Executive Summary
Expanding into the UK can create tax obligations for a foreign company even when it has not incorporated a UK subsidiary.
A permanent establishment (PE) is broadly a taxable business presence in a country. For foreign companies, this can arise through a fixed place of business or certain activities carried out by a person acting on the company’s behalf.
A UK office, branch, or business representative may create permanent establishment risk, depending on the facts and applicable tax rules. However, having UK customers, a website accessible in the UK, or occasional business visits does not automatically create a UK permanent establishment.
For CFOs, the challenge is to identify potential exposure before commercial activities begin and ensure that the company’s legal structure, operating model and tax arrangements are aligned.
This guide explains the main risk areas, the potential tax consequences, and the practical steps foreign companies should take before expanding into the UK.
1. What Is a UK Permanent Establishment?
A UK permanent establishment is a taxable business presence that may bring a foreign company’s UK-attributable profits within the UK Corporation Tax regime.
Under UK domestic law, a company may have a permanent establishment where it:
- Has a fixed place of business in the UK through which its business is wholly or partly carried on; or
- Meets the applicable conditions for a permanent establishment through a person acting on its behalf in the UK.
A fixed place of business may include an office, branch, place of management, factory or other qualifying business location.
The assessment depends on the company’s activities, the degree of permanence of the location, how the location is used, and the applicable legal rules.
The relevant double taxation agreement may also affect the outcome. Where a treaty applies, its wording must be considered alongside UK domestic law.
HMRC explains the relevant principles in its guidance on permanent establishments.
Why does permanent establishment matter?
If a foreign company has a UK permanent establishment, it may need to:
- Register for UK Corporation Tax.
- Calculate profits attributable to its UK permanent establishment.
- File UK Corporation Tax returns.
- Pay Corporation Tax on the profits taxable in the UK.
- Maintain appropriate accounting and tax records.
- Review payroll, VAT and other UK compliance obligations separately.
The existence of a permanent establishment does not mean that all the foreign company’s global profits automatically become taxable in the UK. The profits attributable to the UK activities must be determined under the applicable rules.
2. What Activities Can Create Permanent Establishment Risk?
CFOs should assess the company’s actual UK operating arrangements rather than relying solely on its registered address or contractual structure.
A. Establishing a UK office
A permanent office used to conduct the foreign company’s business may create a fixed-place permanent establishment.
For example, an overseas technology company rents office space in London and uses it to manage UK sales, oversee customer relationships and conduct core commercial activities.
If the office meets the relevant conditions, the company may have a UK permanent establishment.
The fact that the lease is held by another group company does not automatically remove the risk. The actual arrangements and use of the premises must be considered.
B. Hiring employees in the UK
Employing UK-based staff does not automatically create a permanent establishment in every case. However, the functions performed by those employees can be important.
Risk may increase where employees:
- Conduct the company’s core business from a fixed UK location.
- Manage significant commercial activities.
- Negotiate or conclude customer contracts.
- Perform activities that generate revenue for the foreign company.
- Operate from premises effectively available to the foreign business.
Remote working arrangements should therefore be reviewed carefully, particularly where an employee’s home becomes a regular place from which the company’s business is carried on.
C. Using UK-based sales representatives
A foreign company may create permanent establishment risk through a dependent agent.
For accounting periods beginning on or after 1 January 2026, UK domestic law includes circumstances where a person acting on behalf of a company habitually concludes certain contracts or habitually plays the principal role leading to contracts that are routinely concluded without material modification by the company.
This can be relevant when UK-based personnel negotiate sales, develop customer relationships or secure contracts for the overseas business.
The exact outcome depends on the applicable legislation and, where relevant, the relevant double taxation agreement.
D. Using a UK subsidiary
A UK subsidiary does not automatically create a permanent establishment of its foreign parent simply because the parent owns or controls it.
However, risk may arise if the subsidiary also performs functions that amount to carrying on the parent’s business through a fixed place of business or a qualifying dependent-agent arrangement.
For example, a UK subsidiary that provides services to its parent is not necessarily a permanent establishment of the parent. The position needs to be assessed based on the actual functions, contractual arrangements and activities.
E. Carrying out UK projects
Construction, installation and other project-based activities can also create permanent establishment risk.
The applicable threshold and treatment depend on UK domestic law and the relevant double taxation agreement. Some treaties contain specific time limits for construction or installation projects.
Companies undertaking UK projects should review the relevant rules before signing contracts or mobilising personnel.
3. Does Selling to UK Customers Create a Permanent Establishment?
Not necessarily.
A foreign company can sell goods or services to UK customers without automatically creating a UK permanent establishment.
For example, a software company based overseas may sell subscriptions to UK customers, issue invoices from its overseas entity and deliver the service remotely.
If it has no qualifying UK business presence or relevant dependent-agent arrangement, UK customer sales alone will not normally establish a permanent establishment.
However, the position may change if the company subsequently:
- Opens a UK office.
- Employs personnel who perform core business functions in the UK.
- Uses representatives whose activities meet the relevant agency test.
- Establishes a business location through which its activities are carried out.
CFOs should also distinguish permanent establishment risk from other UK obligations. A business may have VAT, payroll or other UK responsibilities even if it does not have a permanent establishment for Corporation Tax purposes.
HMRC discusses this distinction in its guidance on taxing the profits of non-UK-resident companies.
4. What Are the Tax Consequences of a UK Permanent Establishment?
If a foreign company has a UK permanent establishment, it may become liable to UK Corporation Tax on profits attributable to that establishment.
This requires more than identifying UK sales. The company must consider the functions performed in the UK, the assets used, the risks assumed and the activities carried out by the UK operation.
Profit attribution
The company should establish an appropriate method for identifying the profits attributable to its UK permanent establishment.
This may involve reviewing:
- Revenue generated through UK activities.
- Costs incurred by the UK operation.
- Functions performed by UK personnel.
- Assets used in the UK business.
- Commercial risks managed through UK activities.
- Transactions between the UK operation and the rest of the company.
The allocation should be supported by appropriate records and consistent with the relevant tax rules.
Corporation Tax registration and filing
A foreign company that becomes liable to UK Corporation Tax may need to register with HMRC and submit Company Tax Returns.
Where a company is not required to register with Companies House but becomes liable through a dependent-agent permanent establishment, HMRC states that registration should generally take place within three months of the date the company becomes liable.
Where a physical UK establishment is involved, Companies House registration requirements must also be considered.
The applicable registration process depends on the company’s circumstances. See HMRC’s guidance on registering through a dependent-agent permanent establishment.
5. How Does Permanent Establishment Risk Affect CFOs?
Permanent establishment risk is not simply a tax department issue. It can affect the company’s expansion strategy, financial reporting, cash flow and internal controls.
Unexpected tax liabilities
If a company identifies a UK permanent establishment after operations have already begun, it may need to review previous accounting periods and assess whether tax returns or payments should have been made.
The financial impact depends on the facts, the profits attributable to the UK activities, the relevant tax periods and any applicable reliefs.
Additional compliance requirements
A UK permanent establishment may require new accounting procedures, tax calculations and reporting processes.
The finance team may need to separate UK-related income and expenses from the overseas company’s wider financial records.
Transfer pricing and intercompany arrangements
Where the foreign company operates through a UK subsidiary or has transactions with related entities, transfer pricing should be reviewed separately.
Intercompany charges should reflect the actual commercial arrangements and comply with applicable rules. The presence of a UK permanent establishment also requires careful consideration of how profits and expenses are attributed to the UK operation.
Financial reporting and forecasting
CFOs should consider potential UK tax exposure when preparing forecasts, budgets and expansion business cases.
The assessment should include the expected operating model, planned hiring, premises, sales activities and the likely timing of any UK tax obligations.
Identifying the risk before launch allows the company to plan for compliance rather than responding after the business has expanded.
6. How Can CFOs Reduce UK Permanent Establishment Risk?
The objective should not be to avoid a legitimate tax obligation. It should be to understand the company’s position, structure the expansion appropriately and meet the applicable requirements.
Step 1: Review the proposed operating model
Before entering the UK market, document how the business will operate.
Consider whether the company plans to establish an office, employ staff, use local representatives, hold inventory or conduct contract negotiations in the UK.
Step 2: Assess personnel and decision-making
Identify where key business activities take place and what authority UK-based personnel will have.
Review job descriptions, reporting lines, sales processes and contract approval procedures.
Formal limits on authority can be relevant, but they do not necessarily resolve the issue if the actual working practices differ.
Step 3: Review premises and remote working
Assess whether UK premises are available to the foreign business and how they are used.
Where employees work remotely, consider the nature of their activities, the permanence of the arrangement and whether the location is used to carry on the foreign company’s business.
Step 4: Review contracts and agency arrangements
Examine agreements with UK sales representatives, distributors, service providers and group companies.
Determine whether representatives act independently or on behalf of the foreign company, and whether their activities meet the relevant permanent establishment conditions.
Step 5: Check the applicable double taxation agreement
Where a tax treaty applies, review its permanent establishment definition and relevant exceptions.
Treaties may contain provisions that differ from UK domestic law, including specific conditions for dependent agents, construction projects and preparatory or auxiliary activities.
The relevant treaty should be assessed based on the company’s residence and circumstances.
Step 6: Maintain supporting documentation
Keep records of the analysis, including:
- The proposed UK operating model.
- Premises and employment arrangements.
- Relevant contracts and agency agreements.
- Functions performed by UK personnel.
- The rationale for the company’s tax treatment.
- Any advice obtained and decisions made.
The assessment should be revisited when the business changes, rather than treated as a one-off exercise.
7. Common Mistakes Foreign Companies Should Avoid
Assuming that a UK subsidiary automatically protects the foreign parent.
A subsidiary is a separate legal entity, but the parent’s actual activities and arrangements must still be assessed.
Assuming that remote workers cannot create a permanent establishment.
The outcome depends on the facts, including the activities performed and whether the relevant conditions are met.
Focusing only on where contracts are signed.
The activities leading to contracts may be relevant under the applicable rules, even where formal approval takes place overseas.
Assuming that UK sales alone create a permanent establishment.
Selling to UK customers does not automatically establish a taxable presence.
Ignoring treaty provisions.
The applicable double taxation agreement may affect the analysis, so domestic law should not be considered in isolation.
Reviewing the risk only after expansion.
Premises, staffing and agency decisions made at the beginning of the project can affect the company’s tax position later.
8. Practical Checklist Before Expanding into the UK
CFOs should consider the following checklist before committing to a UK operating model:
- Map the planned UK activities and revenue model.
- Identify whether a UK office, branch or other fixed business location will be used.
- Review the functions and authority of UK-based employees.
- Assess remote-working arrangements.
- Review sales representatives, agents and distributors.
- Examine contract negotiation and approval processes.
- Consider whether a UK subsidiary is appropriate.
- Review the relevant double taxation agreement.
- Assess potential UK Corporation Tax and VAT obligations separately.
- Determine whether registration and tax returns may be required.
- Establish accounting records for UK activities.
- Document the analysis and set a date to review it again.
This process helps finance leaders identify risks early and make informed decisions about how the company should operate in the UK.
Frequently Asked Questions
1. What is a permanent establishment in the UK?
A permanent establishment is a taxable business presence that may arise through a fixed place of business or certain activities carried out by a person acting on behalf of a foreign company. The applicable UK rules and any relevant double taxation agreement must be considered.
2. Does having UK customers create a permanent establishment?
Not automatically. A foreign company can sell to UK customers without necessarily having a permanent establishment. Its physical presence, personnel, representatives and actual business activities must be assessed.
3. Can hiring a UK employee create a permanent establishment?
It can, depending on the employee’s activities, working arrangements and the applicable legal tests. Hiring an employee does not automatically create a permanent establishment, but the risk should be reviewed before the arrangement begins.
4. Does a UK subsidiary create a permanent establishment for its foreign parent?
Not simply because the parent owns the subsidiary. However, the subsidiary’s activities and arrangements may create a permanent establishment of the parent if the relevant conditions are met.
5. What taxes may apply if a foreign company has a UK permanent establishment?
The company may be liable to UK Corporation Tax on profits attributable to the UK permanent establishment. VAT, payroll and other obligations must be assessed separately according to the company’s activities.
6. Does a permanent establishment mean that all global profits are taxable in the UK?
No. The existence of a permanent establishment does not automatically bring all global profits into the UK tax charge. The profits attributable to the UK permanent establishment must be determined under the applicable rules.
7. How can a CFO reduce permanent establishment risk?
A CFO should review the proposed operating model, premises, staffing, agency arrangements and contract processes before expansion. The company should also assess the relevant double taxation agreement, document its conclusions and revisit the analysis when its activities change.
Conclusion
Permanent establishment risk should be assessed before a foreign company begins significant UK operations. Offices, employees, sales representatives and group-company arrangements can all be relevant, but the outcome depends on the actual facts and applicable tax rules.
For CFOs, early assessment helps identify potential Corporation Tax exposure, plan compliance requirements and choose an operating structure that supports the company’s commercial objectives. A documented review of the business model, contracts and personnel arrangements can reduce uncertainty and help ensure that UK tax obligations are identified at the right time.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
