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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Profits: permanent establishment

The business profits Article sets out the method by which the profits of the permanent establishment are to be measured. It provides that there shall, in each contracting state, be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. It is a simple arm’s length rule, albeit not always simple to apply. The United Kingdom can tax only so much of the profits of a non-resident enterprise as are attributable to the permanent establishment in the United Kingdom. Where the enterprise derives income from the United Kingdom which is not attributable to the permanent establishment, then such income cannot be taxed under the business profits Article. Where there is a permanent establishment which appears to be making little or no profits and there is evidence that the enterprise is deriving profits in the United Kingdom otherwise than through the permanent establishment, enquiries should be made in order to establish that there are good commercial reasons for this and that the profits are not being diverted from the permanent establishment to a non-taxable source.

The business profits Article also provides that no profit shall be attributed to a permanent establishment by reason of the mere purchase of goods by the permanent establishment.