A permanent establishment of a business creates tax liabilities
If an overseas business has a UK permanent establishment (PE) then the profits of the business that are attributable to that PE, either directly or indirectly, are chargeable to UK tax. The business is required to register the PE with Companies House and HMRC in the UK and to submit annual accounts and tax returns respectively to these bodies.
Due to this significant impact, it is therefore important to determine whether a UK PE is created by an overseas company performing work in the UK, ideally before the work commences.
Most UK double tax treaties have similar provisions for taxing the profits arising to a UK company through an overseas PE in that overseas jurisdiction.
A PE is defined by UK legislation (based on the OECD definition) as where a company has:
- a fixed place of business in a territory (including a place of management, branch, workshop, office or factory) 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 in a territory, authority to do business on behalf of the company.
No UK PE exists if the activities are preparatory or auxiliary to the work of the company as a whole, or if the work is carried on through an independent agent acting in the course of the agent’s business.
Further guidance is given by HMRC and the OECD on these definitions:
- A fixed place of business is very broadly defined in legislation: in order to constitute a fixed place of business, there must be a geographical place with a certain degree of permanence that the business is carried on through. 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.
- An agent habitually exercising his authority to do business on behalf of the company (dependent agent), is someone who has the authority (actual or implied) to conclude binding contracts in the name of the business.
- Activities are deemed to be preparatory or auxiliary to the work of the company if the services it performs is 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. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.
- The definitions and guidance regarding what constitutes an independent agent is broadly the same as the considerations of the degree of control over the work being carried out for determining whether a worker is employed or self-employed, therefore if the contractors are treated as self-employed workers then it is very likely that they will be an independent agent acting in the course of the agent’s business and so will not create a PE for the company.
Tax innovations can determine whether your proposed structure will create a UK PE as well as suggesting possible ways of avoiding the creation of a UK PE. We can also assist with the registration and submission requirements of your UK PE.
If you would like further information on permanent establishments or other areas affecting taxation, please email firstname.lastname@example.org or call us on 01962 856 990 and we would be happy to discuss your issues and advise on whether we are able to help you.
For more information on tax liabilities relating to permanent establishments please call us on 01962 856 990 or visit our contact page.