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HMRC internal manual

International Manual

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

Introduction

Below is a description of the domestic and treaty definition of Permanent Establishment. 

As you will see there are two broad circumstances within which a non-UK resident or a UK resident enterprise could have a permanent establishment.  These are: 

  • Where there is a fixed place of business through which the business of an enterprise is wholly or partly carried on - Model Treaty Article 5(1). This is known as the fixed place of business permanent establishment (INTM264400).

Or,

  • Where an agent, other than an agent of independent status, acting on behalf of an enterprise has, and habitually exercises, in a contracting state an authority to conclude contracts in the name of the enterprise - Model Treaty Article 5(5). This is known as the dependent agent (or deemed) permanent establishment (INTM264500).

The Commentary to Article 5 (at paragraph 35 in the July 2010 version) makes it clear that there is no need to consider, in respect of the same profits, whether a deemed dependent agent PE exists if it is already clear that there is a fixed place of business PE.

Domestic PE definition – CTA 2010/S1141

CTA2010/S1141(1) states that a company will have a PE if and only if:

a.  it has a fixed place of business here through which the business of the company is wholly or partly carried on, or

b.  an agent acting on behalf of the company has and habitually exercises here authority to do business on behalf of the company.

CTA2010/S1141(2) lists examples (which is not an exhaustive list) of ‘fixed places of business’ such as:

a.  a place of management,

b.  a branch,

c.  an office,

d.  a factory,

e.  a workshop,

f.  an installation or structure for the exploration of natural resources,

g.  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources,

h.  a building site or construction or installation project.

CTA2010/S1142 states that an agent of independent status is not a permanent establishment i.e. the PE must be a ‘Dependent Agent Permanent Establishment’ (‘DAPE’). (This is discussed further in INTM264500.)

CTA2010/S1143 goes on to say that there is no permanent establishment in the UK if the activities here, whether conducted through a fixed place of business or by an agent, are preparatory or auxiliary in character in relation to the business as a whole. The statutory definition includes the activities that are listed as “activities of a preparatory or auxiliary character”:

a.  The use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the company,

b.  The maintenance of a stock of goods or merchandise belonging to the company for the purpose of storage, display or delivery,

c.  The maintenance of a stock of goods or merchandise belonging to the company for the purpose of processing by another person,

d.  Purchasing goods or merchandising, or collecting information, for the company.

For the avoidance of doubt the activities listed in subparagraphs 1) to 4) are exempt activities regardless of whether they are preparatory or auxiliary in nature.

(See INTM264460 for treaty exemptions)

Treaty PE definition – Article 5

The model tax treaty states:

Article 5(1):

This paragraph introduces the concept of trading through a fixed place of business in defining a permanent establishment.

See INTM264400 for further details.

Article 5(2):

Subparagraph 2 states that the following are specifically included within the PE definition:

a)  a place of management

b)  a branch

c)  an office

d)  a factory

e)  a workshop, and

f)  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.’

See INTM264450 for further details.

Article 5(3):

This states that a construction or installation project can only constitute a PE if it lasts more than 12 months. 

This will be discussed further in INTM264800.

Article 5(4):

Subparagraph 4 applies the following exemptions in defining PE:

a)  the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

b)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

c)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

d)  the maintenance of a fixed place of business solely for the purpose of purchasing good or merchandise or of collecting information, for the enterprise;

e)  the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

f)  the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.’ 

This is discussed further in INT264460.

Article 5(5):

This subparagraph introduces the second circumstance in which a PE can exist i.e. a dependent agent permanent establishment (‘DAPE’).  The treaty definition goes one step further than domestic law by stating that the DAPE must have the ability to conclude contracts in the name of the enterprise.

This is discussed further in INT264500

Article 5(6):

This paragraphs states that a broker, commission agent or any other agent of independent status will not be deemed to have created a permanent establishment of the foreign enterprise provided the agent is acting in the ordinary course of its business.

Article 5(7):

This paragraph of the Article makes it clear that the existence of a subsidiary does not automatically constitute a permanent establishment of the parent company.

However, a parent that has part or all of a subsidiary company’s premises at its disposal creates a permanent establishment if the parent then carries on its business there (see INTM264420).

Treaty provisions v Domestic provisions

The UK definition of PE is almost identical to the OECD Article 5 definition except:

  • Treaty law requires that a construction site or installation project must be in existence for more than 12 months to constitute a PE whereas domestic law is silent on time.
  • For DAPE the treaty requires that the agent must be able to conclude contracts in the name of the enterprise, whereas UK domestic law only requires that it has authority to do business on behalf of the non-resident company.

Important point:

As mentioned in INTM264200 although it is likely that the vast majority of the UK’s double tax treaties will be based on the OECD model tax treaty it is important that the wording of the specific country treaty is considered as it can differ, e.g. there may be language which is closer to the UN Model.