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HMRC internal manual

International Manual

UK subsidiaries of foreign banks and foreign banks trading in the UK through permanent establishments: Representative Offices

Some foreign banks will only operate in the UK through a representative office. Consideration will need to be given to whether or not the representative office constitutes a permanent establishment (PE), both for the purposes of UK domestic law and under the terms of any relevant double taxation agreement. See INTM267621 for the charge to corporation tax and INTM264050 for more detail on the definition of a PE.

CTA10/S1143(1) provides that a company will not be regarded as having a PE in the UK if it carries on activities for (or on behalf of) the company and if in relation to the business of the company as a whole, the activities are only of a preparatory or auxiliary nature. Some examples of auxiliary or preparatory activities are set out in CTA10/S1143(3), and more guidance can be found at INTM266120. This may be relevant in determining whether or not the existence of a representative office amounts to a PE.

Each case has to be examined on its facts but in many cases the activities of a representative office will be insufficient to constitute a PE. For some this position may not change, but other representative offices may eventually be upgraded to full PE status. It may not always be easy to determine when the borderline has been crossed. Often there will be no doubt as to when it happens - the PE will be officially launched, new premises may need to be acquired, additional staff recruited or transferred in, and appropriate notifications given to the Financial Services Authority, etc. In some cases, however, active participation in the bank’s activities may have commenced some time before, and from time to time a representative office’s activities should be examined to see whether it has crossed the line. It is, however, not intended that undue time should be devoted to this in the absence of information suggesting there has been a significant change in the representative office’s activities. Of course, the obligation to notify chargeability to tax on the commencement of a PE lies with the bank.

When a representative office is upgraded to full PE status, the first accounts and/or computations will often include a deduction for pre-trading expenditure. It is important to distinguish, and disallow, any costs incurred wholly or partly for the purposes of the representative office. Cases have been seen in which, after a branch has opened, it has been claimed that the previous representative office continues in some form alongside it. There is obvious scope here for what we would see as UK business properly attributable to the PE to by-pass the branch’s accounts and in worthwhile cases appropriate enquires should be made to establish the facts and the appropriate tax treatment.