The definition of permanent establishment under UK domestic law closely mirrors the definition contained in Art. 5 of the OECD Model. Consequently, save where the modifications to Art. 5 are material changes not yet adopted by the UK Parliament, or where the UK had made an observation or reservation on a specific matter, the Commentaries on Art. 5 may be resorted to interpret the corresponding UK domestic rules.

Note that HMRC on 19 June 2023 released for consultation a draft which would inter alia amend several provisions relating to permanent establishments. The draft notably proposes to amend the definition of permanent establishment to achieve greater alignment with the 2017 OECD Model, notably with respect to the Model’s expanded agency PE definition.

Pursuant to the current rules, a non-resident is deemed to have a permanent establishment in the UK if it has a fixed place of business through which its carries on its trade or business in the UK. The definition includes the following:

A place of management;
A branch;
An office;
A factory;
A workshop;
An installation or structure for the exploration of natural resources;
A mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
A building site or construction or installation project; or
An agent who has the authority to conclude contracts and habitually exercises such authority to conduct business on behalf of the foreign enterprise in the UK.

No agency PE arises if the agent is both legally and commercially an independent agent acting in the ordinary course of its business. Furthermore, no permanent establishment of a foreign enterprise is recognized in the UK in the following scenario’s:

Using facilities only for the storage and display of goods and merchandise owned by the enterprise;
Maintaining an inventory of goods and merchandise owned by the enterprise for storage or display purposes;
Maintaining an inventory of goods and merchandise owned by the enterprise only for the purpose of reprocessing by another enterprise;
Maintaining a fixed place of business for the sole purpose of purchasing goods or merchandise or the gathering of information for the enterprise;
Maintaining a fixed place of business to carry out for the enterprise an activity of a preparatory or supporting nature to a project; or
Maintaining a fixed place of business to carry out a combination of any of the above activities, provided that the overall activity of the fixed place of business, is only of a preparatory or supporting/ auxiliary nature.

The UK has adopted the anti-fragmentation rule in line with BEPS Action Plan 7, which is incorporated into its tax treaties through the Multilateral Instrument (MLI). Accordingly, the above exemptions do not apply effective from 1 January 2019 if the non-resident company is deemed to have artificially fragmented its operations to avoid forming a permanent establishment in the UK.

Profit Attribution

Where non-residents carry out a trade partly in the UK and partly abroad, the UK charge is limited under both the domestic profit attribution provisions and the business profits article of the relevant tax treaty. In simple terms, if the trade consists of selling goods manufactured abroad in the UK, it is only the profit from sales and not manufacturing which comes within the UK tax net.

The following profits are attributable to a permanent establishment for corporate tax purposes:

Trading income arising directly or indirectly through or from the permanent establishment;
Income from property or rights used by, or held by or for, the establishment; and
Chargeable capital gains (see Sec. 8.2.1.).

Chargeable profits are determined under the “separate entity approach”. This is in accordance with the OECD’s Report on Attribution of Profits to Permanent Establishments which attributes profits to the permanent establishment as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions dealing wholly independently with the non-resident enterprise of which it is a permanent establishment.

Non-residents liable to tax in the UK are required to complete annual returns and self-assessments under the same legislation which applies to UK residents. Non-residents are required to include a balance sheet and profit and loss account for both the company as a whole and for the UK operations, and the accounts for the UK operations would be the usual starting point in calculating the UK chargeable profits. Adjustments are required where the accounts are not in accordance with the UK standards. In the same way as any other taxpayer, the permanent establishment is also required to submit its tax computations by making the same adjustments to the accounting profits. For example, depreciation is to be added back and capital allowances are to be claimed where appropriate under normal capital allowances rules.

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