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HMRC internal manual

International Manual

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Foreign Permanent Establishments of UK Companies: introduction: exempt profits or losses: treaty attribution of profits to a PE

Attribution of profits by a PE territory

The business profits article of a treaty will in general provide for each contracting state to make an attribution of profits to a PE. Typical treaty wording is:

“…where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits that 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…”

The attribution made by the PE territory is for the purpose of establishing that jurisdiction’s taxing rights in respect of a UK resident company. The attribution by the UK is a calculation of the corporation tax profits arising from the PE, which is made to establish entitlement to credit relief in respect of any foreign tax (see INTM281060).

Income that would otherwise be dealt with under a separate article is generally attributed to a PE in accordance with the business profits article if it is “effectively connected” with a PE. For example, typical treaty wording for the interest article includes the following:

“The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.”

The term “effectively connected” is used in the OECD Model Convention and many treaties, although the UK / US treaty for example refers directly to PE attribution:

The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated therein, and the interest is attributable to such permanent establishment. In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply.

Articles dealing with dividends and royalties will similarly make reference to the business profits article where appropriate.

The position for chargeable gains is explained at INTM283000