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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 - matching up domestic law with treaty law

We have already considered the differences between the UK corporation tax and income tax charging provisions relevant to non-residents at INTM262020+. As a summary reminder; corporation tax applies to a non-resident company where it trades in the UK through a UK permanent establishment as defined under UK domestic legislation. And income tax applies to non-residents exercising a trade in the UK where the non-resident is either an individual (regardless of the manner in which the trade is carried out) or a company where the trade is not carried out through a permanent establishment (as defined under domestic legislation).

The different decision maps in each case can be illustrated as follows:

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In the majority of corporation tax cases, you should quickly ascertain that steps 2 and 3 could become a single step because the applicable treaty has a permanent establishment definition in the same terms or essentially the same terms as the UK domestic legislation definition. But this should never be assumed without checking. For accounting periods beginning before 1 January 2003 the UK domestic CT charge required that the non-resident’s trade was carried out through a ‘branch or agency’ (see INTM264020). Thereafter the term ‘branch or agency’ was modernised to the term ‘permanent establishment’ and defined under UK domestic law (see INTM264050). Where a non-resident company trades in the UK but not through a domestic permanent establishment (branch or agency pre FA2003) there will still be a charge to income tax if there is no treaty restriction of charging rights to permanent establishments.