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HMRC internal manual

International Manual

HM Revenue & Customs
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Foreign Permanent Establishments of UK Companies: exclusions and definitions: particular circumstances

Specific exclusions

Dual resident companies

A dual resident company cannot benefit from branch exemption in respect of profits arising from business activities in a foreign territory in which it is treated as resident under the terms of a treaty for long as it remains a dual resident of that territory and the UK. That is because a permanent establishment can only exist where an entity is resident in one State but is not resident in the other. As a dual resident company does not have a PE in either State where it claims to be resident, its profits are taxed as profits of a resident company of each State.

Branch profits of enterprises engaged in operating ships and aircraft in international traffic cannot benefit from branch exemption because Article 8 of the OECD Model Tax Convention reserves taxing rights to the residence state. In the exceptional case where a UK tax treaty does not contain that article it will be assumed to apply because of CTA09/S18A(6)(b). It follows that those foreign branch profits are necessarily excluded from the calculation of the relevant profits amount: no profits are attributed to the permanent establishment, and there can be no amount for which credit would be allowed under TIOPA10 in respect of tax paid in the relevant foreign territory.

Air transport and shipping

In the case where there is no treaty, CTA09/S18A(6)(b) defines the relevant profits amount as the profits that would be so attributable if there were a full treaty based on the OECD Model. That means that the residence state always has sole taxing rights because again no profits can be attributed to the PE.

Small companies

Where a company is a small company at any time in an accounting period only its profits or losses from PEs in full treaty territories will be regarded as forming part of a relevant profits or relevant losses amount for exemption in that period.

The definition of small company follows that from the Annex to Commission Recommendation 2003/361/EC of 6 May 2003, as provided by CTA09/S18S; see INTM652060.