What is a UK Permanent Establishment?
A Permanent Establishment (“PE”) is created in a situation where a business is mainly based/trading in an overseas territory, but it has a taxable presence in the UK. Full details as to what is classified as a taxable presence are detailed below.
For non-resident companies, the liability to UK corporation tax depends on the existence of any kind of Permanent Establishment through which a trade is carried on.
If an overseas company trades in the UK through a PE, then this brings the profits attributable to this PE into the charge to UK corporation tax.
When do you have a UK Permanent Establishment?
Subject to the terms of the relevant Double Tax Treaty, a non-resident company will have a PE in the UK if:
- it has a fixed place of business in the UK through which the business of the company is wholly or partly carried on, or
- an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in the UK.
A fixed place of business includes (but is not limited to) a place of management; a branch; an office; a factory; a workshop; an installation or structure for the exploration of natural resources; a mine, oil or gas well, quarry, or other place of extraction of natural resources; or a building, construction, or installation project.
There is no minimum time for a fixed place of business to become a PE, but generally, a place of business will not be treated as a PE where it exists for less than 6 months and is not a recurring place of business.
When do you not have a UK Permanent Establishment?
A company is not regarded as having a UK PE if the activities for which the fixed place of business is maintained or which the agent carries on, are only of a preparatory or auxiliary nature.
Activities are deemed to be preparatory or auxiliary to the work of the company if the services it performs are so remote from the actual realisation of profits by the enterprise that it would be difficult to allocate any part of the profit to the fixed place of business.
Practical considerations
If the business has a UK PE, it is required to register with Companies House and HMRC and to submit annual accounts and tax returns. This is to ensure that the profits made from sales/PE in the UK are quantified, and to calculate the corporation tax. The parent company’s accounts will need to be filed alongside this.
The other alternative is to incorporate a UK subsidiary which will allow the company to only report the UK financial information (and not the parent company’s accounts).
If an overseas business is employing a salesperson who has authority to conclude contracts on the company’s behalf, then this employee will constitute a UK PE.
To avoid a UK PE, if a non-resident company has employees in the UK, they should not be given authority to negotiate or conclude contracts (this restriction can be written specifically into the employment contract and followed in practice).
Please note, however, that the OECD, under Action 7 of its BEPS Action Plan, has recommended a widening of the scope of the PE definition in Article 5 of the OECD Model Tax Convention. This is to avoid anti-abuse, to include in the PE definition, for example, someone playing the role of principal such that on passing over a potential sale, no material modifications are needed to be made by the company.
