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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Employment

The third condition for exemption under Article 15(2) is that the remuneration of the employee must not be borne by a permanent establishment or fixed base which the employer has in the United Kingdom - see DT1710 onwards and DT219 for general guidance concerning the meaning of these terms.

This condition should be considered carefully in all cases where the employee has not apparently been assigned to work in the United Kingdom for a United Kingdom-resident company. If an employee has simply been seconded by his overseas employer to work here for a United Kingdom-resident company it will not usually be necessary to consider this condition.

A subsidiary company in the United Kingdom is not generally a permanent establishment of its overseas parent company (see DT1714). The subsidiary is not in law part of its parent company but is a distinct legal person. A permanent establishment is simply a part of an overseas company which is transplanted in the United Kingdom. Customers and employees all contract with the overseas company rather than with a separate legal person in the United Kingdom. Company letter-paper often indicates how the United Kingdom operations are organised; the registered number and place of registration of a United Kingdom company are often given at the head or foot of the paper.

If operations in the United Kingdom are carried out through a permanent establishment, it should be assumed in the absence of evidence to the contrary that the cost of remuneration of an employee seconded to the permanent establishment is a deduction in computing the profits of the permanent establishment. This will be the normal basis of allocating costs in accordance with international tax principles. The permanent establishment should therefore be regarded as bearing the cost of that individual’s remuneration unless there is evidence that the overseas Head Office continues to pay the employee and the cost is not allocated to the United Kingdom permanent establishment for United Kingdom tax purposes. A permanent establishment cannot be said to `bear the remuneration’ unless it is charged against its profits without a corresponding credit, for example by way of a management charge. In doubtful cases advice may be sought from the Inspector dealing with the accounts of the permanent establishment.

Sometimes dealing with the PAYE District may be the first contact which an overseas company has with the United Kingdom Revenue and it may not yet have been established whether or not the company has a permanent establishment in the United Kingdom. If the company has had no prior contact with the Revenue the Corporation Tax District which would have responsibility for the company (the District dealing with the area where the business premises of the company are located) should be asked to advise whether or not a permanent establishment exists in the United Kingdom (see DT1715 in cases of difficulty).