The UK government will tighten transfer pricing rules and replace the diverted profits tax with a new corporation tax charge.

The government has announced plans to revise the UK’s international tax framework, which involves narrowing the application of transfer pricing rules between UK entities and replacing the existing diverted profits tax regime.

Draft legislation has been released for public consultation, proposing updates across several areas:

Transfer pricing: The proposed changes aim to align UK regulations more closely with international standards, enhance ease of compliance for businesses, and strengthen enforcement where necessary.

Key adjustments include:

  • A general exemption from transfer pricing rules for transactions between UK companies where there is no risk of revenue loss, with certain exceptions. Companies will retain the option to apply transfer pricing rules voluntarily if preferred.
  • Expanding the participation condition to ensure all relevant transactions fall within the transfer pricing rules’ scope.
  • Streamlining the application of intangible fixed asset rules by adopting a unified valuation method. For instance, the arm’s length principle will serve as the basis for pricing cross-border dealings between related parties subject to transfer pricing requirements.
  • Bringing UK rules on guarantees into closer alignment with the OECD guidelines and the model tax convention.

Permanent establishment: Amendments to the definition of “permanent establishment” and the rules governing profit attribution to permanent establishments aim to harmonize UK law with current international consensus.

Diverted profits tax (DPT): The existing diverted profits tax will be replaced by a new corporation tax charge on unassessed transfer pricing profits (UTPP). This change is intended to clarify how diverted profits taxation interacts with transfer pricing rules, while also improving access to treaty benefits.

Earlier, the UK’s tax authority, His Majesty’s Revenue and Customs (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.