Tax & Accounting News

Permanent Establishment

14/08/2009

Permanent Establishment (PE) is an important concept when it comes to determining whether a business is subject to tax in a particular country, and in deciding double taxation issues. A non-UK company with no PE in the country may be able to carry on a trade in the UK with a low or zero corporation tax rate in its country of residence.

A company is considered to have PE in the UK if it has a fixed place of business here through which its business is wholly or partly carried on, or if an agent acting on behalf of the company habitually exercises an authority to do business on its behalf, particularly if the agent concerned does not act for any other clients or has additional non-business relationships with the company.

A fixed place of business would include a place of management, branch, office, factory, workshop, mine, quarry or building site. However, the existence of a fixed place does not automatically constitute a PE – the business must also be wholly or partially carried out from that place. Persons working for the business would also have to have worked from that place. A computer server used by an e-commerce business is not normally considered a PE.

A fixed place of business will normally be a premises but could also be machinery or equipment, or a space within a larger premises. Presence at a customer’s premises over a period of time could constitute a fixed place of business, for example if an employee is allowed to use an office in a customer’s premises in order to monitor the progress of a contract. HM Revenue and Customs (HMRC) does not normally consider that PE exists where a place of business has been in operation for less than six months, but it may do if a place of business has been in operation for a series of short periods over a long period of time.

With regards to building sites or construction or installation projects, the UK does not specify a minimum period for a building site to constitute a PE, but most treaties specify a minimum period of either six or 12 months. A building site or project may not constitute a PE if it can be argued the company has not carried out its business through it, for example by project-managing it through an independent third party contractor, particularly if the company does not have access to the site itself.

It should also be remembered that a non-UK resident company with no PE in the UK would still be liable to income tax on any UK rental income. Income tax will also be due on a trading transaction where no appropriate double taxation treaty is available.

For the purposes of deciding which country has the right to tax a company’s profits, each double taxation treaty has its own criteria for determining whether a company has a PE in the country concerned. The UK statutory rules are largely based on the model OECD treaty, so are similar to those in most other countries, but variations do exist, so it is worth checking the situation.

For more information please contact us.

 

Print page