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HMRC internal manual

International Manual

Foreign banks trading in the UK through permanent establishments: Interaction of double tax agreements with UK domestic law

The provisions of a double tax agreement (DTA) entered into by the UK take precedence over domestic legislation under the provisions of TIOPA10/Part 2/Chapter 1, insofar as they provide relief from double taxation. A DTA (also referred to as Double Taxation Treaty) can provide relief or exemption from the UK domestic charge but cannot impose a charge to tax where one does not exist under UK law.

This principle applies where income and gains are attributed to the UK permanent establishment (PE) of a foreign bank and are chargeable to tax in the UK. This means that one must first consider the operation of UK domestic law and then the terms of any relevant DTA to establish whether that agreement provides any specific relief or exemption from the UK domestic tax charge.

In practice, it is unlikely that the provisions of a UK DTA will differ materially from those in UK domestic legislation because both are based on the wording in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, so it is probable that the two will have a similar effect.

The Permanent Establishment Article of a DTA, (Article 5 in the OECD Model Tax Convention) provides a definition of a PE and sets out certain conditions that have to be met before one will exist. The language of Article 5 of the OECD Model has substantially been adopted in the UK domestic law definition of PE in CTA10/S1141. This is covered in more detail in the International Manual at INTM265020.