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HMRC internal manual

International Manual

Description of double taxation agreements: Business profits

The business profits of an enterprise of one country can only be taxed in the other country if the enterprise carries on business in that other country through a permanent establishment. Only the profits attributable to that permanent establishment can be taxed in the other country.

The profits to be attributed to the permanent establishment are those which it might be expected to make if it were a separate enterprise from the one of which it is a permanent establishment and dealing independently with the enterprise. In other words the profits of any permanent establishment have to be calculated on an `arm’s length’ basis. In calculating its profits the permanent establishment is entitled to deduct not only the expenses incurred for its purposes but also a reasonable proportion of the general administrative and executive expenses which are incurred for the purposes of the enterprise as a whole and whether incurred in the country where the permanent establishment is located or elsewhere.

As indicated at (e) of INTM153040 an enterprise of a contracting state is defined as an enterprise carried on by a resident of a contracting state. See INTM154010 onwards for guidance regarding residence for agreement purposes.

Information about tax credit relief for foreign tax charged on permanent establishments of United Kingdom enterprises situated in a foreign country can be found at INTM163030 onwards.