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HMRC internal manual

International Manual

Non-residents trading in the UK: permanent establishment: domestic law and treaty law

UK Legislation

S5 and S19 CTA 2009 introduce the concept of Permanent Establishment (‘PE’) and cover the corporation tax charging provisions (see INTM262300).

S1141 et seq. CTA 2010 cover the UK definition of PE.  That definition of PE is similar to, and has the same broad effect as, the OECD model treaty article 5 definition.

With effect from accounting periods beginning on or after 1 January 2003, for companies only, the term ‘branch or agency’ was replaced by the term ‘permanent establishment’.

Although ITTOIA05/S6(2) under which non-residents are charged to income tax does not mention ‘branch or agency’, the machinery provisions for assessment and collection of tax impose the non-resident’s liability on the UK branch or agency (see INTM268000 for further discussion on machinery provisions).

Double Tax Treaties

The UK has negotiated double tax conventions (treaties) with over 100 countries around the world. The majority of those treaties follow the format of the model treaty developed and agreed between the member states of the Organisation for Economic Co-operation and Development (OECD) (see below). 

You should always be aware that where the non-resident is a resident of a country with which the UK has a double tax treaty it will be necessary for you to consider whether that treaty, which takes precedence over UK legislation by virtue of TIOPA10/S6, affects the extent of the UK to charge to tax. 

Treaties can vary the extent of or even remove the charge to tax on a person under domestic law but cannot impose a charge to tax where one does not already exist at all under our domestic law. There must be a charge under the domestic provisions regardless of what the treaty states before an assessment or its equivalent to UK tax can be contemplated.

Where a resident taxpayer of a State makes business profits from activities within another State with which the first State has a double tax treaty, without some provision under the treaty the taxpayer could be taxed twice on the business profits. Treaties generally provide, firstly, that the second State can only tax the business profits arising in its territory where they arise through a treaty permanent establishment and secondly, that any double taxation will be relieved in the first State.

Any matters of interpretation of undefined terms used in the OECD Model Treaty, Article 5 or any other article of a treaty should be interpreted in the UK under UK law or at least common meaning.

The treaties are reproduced in full, in alphabetical order, on the UK Government website. A summary of each treaty can be found from DT2140PP onwards.

OECD Model tax treaty and the commentary

The OECD Model Treaty, at Article 5 defines permanent establishment for the purposes of the treaty. Then the ‘Model Tax Convention on Income and on Capital’, better known as the OECD Commentary to the Model treaty, provides extensive interpretation on what the words in article 5 are intended to mean.

Not all of the UK’s treaties follow the OECD Model Treaty. Where the treaty with which you are concerned is materially different to the Model Treaty you will need to exercise caution as to whether the OECD Commentary applies in part, in full or not at all.

Although the Commentary is not imported into UK domestic law the UK has contributed to and agreed the content except in specific instances where the UK has put on record either a reservation on the model treaty article or an observation on a specific section of the Commentary (see below). So, where the wording of the UK domestic law PE provisions are the same as those used in the OECD Model Treaty Article 5 then the Commentary interpretation on those words will apply to those provisions.

Observations and reservations

Observations do not express any disagreement with the text of the commentary but usefully indicate the way in which the particular country will apply the provisions of the treaty article in question. Reservations are made in respect of the article where a particular country cannot agree the OECD Commentary interpretation decided upon. In those cases the reservation will usually indicate the country’s alternative interpretation.

Domestic law v Treaty law

As mentioned above the domestic law definition of Permanent Establishment (‘PE’) is similar to and has the same broad effect as the OECD model treaty Article 5 definition of PE (see INTM264300).  So it is unlikely that the application of a treaty that followed the model Article 5 would differ from the UK domestic charge to tax on a non-resident trading in the UK through a PE as defined under domestic law.

It is vital that when considering the domestic law provisions that consideration is given to the wording in the relevant double tax treaty (if applicable) as well as the Commentary to Article 5.  Even in the absence of a Double Tax Treaty the Commentary to Article 5 needs to be considered in interpreting the domestic law provisions.  Similarly in considering profits attributable to the PE the domestic provisions need to be considered in conjunction with treaty law.

Treaty law – foreign employees

Treaty permanent establishment can also be an important concept for the taxation of foreign employees who are often liable to personal taxes and contributions if they are employed by a permanent establishment of a foreign employer. For further guidance on this in the context of foreign employees working in the UK see EIM35000+.