Reforms to transfer pricing, permanent establishment and Diverted Profits Tax

As part of the Autumn Budget on 26 November 2025, HMRC published the outcome of its technical consultation on draft legislation for the reform of transfer pricing, permanent establishment and Diverted Profits Tax (DPT), which was launched as part of the government’s Spring 2025 Tax Update in April 2025 (the Technical Consultation).

HMRC also published, as part of the 2025 Autumn Budget, the outcome of its policy consultation on transfer pricing scope and documentation (the Transfer Pricing Policy Consultation), which was also launched as part of the Spring 2025 Tax Update.

The legislation which was the subject of the Technical Consultation was included in Finance Bill 2025-26, the first version of which was published on 4 December 2025. HMRC has published a policy paper explaining the changes implemented by the legislation.

The legislation, which will be supported by guidance in HMRC’s International Manual, implements various changes to the UK’s rules in relation to transfer pricing, permanent establishment and DPT, including:

• introducing a general exemption from UK-UK transfer pricing where both persons are subject to corporation tax (CT) at the same rate;
• amending the statutory definition of a permanent establishment to align it with the 2017 OECD Model Tax Convention; and
• withdrawing DPT as a separate tax and creating a new charging provision for Unassessed Transfer Pricing Profits (UTPP) within CT, which will retain the essential features of the DPT regime.

In general, the changes will take effect for chargeable periods beginning on or after 1 January 2026, with transitional rules applying to certain amendments relating to financial transactions.

Following the Transfer Pricing Policy Consultation, HMRC decided:

• that small and medium-sized enterprises (SMEs) will continue to benefit from the existing exemption from UK transfer pricing. (The Transfer Pricing Policy Consultation had proposed the removal of the exemption for medium-sized enterprises); and
• to introduce a requirement for multinationals to report information on cross-border related party transactions to HMRC through an International Controlled Transactions Schedule (ICTS). HMRC published a policy paper explaining this change, which is expected to take effect for accounting periods beginning on or after 1 January 2027.

Primary legislation was included in Finance Bill 2025-26 to empower HMRC to make regulations in relation to the ICTS requirement. In spring 2026 the government will hold a technical consultation on draft regulations setting out the details of the ICTS requirement.

What else do I need to know about the reforms to the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules?

Technical Consultation

Subject to certain amendments following stakeholder feedback, the legislation included in Finance Bill 2025-26 is broadly in line with the draft legislation which was published as part of the Technical Consultation. We set out below some of the key changes which will be introduced by the Finance Bill 2025-26 legislation.

Transfer pricing

The legislation included in Finance Bill 2025-26 implements changes to various aspects of the UK’s transfer pricing rules, which are intended to simplify the application of the current legislation, update the rules in line with international standards, reduce compliance obligations on businesses and address areas of potential legislative weakness.

One notable change is to exempt domestic transactions between UK companies in scope of transfer pricing where there is no risk of tax loss. The legislation introduces (subject to certain exclusions) a general exemption from UK-UK transfer pricing where both persons are subject to CT at the same rate.

HMRC will have the ability to issue a transfer pricing notice to disapply the exemption in order to prevent a loss of tax, and taxpayers will be able to elect to apply transfer pricing should they wish to do so.

Other amendments include changes to the participation condition and changes to valuation in relation to cross-border intangibles transactions between related parties. The legislation explicitly confirms that the UK’s transfer pricing legislation should be interpreted in accordance with OECD principles.

Permanent establishment

The legislation included in Finance Bill 2025-26 brings the UK’s permanent establishment rules in line with the latest international consensus on the definition of a permanent establishment and the attribution of profits to a permanent establishment.

The changes include:

• amendments to the statutory definition of a permanent establishment to align it with the 2017 OECD Model Tax Convention;

• clarifications regarding how OECD documents may be used to interpret the UK’s permanent establishment legislation; and

• amendments to the Investment Manager Exemption (IME). HMRC will publish an updated version of Statement of Practice 1/01 in due course, to provide guidance on how to interpret the amended IME rules.

Diverted Profits Tax

The legislation included in Finance Bill 2025-26 repeals DPT as a separate tax and creates a new charging provision for UTPP within CT, which will retain the essential features of the DPT regime.

This approach is intended to clarify the relationship between the taxation of diverted profits and transfer pricing and to enable businesses to benefit from the UK’s treaty network features such as access to the Mutual Agreement Procedure to remove double taxation.

Transfer Pricing Policy Consultation

The Transfer Pricing Policy Consultation sought views on two related proposals, designed to protect the UK tax base against cross-border profit diversion by multinational enterprises (MNEs) and align the UK more closely with international peers.

SME exemption

The first proposal was to amend the SME exemption from UK transfer pricing, including potentially removing the exemption for medium-sized enterprises. Following stakeholder feedback, the government decided that medium-sized enterprises will continue to benefit from the existing exemption from transfer pricing.

Reporting requirement

The second proposal was to introduce a requirement for multinationals to report information on cross-border related party transactions to HMRC through an ICTS. The Transfer Pricing Policy Consultation sought views on the introduction of this requirement and its proposed scope and content.

Following stakeholder feedback, the government decided to continue with the introduction of this requirement, which is intended to assist HMRC by facilitating automated, data-led risk assessment and more accurate identification of transfer pricing risk. The government expects the requirement to increase efficiency by promoting tax compliance and reducing the length of transfer pricing enquiries.

The ICTS is expected to be an annual filing requirement that captures specific information about cross-border related party transactions in a standardised format.

Changes are expected to take effect for accounting periods beginning on or after 1 January 2027, which will allow time for both HMRC and businesses to put the required systems and processes in place. The government has indicated that it will provide practical guidance to support businesses in preparing and filing the ICTS for the first time.

Comment

The legislation included in Finance Bill 2025-26 is the result of a long period in which the UK government has been considering and consulting on reforms to the UK’s transfer pricing, permanent establishment and DPT rules. (Prior to the April 2025 Technical Consultation, HMRC launched a policy consultation on potential reforms in June 2023, which was followed by a summary of responses in January 2024.) The new legislation, which encompasses a wide array of changes, represents a significant milestone in the development of the UK’s international tax rules.

Affected businesses will welcome many of the changes, including the simplification provided by the introduction of a general exemption from UK-UK transfer pricing where both persons are subject to CT at the same rate (subject to certain exclusions), and the enhanced MAP access enabled by (essentially) bringing the DPT regime within CT. Medium-sized enterprises will breathe a sigh of relief that they will continue to benefit from the existing exemption from UK transfer pricing.

However, affected businesses may be less pleased by the new requirement to report information on cross-border related party transactions to HMRC through an ICTS. These businesses should carefully monitor developments in this area to ensure they are prepared to comply with the new requirement, including reviewing (and potentially responding to the consultation on) the draft secondary legislation when it is published in spring 2026. When introducing the new requirement, it is crucial for HMRC to ensure it does not damage the UK’s international competitiveness by imposing an overly onerous compliance burden.

Further reading on the reforms to the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules

Reforms to the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules

Changes to the UK’s transfer pricing, permanent establishment and diverted profits tax rules proposed

Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax

For more information on the reforms to the UK’s transfer pricing, permanent establishment and Diverted Profits Tax rules

If you have any questions regarding the proposed changes to transfer pricing, permanent establishment and DPT, or how these changes may affect your business, please do not hesitate to get in touch with one of the Eversheds Sutherland contacts set out below.