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HMRC internal manual

International Manual

Non-residents trading in the UK: domestic charging provisions: Corporate Tax charge


The charge to Corporation Tax

CTA09/S5(2), S19(1) charges Corporation Tax on non-resident companies trading in the UK through a permanent establishment (previously branch or agency). Where a company trades in the UK, other than through a permanent establishment (see INTM264050), there can be no charge to Corporation Tax. In those unusual circumstances the charge to income tax under ITTOIA05/S6(2) continues to apply. An example that would fit this situation might be a non-resident company with a peripatetic ‘door to door’ sales operation where the activities were briefly carried out at a succession of customer’s premises, or a one-off sale.

Corporation tax and what is now the CTA09/S5(2) charge on non-residents were introduced in 1965 and remain little changed until FA03. The effects of those changes, applicable with effect from accounting periods beginning on or after 1 January 2003, are detailed at INTM267040. The significant element of the change concerns the need for attribution of equity capital to the non-resident company’s UK operations before interest on debt can be allowed as a deduction from UK chargeable profits. Additionally, and less significantly, references in the legislation to a ‘branch or agency’ of the non-resident company were changed to ‘permanent establishment’ with that term being defined in line with the internationally recognised criteria from the OECD Model Tax Convention, article 5 (see INTM266040). The terms permanent establishment and branch or agency are to be taken as being broadly equivalent.

Profits chargeable to Corporation Tax

A non-resident company trading in the UK through a permanent establishment is chargeable to UK corporation tax on only the profits arising from the permanent establishment [CTA09/S5(2), S19(1)].

The chargeable profits are, subject to any exceptions provided for by the Corporation Tax Acts, all profits, wherever arising, that are attributable to the UK permanent establishment. In line with Corporation Tax generally, chargeable profits can include capital gains. The chargeable profits are:

  • trading income arising directly or indirectly through or from the permanent establishment.
  • income from property or rights used by, or held by or for, the permanent establishment, and
  • chargeable gains under TCGA92/S10B: assets used or held or acquired for the permanent establishment (TCGA92/S10) or the trade carried on through the permanent establishment.

Non-trading income chargeable to CT

The profits chargeable to CT for the non-resident’s UK permanent establishment can only include non-trading income where the CTA09/S5(2), S19(1) charge has already been triggered because the non-resident company has been trading in the UK through a permanent establishment. Where that is the case the chargeable profits include [under CTA09/S19(3)(b)] ‘income from property or rights used by, or held by or for, the permanent establishment ’. The first part of that phrase can be confusing as any rental income that the non-resident had from UK properties would be chargeable under the non-resident landlords scheme provisions (described in more detail at SALF703). The phrase would apply, for example, to interest, patent royalties or license fees where the source was connected to the permanent establishment operations.

For example, a non-resident electronics design and manufacture company carries out its trade in part through a UK permanent establishment. Certain product lines were designed at the UK factory and these go on to be licensed to third parties who pay license fees to the non-resident company. The UK chargeable profits would include the license fees receivable in respect of rights granted over intellectual property developed by the UK permanent establishment.

Another example, this time involving an interest source: the UK permanent establishment operations of a foreign company manufacturing computer games have been commercially successful and have generated surplus trading funds. The UK manager invests the surplus funds in UK securities. The UK chargeable profits should include the interest source.