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HMRC internal manual

International Manual

Non-residents trading in the UK: profits of the PE: Treaty provisions: Article 7 (business profits article) - interaction with domestic provisions

The provisions of double tax treaties entered into by the UK apply in precedence to domestic legislation as provided at TIOPA/S2. So where a UK treaty provides exemption or relief to a non-UK resident from UK tax otherwise chargeable under UK legislation the domestic charge is not applicable. And, importantly, treaties only provide for relief from UK tax and cannot impose a charge to UK tax where none exists under the domestic charging provisions.

The same principle applies to the attribution of income and gains to the non-resident’s operations that are chargeable to tax in the UK. If the treaty terms of how income or gains should be attributed to a permanent establishment differ from the UK domestic attribution provisions (INTM262020 to INTM262040) then the treaty provisions would take precedence.

In practice, however, it is unlikely that a UK treaty would differ materially from domestic legislation on how profits should be attributed to a permanent establishment (INTM267030). Most of the UK treaties are written in the same or similar terms to the OECD model treaty. Under the model treaty the business profits article is numbered 7 and provides under article 7(2) that profits be attributed to a permanent establishment as follows:

“…the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.”