What is Diverted Profits Tax (DPT)?

DPT is a 31% tax on profits artificially diverted from the UK. It applies in two scenarios: avoided PE (arrangements to avoid a UK permanent establishment) and tax mismatch (arrangements creating a tax mismatch without economic substance). Diverted Profits Tax (DPT) was introduced in Finance Act 2015 as an anti-avoidance measure to counter the diversion of profits from the UK. DPT is charged at 31% (higher than the 25% corporation tax rate) and applies to profits that have been artificially diverted from the UK. DPT applies in two main scenarios: (1) Avoided PE — where a foreign company uses arrangements to avoid creating a UK permanent establishment, but has significant UK involvement (e.g., a person in the UK habitually plays the principal role in concluding contracts). The arrangements must be designed to avoid a UK PE. (2) Tax mismatch — where a UK company (or a foreign company with a UK PE) enters into arrangements that create a tax mismatch (e.g., a tax deduction in the UK without corresponding taxation in another country) and the arrangements lack economic substance. Both scenarios require the arrangements to be 'artificial' — designed to divert profits from the UK. DPT is a separate tax from corporation tax, with its own notification and payment rules. Relevant legislation: Finance Act 2015, Part 3 (Diverted Profits Tax); TIOPA 2010 (interaction with transfer pricing and CFC rules). Example: A multinational group structures its UK sales through an overseas entity, with a UK-based employee who habitually negotiates and plays the principal role in concluding contracts, but the contracts are signed overseas to avoid creating a UK PE. HMRC may determine that this is an avoided PE scenario and charge DPT on the profits attributable to the UK activity. Common mistake: Assuming that DPT only applies to large multinationals. While DPT is primarily aimed at large groups, it can apply to any company with artificial arrangements that divert profits from the UK.

When must I file a Diverted Profits Notification (DPN)?

A DPN must be filed within 3 months of the end of the relevant accounting period if the company has arrangements that could potentially fall within the scope of DPT. Filing a DPN does not mean DPT is due — it is a notification for HMRC review. A Diverted Profits Notification (DPN) must be filed by companies that have arrangements potentially within the scope of DPT. Key points: (1) Timing — the DPN must be filed within 3 months of the end of the accounting period in which the potential diverted profits arose. (2) Who must file — the DPN must be filed by: (a) the UK company that entered into the arrangements (for the tax mismatch scenario), or (b) the foreign company that avoided a UK PE (for the avoided PE scenario). (3) Content — the DPN must provide information about the arrangements, the companies involved, and the potential diverted profits. (4) Not a self-assessment — filing a DPN does not mean that DPT is due. It is a notification for HMRC to review. HMRC then has 30 months from the end of the accounting period to issue a DPT charging notice if they determine that DPT is due. (5) Exemptions — some exemptions from the DPN requirement are available, including: (a) small and medium-sized groups (under certain thresholds), (b) arrangements where the potential DPT charge is below £500,000, and (c) arrangements already covered by an Advance Pricing Agreement (APA) or clearance. (6) Penalties — failing to file a DPN on time can result in penalties. Relevant legislation: Finance Act 2015, Schedule 3 (Diverted Profits Notification); FA 2015, Section 81 (DPN requirements). Example: A UK company has an accounting period ending 31 December 2025. It has arrangements with an overseas affiliate that could potentially fall within the DPT tax mismatch scenario. It must file a DPN by 31 March 2026 (3 months after 31 December 2025). HMRC then has until 30 June 2028 (30 months after 31 December 2025) to issue a DPT charging notice. Common mistake: Not filing a DPN because the company believes the arrangements are not within DPT scope. The DPN is required if the arrangements could potentially be within scope — it is not a self-assessment. If in doubt, file a DPN.

What is the DPT rate and how does it compare to corporation tax?

DPT is charged at 31% (higher than the 25% corporation tax rate for large companies). The higher rate acts as a deterrent. If the diverted profits are subsequently subject to corporation tax, DPT can be credited, effectively reducing the rate to 25%. DPT is charged at 31% on the diverted profits, which is higher than the standard corporation tax rate of 25% (for large companies). The higher rate serves as a deterrent — it ensures that profit diversion is not financially advantageous and encourages companies to bring profits within the scope of corporation tax. Interaction with corporation tax: (1) DPT as a separate tax — DPT is a separate tax from corporation tax, with its own payment and reporting rules. DPT must be paid within 30 days of HMRC issuing a DPT charging notice (much faster than corporation tax, which is typically due 9 months and 1 day after the end of the accounting period). (2) Credit for corporation tax — if the diverted profits are subsequently brought into charge to UK corporation tax (e.g., the company revises its transfer pricing or structure), the DPT paid can be credited against the corporation tax liability. This effectively reduces the overall tax rate to 25% (the corporation tax rate). (3) No credit for foreign tax — DPT does not give a credit for foreign tax paid on the same profits. (4) Interest — interest is charged on late-paid DPT from the due date. The higher rate and accelerated payment make DPT a powerful deterrent, encouraging companies to comply with transfer pricing and PE rules rather than risk a DPT charge. Relevant legislation: Finance Act 2015, Section 76 (DPT rate and charge); FA 2015, Section 84 (interaction with corporation tax). Example: A company has £1 million of diverted profits. DPT at 31% = £310,000 (due within 30 days of the charging notice). If the company subsequently brings the £1 million into charge to corporation tax (at 25% = £250,000), the DPT can be credited against the corporation tax. The effective rate is 25% (£250,000 corporation tax, with £60,000 DPT refunded or credited). Common mistake: Assuming that DPT is just an additional penalty on top of corporation tax. DPT is a separate tax, but if the profits are subsequently brought into charge to corporation tax, the DPT is credited, so the overall rate is 25%.

How does DPT interact with transfer pricing and CFC rules?

DPT, transfer pricing, and CFC rules can all apply to the same arrangements. DPT is a separate anti-avoidance tax, while transfer pricing adjusts profits and CFC rules bring overseas profits into UK charge. HMRC will determine which provision is most appropriate. DPT, transfer pricing, and CFC rules are all anti-avoidance provisions that can apply to cross-border arrangements: (1) Transfer pricing — ensures that transactions between connected parties are at arm's length. If the transfer price is not at arm's length, HMRC can adjust the UK company's profits. Transfer pricing adjustments are made to the corporation tax return. (2) CFC rules — determine whether the profits of a non-UK company (controlled by UK persons) are brought into charge to UK tax. CFC rules apply to the overseas company's profits. (3) DPT — applies to profits artificially diverted from the UK, either through an avoided PE or a tax mismatch. DPT is a separate tax, charged at 31%. The interaction: (a) Transfer pricing and DPT — if HMRC adjusts the transfer pricing (increasing the UK company's profits), the diverted profits may be brought into charge to corporation tax, and DPT may be credited. However, DPT can also apply independently of transfer pricing (e.g., where there is an avoided PE but no transfer pricing issue). (b) CFC and DPT — DPT applies to the UK side (avoided PE or UK company's arrangements), while CFC rules apply to the overseas side. In some cases, both may apply, but HMRC will typically choose the most appropriate provision. (c) HMRC's approach — HMRC will assess the arrangements and determine which provision(s) are most appropriate. In some cases, multiple provisions may apply. Specialist advice is essential for groups with cross-border arrangements. Relevant legislation: Finance Act 2015, Part 3 (DPT); TIOPA 2010, Sections 147-148 (transfer pricing); TIOPA 2010, Part 9A (CFC rules). Example: A UK company charges its overseas affiliate a below-market fee for management services, creating a tax mismatch. HMRC could: (a) adjust the transfer pricing (increasing the UK company's profits and charging corporation tax at 25%), or (b) charge DPT at 31% on the diverted profits. HMRC will determine which is more appropriate. In many cases, DPT is used where transfer pricing adjustments are not sufficient (e.g., where the arrangement involves an avoided PE). Common mistake: Considering DPT, transfer pricing, and CFC rules in isolation. The three provisions interact, and HMRC will assess the arrangements holistically to determine the most appropriate provision.

How can I manage DPT risk for my multinational group?

Manage DPT risk by reviewing intercompany arrangements for artificiality, ensuring transfer pricing is at arm's length, confirming overseas entities have genuine substance, filing DPNs on time, and seeking specialist advice on complex cross-border structures. To manage DPT risk for a multinational group: (1) Review intercompany arrangements — assess whether any arrangements could be seen as 'artificial' (designed to divert profits from the UK) or lacking economic substance. Focus on: (a) arrangements that avoid a UK PE (e.g., structuring UK sales through an overseas entity with a UK-based employee), and (b) arrangements that create a tax mismatch (e.g., a deduction in the UK without corresponding taxation overseas). (2) Transfer pricing compliance — ensure that transfer pricing between UK and overseas entities is at arm's length and well-documented. Proper transfer pricing can prevent DPT charges by ensuring profits are correctly allocated. (3) Economic substance — ensure that overseas entities have genuine employees, premises, and decision-making capacity. If an overseas entity lacks substance, HMRC may view the arrangements as artificial. (4) File DPNs on time — if a DPN is required, file it within 3 months of the end of the accounting period to avoid penalties. When in doubt, file a DPN — it is a notification, not a self-assessment. (5) Seek clearance — for complex arrangements, consider seeking HMRC clearance or an Advance Pricing Agreement (APA) to obtain certainty on the DPT position. (6) Specialist advice — DPT is complex and fact-specific, and specialist advice is essential for groups with cross-border arrangements. By proactively managing DPT risk, groups can avoid the 31% DPT charge and the associated accelerated payment and compliance burden. Relevant legislation: Finance Act 2015, Part 3 (DPT); TIOPA 2010, Sections 147-148 (transfer pricing); HMRC International Manual (DPT guidance). Example: A multinational group reviews its UK structure and identifies that a UK-based employee is habitually negotiating contracts for an overseas entity (potential avoided PE). To manage DPT risk, the group restructures so that contracts are negotiated and concluded overseas, with the UK employee providing only preparatory/auxiliary support. The group also ensures the overseas entity has genuine substance and files a DPN if required. Common mistake: Not reviewing the group's arrangements for DPT risk until HMRC opens an enquiry. DPT risk should be assessed proactively, as the 31% rate and accelerated payment make it costly if HMRC determines that DPT is due.

International Tax › Corporate

Diverted Profits Tax (DPT)

DPT is a 31% tax designed to counter profit diversion from the UK. Understand when it applies, the notification requirements, and how to manage DPT risk for multinational groups.

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Diverted Profits Tax (DPT) was introduced in 2015 as an anti-avoidance measure to counter the diversion of profits from the UK through artificial arrangements. DPT is charged at 31% (higher than the 25% corporation tax rate) and applies to profits that have been artificially diverted from the UK. DPT is a separate tax from corporation tax, with its own notification and payment rules. Understanding when DPT applies and how to manage the risk is essential for multinational groups with UK operations.

When DPT Applies

DPT applies in two main scenarios: (1) The避avoidance provision — where a company uses arrangements to avoid creating a UK permanent establishment (the 'avoided PE' scenario). (2) The tax mismatch provision — where a company enters into arrangements that create a tax mismatch (e.g., a deduction in one country without corresponding taxation in another) and lack economic substance. Both scenarios require the arrangements to be 'artificial' — designed to divert profits from the UK.

The 31% Rate

DPT is charged at 31% on diverted profits (higher than the 25% corporation tax rate for large companies). The higher rate acts as a deterrent and ensures that profit diversion is not financially advantageous. If the diverted profits are subsequently subject to corporation tax, the DPT can be credited against the corporation tax liability, effectively reducing the overall rate to 25%.

Diverted Profits Notification (DPN)

Companies potentially within the scope of DPT must file a Diverted Profits Notification (DPN) within 3 months of the end of the relevant accounting period. The DPN informs HMRC that the company may have diverted profits and provides information about the arrangements. Filing a DPN does not mean that DPT is due — it is a notification, not a self-assessment. HMRC then reviews the DPN and issues a DPT charging notice if they determine that DPT is due.

Managing DPT Risk

To manage DPT risk: (1) Review arrangements — assess whether any intercompany arrangements could be seen as artificial or lacking substance. (2) Transfer pricing — ensure transfer pricing is at arm's length and well-documented. (3) Substance — ensure overseas entities have genuine substance (employees, premises, decision-making). (4) File DPNs on time — if a DPN is required, file it within 3 months to avoid penalties. (5) Seek specialist advice — DPT is complex, and specialist advice is essential for groups with cross-border arrangements.

Key Points

What You Need to Know

DPT is charged at 31% on profits artificially diverted from the UK
Two main scenarios: avoided PE and tax mismatch with insufficient substance
Companies must file a Diverted Profits Notification (DPN) within 3 months
Filing a DPN does not mean DPT is due — HMRC reviews and issues a charging notice
The higher rate (31%) acts as a deterrent against profit diversion

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Statutory Residence Test (SRT)Non-Dom Reforms April 2025 Overseas Workday Relief (OWR)Split-Year Treatment Double Taxation Treaties Transfer Pricing Permanent Establishment (PE)Controlled Foreign Companies (CFC)Withholding Tax on Cross-Border Payments Inbound Property Investment Outbound Expansion Structuring Cross-Border Employment Taxation Diverted Profits Tax (DPT)Anti-Hybrid & Mismatch Rules Corporate Interest Restriction Exit Charges & Company Migration Cross-Border Trust Taxation

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