract is only part of the factual analysis. If the UK subsidiary is to bear the relevant commercial risks, the group should identify the people who will control those risks and establish its financial capacity to bear them.

A revised agreement may allocate customer exposure to the UK company while overseas personnel continue making the significant decisions. Alternatively, UK personnel may already be taking decisions that the documents reserve to the principal.

The implementation review should resolve such discrepancies. The future allocation of profit needs to follow the transaction as accurately delineated, including the actual control and assumption of risk.

Keep the UK subsidiary and the principal’s PE separate

The group already has a UK subsidiary and a UK permanent establishment of its overseas principal. That makes the identity of the transferor particularly important.

A transfer from the principal to the subsidiary is a transaction between separate companies. A change in the activities attributed to the principal’s UK PE concerns parts of the same legal enterprise.

The PE is not a separate company that can independently own and sell the principal’s contracts. Nevertheless, its functions and the economic ownership of assets attributed to it may affect the tax consequences of a disposal by the principal.

If responsibilities change within the principal, the group must analyse the effect under the applicable PE attribution framework, including any relevant dealings, rather than mechanically applying an intercompany compensation model.

For an actual transfer to the subsidiary, the group should separately establish which consequences fall within the principal’s UK taxable position. The relevant domestic rules and treaty remain essential.

Price the transition alongside the future arrangements

The group also plans to revise the subsidiary’s ongoing remuneration. That calculation must remain consistent with any compensation for the restructuring.

Suppose the UK company pays for contractual rights and then pays a continuing charge that also rewards the principal for those same rights. The review should test whether the two payments overlap or remunerate different contributions.

Conversely, a transfer price may have been negotiated on the basis that the principal will retain income under a continuing supply or service arrangement. Ignoring that arrangement could misstate what an independent buyer would pay.

HMRC’s guidance expressly calls for restructuring compensation and subsequent prices to be considered together. I would require the valuation assumptions and the future pricing model to reconcile before either was approved.

Give the valuer a defined subject and a supported forecast

A valuation instruction should identify the rights or business being valued, the transaction date and the continuing arrangements. Asking someone to value “the profit moving to the UK” leaves the central issue unresolved.

Where an income approach is appropriate, the projections should address customer retention, the remaining life of contracts and the expenditure required to earn the forecast income. Growth, discount rates and any terminal value need support.

The analysis should also consider the alternatives realistically available to each party. The principal’s preferred price and the subsidiary’s willingness to pay cannot be assessed solely by reference to the consolidated group forecast.

I would retain the forecasts and commercial evidence available at the transaction date, together with the reasons for the assumptions selected. A later budget should be identifiable as a later budget.

Check exactly what the APA will cover

An agreement covering recurring PE attribution or a service margin does not automatically settle the pricing of a separate restructuring transaction. The scope of an APA can be limited to particular issues.

If an application is still being negotiated, the group should identify the proposed transfer and establish which questions the authorities are being asked to agree.

If an APA already exists, its terms and notification requirements need review. Any necessary revision must follow the agreed process; bilateral revisions involve the other competent authority.

The board should be told which issues are covered, which remain open and whether the intended implementation timetable allows those issues to be addressed.

Prepare one account of the transition for both jurisdictions

The implementation file should give advisers in both countries the same factual description. They can then assess the local tax treatment of any consideration and the future income on that basis.

Agreement between group companies on a price does not bind their tax authorities. If the authorities disagree on a transfer-pricing or attribution issue, treaty remedies, including the Mutual Agreement Procedure where available, may need consideration. MAP is a process for seeking resolution; its availability does not itself guarantee relief.

For this group, I would bring the legal implementation schedule, tax analysis and financial model into one review before contracts move. Outstanding issues should have a named owner and an agreed action date.

The next question for management would then be precise: what is each company giving up or acquiring, and how have the terms been justified from its perspective?

How Vectigalis AC Tax can assist

Vectigalis AC Tax advises international groups on business restructurings, UK permanent establishments, transfer pricing and the tax consequences of changes in commercial responsibilities.

I help groups assess whether a proposed change requires restructuring compensation, coordinate that analysis with PE attribution and future remuneration, and identify matters requiring input from overseas advisers or tax authorities.

If your group is moving customer contracts or changing where commercial decisions are made, a scoped review before implementation can identify the tax questions while the terms can still be shaped.

Contact angelo@vectigalistax.co.uk to discuss your proposed restructuring.

Angelo Chirulli FCA ADIT TEP
Vectigalis AC Tax
www.vectigalistax.co.uk

Sources checked on 16 October 2026. The group and figures in the article are illustrative. The references below support the technical distinctions; the implementation proposals are the author’s analysis of that example.

OECD Transfer Pricing Guidelines 2022 Chapter IX paragraphs 9.10 to 9.13, 9.27 to 9.33, 9.39 to 9.41 and 9.75 to 9.97 on the restructuring, profit potential, realistic alternatives and termination or renegotiation

HMRC INTM485021 Accurate delineation before comparison and pricing

HMRC INTM485023 Risk control and financial capacity

HMRC INTM267040 Distinction between separate companies and parts of one enterprise

HMRC INTM441130 Considering restructuring compensation together with subsequent prices

HMRC INTM440140 Valuation subject, techniques, assumptions and parties’ alternatives

HMRC INTM422020 APA scope

HMRC INTM422120 Consultation on revisions including the other competent authority for bilateral agreements

HMRC INTM423010 MAP and corresponding adjustments subject to the relevant treaty

The article identifies questions requiring analysis rather than concluding that a particular compensation payment, tax charge or relief arises. HMRC manuals state HMRC’s interpretation and must be read with the applicable law and treaty.