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HMRC internal manual

International Manual

Non-residents trading in the UK: profits of the PE: Interest receivable by PE

The domestic charging provisions for taxation of interest etc. apply equally to foreign taxpayers along with those resident in the UK. Under CTA09/S19(3) the CT chargeable profits of a foreign company trading in the UK through a permanent establishment would include interest income from sources used by, or held by or for the PE. In any particular case it is of course necessary to consider the terms of any applicable double tax treaty and specifically whether the domestic charge is exempted or reduced. The model treaty interest article (11) preserves the domestic charge on the non-resident where the interest is UK-source and the debt-claim in respect of which the interest is paid is effectively connected with the non-resident’s permanent establishment in the UK. Some UK treaties preserve the domestic charge even where the interest source is non-UK. When the domestic charge over the interest source is preserved the interest becomes part of the PE business profits under the business profits article (7).

An example of circumstances in which UK PE chargeable profits would include interest is as follows:

The UK permanent establishment operations of a foreign computer games manufacturer have been commercially successful and have generated surplus trading funds. The UK manager invests the surplus funds in UK securities. The applicable double tax treaty allows the UK to treat the interest as business profits of the PE where the interest is effectively connected with the PE. The chargeable profits should include the interest source.

Where UK source interest is paid to the UK permanent establishment of a non-resident company there is no need for an income tax deduction at source under ITA07/Part 15 (see INTM505090).