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HMRC internal manual

International Manual

HM Revenue & Customs
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Non-residents trading in the UK: Treaty permanent establishment: Importance

Process map

In all cases where you are considering the potential chargeability of a non-resident you should consider the facts of the case in the process illustrated below. The relevant guidance for each stage of consideration is sign-posted accordingly. This chapter of the guidance concerns stage 2 of the process laid out below and specifically considers the concept of permanent establishment as defined under treaty law and its potential to remove or vary a domestic charge to tax over a non-resident trading in the UK. Where an enquiry into a non-resident is concerned stage 4 (whether any tax liability can be collected) of the process should equally be under consideration from the outset.

Stage 1

Is there a charge under domestic legislation on the activities in question? If there is not, you need consider the case no further. [INTM261000 to INTM264120]

Stage 2

If the non-resident is a resident of a state with which we have a Double Taxation Agreement, does the treaty restrict the domestic charge? [INTM265010 to INTM266160]

Stage 3

How much are the chargeable profits that can be taxed in the UK? [INTM267010 to INTM267170]

Stage 4

Having established that there is a domestic charge and having taken account of the effects of the relevant treaty, how do we assess and collect any tax that is due? [INTM268010 to INTM268050]  

This guidance covers the situation where a double tax treaty is in point and considers in detail whether a permanent establishment as defined under the relevant treaty exists. This is important 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 and 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.

This guidance on ‘treaty permanent establishment’ could apply equally to consideration of whether a foreign person has a treaty permanent establishment in the UK or whether a UK person has a treaty permanent establishment in another country. 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+.

None of this section of the guidance is relevant in a case where either the non-resident is from a country with which the UK does not have a treaty or the UK resident has business profits from a non-treaty partner country.