Permanent establishments, acquisition of partnership interests and intangible assets

Thu 03 May 2018

The First tier Tribunal has held that the acquisition by Bloomberg entities of the remaining interests in a partnership to bring its interest in that partnership to 100%, did not result in the UK permanent establishments (PEs) of those acquiring entities acquiring an interest in the partnership’s intangible assets for the purpose of the corporate intangible asset regime.  As a result, the claim for annual tax relief at a fixed rate of 4% was denied.

Comment

The amounts at stake in the case are not stated, though reports from 2008 indicate the acquisition of Merrill Lynch’s 20% share cost Bloomberg $4.5bn, so that amounts of tax at stake in the UK may be significant. This case may yet be appealed.  The method of accounting to be assumed for the PEs in respect of this acquisition and whether they can be said to meet the conditions for ‘look through’ accounting, is key.  Generally a company with an interest in a partnership will reflect its interest in the partnership as an investment in its separate company balance sheet, precluding application of the intangible asset regime to the company’s interests in the partnership’s intangible assets.  There may, however, be circumstances when the partnership’s assets and liabilities can be reflected in the company partner’s separate accounts, (for example IFRS11 accounting in the individual financial statements of a joint operator). There may also be other ways for a company to hold the intangible assets used by a partnership of which it is a partner.  For a further discussion of the way intangible assets are dealt with in the corporate tax regime please get in touch with a member of the Mazars corporate tax team.

Background

On 17 July 2008 two Bloomberg entities (Bloomberg Inc (BI – with a UK PE) and BLP Acquisitions LP (BA LP)), , acquired from Merrill Lynch Inc the remaining 20% of the partnership Bloomberg LP (BLP) the Bloomberg group did not already own,. One of the partners in BA LP was Bloomberg Acquisition Holdings LLC (BAH, another Bloomberg entity with a UK PE).

In computing the UK tax for the UK PEs of BI and BAH, these companies took the view that their acquisition of interests of BLP included their share of the separate assets of BLP which included intangible assets subject to the intangible asset regime such as customer relationships, trade names and goodwill.

In considering the tax issues, it was agreed that:

• If the UK PE activities of BI and BAH constituted 100% of the UK activities of the partnership BLP, or the acquisition of an increased partnership interest in BLP, it was agreed the accounting for the balance sheet of the UK PE’s would reflect the acquisition of partnership units as an investment.
• If the UK PE activities of BI and BAH constituted the acquisition of the underlying UK trade and assets of BLP, the balance sheet accounting would reflect the acquisition of the relevant assets and liabilities of the BLP business.

Application of the intangible asset regime to the facts

The intangible asset regime provides that certain assets are excluded from the intangible asset regime. The exclusions include the interests of a partner in a firm (CTA 2009 s.807(1)(c)), except where that interest represents, for accounting purposes, an interest in partnership property that is an intangible fixed asset to which the intangible asset regime applies (CTA 2009 s.807(3)).  HMRC guidance at CIRD20560 highlights that the exclusion in CTA 2009 s.807 does not apply to the extent that the assets of the partnership are intangible assets that are accounted for by a company partner on a look through basis such that the company is considered to directly hold the asset.

The companies contended that the treaty principle that a PE should be treated as a separate and distinct entity required that the transaction be treated as an acquisition of intangible assets by the PE. In contrast HMRC argued that the activities of BI and BAH which, crucially, were carried out in partnership, should first be assessed at the partnership level, and that the profits of the partnership should then be attributed to the UK PEs of BI and BAH.

The FTT considered how the UK/US double tax treaty applied in the context of allocating the partnership results, but determined that HMRC’s view of how the transaction should be treated (as the acquisition of partnership interests rather than the underlying assets) was correct.