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HMRC internal manual

International Manual

Non-residents trading in the UK: Treaty law could potentially affect the UK domestic charge to tax: Treaty law - the business profits and permanent establishment Articles 7 & 5

Where the non-resident is a resident of a country with which the UK has a DTA, the treaty will normally provide that the UK may tax the business profits attributable to a UK permanent establishment of the non-resident and it will define the term ‘permanent establishment’ for the purposes of that specific treaty. In this way, article 7 (the business profits article) in the OECD model treaty (see INTM159000) provides that;

“The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.”

This means that, under the treaty, the UK could only tax the profits of a resident enterprise of the treaty partner territory if that enterprise had a permanent establishment (as defined under the treaty) in the UK. Then article 5 of the model treaty gives a detailed definition of the term permanent establishment. For more guidance on the business profits article see INTM267010 onwards and on the permanent establishment article at INTM266010 onwards. Neither the numbering nor the specific wording of articles in the various UK treaties will necessarily follow those used in the OECD model treaty. It is important to always read the relevant articles from the actual double tax convention (DT2140PP onwards) negotiated between the UK and the treaty partner concerned to establish the effect, if any, in your particular case.

The non-resident may also be taxed on the profits arising through the UK permanent establishment by his own country of residence. In those circumstance the non-resident would suffer double taxation and could make a claim under the treaty to the country of residence for double tax relief.

In cases of doubt, a claim that a domestic charge on trading profits is extinguished by the absence of a treaty permanent establishment in the UK should be referred in accordance with SCS122/02 to CSTD Business, Assets & International, HMRC.