HMRC issued final legislation reforming UK transfer pricing, permanent establishment rules and the Diverted Profits Tax.
The UK’s HM Revenue & Customs (HMRC) on 26 November published a policy paper outlining extensive reforms to the UK’s transfer pricing framework, permanent establishment (PE) rules and the Diverted Profits Tax (DPT). The update follows a technical consultation earlier in 2025 and introduces finalised legislation that will apply to chargeable periods beginning on or after 1 January 2026.
According to HMRC, the measure will simplify transfer pricing requirements in several areas, including the participation condition, intangibles, financial transactions, UK-to-UK transfer pricing, and commissioners’ sanctions. The reforms also confirm that interpretation of UK transfer pricing rules should follow OECD principles.
The legislation brings the UK’s PE rules into line with the latest international consensus by updating both the definition of a permanent establishment and the rules for allocating profits to a PE. It also introduces a mechanism allowing a UK-resident company to claim relief when a transfer pricing adjustment is made to a connected non-resident company relating to a UK PE.
Another key element is the introduction of a new charging provision for Unassessed Transfer Pricing Profits within Corporation Tax. This replaces the existing Diverted Profits Tax regime, which is repealed in full, although the core features of the regime are preserved within the new corporation tax framework.
The reforms also clarify which guidance and materials may be used to interpret UK legislation and update both the legislation and the Statement of Practice on the Investment Manager Exemption.
Earlier, HMRC launched consultations seeking public input on potential updates to the UK’s transfer pricing framework, permanent establishment rules and the diverted profits tax on 28 April 2025.
