Permanent Establishment

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Many non-EU companies seeking to expand into Europe will start with a presence in the UK due to language and cultural connections, the UK’s legal framework and access to capital markets.

What are the potential UK tax implications from such a presence?

Well, if a non-UK resident company carries on a trade in the UK through a Permanent Establishment (PE) in the UK it is chargeable to Corporation Tax (CT) on the profits and gains attributable to that PE.

Action 7 of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project is looking at ways to prevent the artificial avoidance of a PE.

My previous Note in this category looked at the UK’s Diverted Profits Tax (DPT) which seeks to introduce the principles of BEPS Action 7 in advance of the OECD Project.

DPT is a penal tax intended to deter and counteract the diversion of profits from the UK by Multi-National Enterprises that attempt to avoid creating a UK PE to avoid UK tax, or otherwise use arrangements or entities which lack economic substance to gain a UK tax benefit.

So, if you’re a non-UK resident enterprise and you want to do business in the UK you need to know what is meant by a UK PE. If you have to pay UK tax, 20% CT is better than 25% DPT.

There are three questions to consider:

  1. Does the non-resident company carry on a trade in the UK?
  2. Does the company carry on that trade through a PE in the UK?
  3. What are the chargeable profits attributable to that UK PE?
  1. Trading in the UK

A non-UK resident company must be trading in the UK for it to be chargeable to CT.

The UK has a wealth of case law on what constitutes trading, so the question whether a non-resident is exercising a trade is a question of fact.

There is also case law which determines whether that trading takes place in the UK or with the UK. This is an important distinction.

Early case law looked at the place of contract for the sale of the goods or services as determining where the trading takes place. This remains a key aspect of what is meant by trading in the UK.

However, later cases placed less emphasis on the place of contract and the question became, “where do the operations take place from which the profits in substance arise?”

Therefore the place of contract is not the determining factor if there are other circumstances present that outweigh its importance, or unless there are no other circumstances that can. For example, if the whole of the trade is exercised in the UK, then the company will be trading in the UK even if contracts are concluded offshore.

Contract law is complex and it is not always straightforward to know where a contract is made.

A contract consists of offer and acceptance. The place of contract is the same place as the buyer’s location when receiving the seller’s acceptance.

There is no difficulty in ascertaining the place of contract where a transaction is agreed between the seller and buyer in person, whether by invoice, verbally or even by a handshake. It will be the place where both are at the time.

However, where acceptance is communicated by letter, the place of acceptance is the place of posting rather than the place of the final destination.

On the other hand, the rule with instantaneous communication (i.e. internet, email, fax, telephone, etc.) is that the place of contract is the place of the buyer when he receives the acceptance.

  1. Permanent establishment

OK, we’ve established that our non-resident is trading in the UK, but is that trade carried on through a PE in the UK?

A non-resident company will have a PE in the UK if either:

  • it has a fixed place of business in the UK through which the business of the company is wholly or partly carried on (“Establishment PE”), or
  • it has an agent acting on its behalf who habitually exercises authority in the UK to do business on behalf of the company (“Agency PE”)

A fixed place of business is characterised by:

  • A geographic position i.e. a distinct place of business e.g. office or factory (it need not be owned),
  • A degree of permanence. One would generally look for an occupation at the site lasting at least six months (there may be a specific time defined in Treaties for a building or construction site)
  • A human presence. The requirement that the business must be carried on at the fixed place of business normally means that there must be people working there, in the business, either as employees or others receiving instructions from the business.

Excluded from PEs are fixed places of business maintained for carrying on activities of a broadly preparatory or auxiliary character e.g. facilities for storage, display or delivery, the purchasing of goods.

With the advent of the internet, it is possible for many non-resident companies to sell remotely into the UK. For such companies, having a server alone in the UK may not create a PE as HMRC take the view, contrary to most countries, that a server will not of itself constitute a PE.

On the other hand, Cloud based businesses, ISP providers, data warehousing etc. are treated differently from internet retailers. If these businesses have servers in the UK, they are viewed to have a PE in the UK.

Even when there is no fixed place of business, an agent who acts on behalf of the non-resident company and who both has and habitually exercises an authority to conclude contracts on behalf of the non-resident is also a PE of the non-resident.

Note that the UK definition refers to “exercising authority to do business on behalf of the company” rather than “concluding contracts”, which is a little broader than the OECD model treaty.

Independent agents (“an agent of independent status …… acting in the ordinary course of their business”) are excluded as they are both legally and economically independent of their principal. The independent agent will not be under the principal’s control or economically rely on the principal.

  1. Profits attributable to a Permanent Establishment

Finally, what are the chargeable profits attributable to the UK PE?

If there is a UK PE, then the chargeable profits are those which can be attributed to the PE and which fall within the following categories:

  • trading profits arising directly or indirectly through or from the PE
  • income from property or rights used by or held by or for the PE – there is no requirement that the income should arise in the UK as long as it arises in respect of the PE. Thus a UK PE of a non-UK resident company might place surplus cash in a deposit account in Switzerland but, as long as it can be linked with the PE, any interest arising from it is liable to Corporation Tax.
  • chargeable gains on assets being used in or for the purposes of the trade carried on by the company through the PE and in or for the purposes of the PE.

The amount of the non-resident company’s profits chargeable in the UK is determined under the ‘separate entity principle’. This attributes profits to the PE which it would have made if it were:

  • a distinct and separate enterprise;
  • engaged in the same or similar activities;
  • under the same or similar conditions, and
  • dealing wholly independently with the non-resident company of which it is a PE.

Expenses are only attributable to the PE where the expense was incurred for the purposes of the PE. An actual expense by the non-resident company itself must have been incurred whether or not that expense was paid directly by the PE or another part of the company.

Two specific items of expenditure made by a PE to any other part of the non-UK resident company are prohibited by UK domestic legislation.

  • royalties or similar payments in respect of intangible assets held by the company
  • interest or any other financing costs. This does not apply if the non-UK resident company has paid interest or other financing costs to another party and a proportion of them relates to the PE. (There are special rules for banking and other financial businesses.)

This is consistent with the UK’s application of the old OECD Model Treaty Article 7. Where the new Article 7 applies – only to new treaties negotiated after 2010 – then internal royalties and interest may be allowable, but do check the wording of the Treaty in each case.

To end this note, the reporting requirements of a UK PE include:

  1. Companies House registration
  2. Registration with HMRC (Corporation Tax, VAT, PAYE and NIC) plus annual reporting requirements
  3. File the financial statements of overseas company at Companies House each year

Bye for now.


I reviewed published articles by Bird & Bird, the Donald Reid Group and Moore Stephens in the preparation of this note. I also referenced guidance published by HM Revenue & Customs.


I try to make the contents of this website as useful, reliable and factual as possible but any opinions expressed are solely my own. They do not represent the views of my employer or any other person I’m connected with.

The purpose of the site is to inform and educate readers with general guidance and useful tips. It provides only an overview of the regulations and guidance in force at the date of publication and is not a substitute for professional advice. It is not designed to provide professional advice or financial advice and should not be relied on as such.

You should not base any action on the contents of this website without first obtaining specific professional advice from appropriately qualified Transfer Pricing experts. They can establish the full facts and circumstances of your business – I can’t.

Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of this Website can be accepted by the author.


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