Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

International Manual

Foreign Permanent Establishments of UK Companies: exclusions and definitions: payments subject to deduction of income tax


The provisions at CTA09/S18D are aimed at protecting the effect of the rules relating to the deduction of income tax from payments made to non-UK resident companies. The closer alignment of taxation of foreign permanent establishments with that of foreign subsidiary companies under branch exemption means that exempt PE structures might provide a means of side-stepping the obligations on UK residents to deduct tax at source from certain types of payment.

ITA07/Part 15 requires deduction at source of sums representing income tax from certain payments, for example of yearly interest, annual payments or royalties to a non-resident company. The tax deducted in accordance with the rules in Part 15 may be limited to a lower rate or eliminated by the relevant double taxation article restricting the UK’s right to tax, or by specific legislation.

ITA07/Part 15/Chapter 11 provides for some payments made by companies, local authorities and qualifying partnerships to be made gross, where they would otherwise be subject to the duty to deduct. In particular ITA07/S933 allows a company, etc to make gross payments where ‘the person beneficially entitled to the income in respect of which the payment is made is a UK resident company’. So payments to the foreign PEs of UK companies can generally be made by other UK resident companies without deduction of tax. This is unchanged with the introduction of branch exemption.

CTA09/S18D restricts the amount to be exempt so that branch exemption does not present an incentive to arrange for payments that would otherwise be subject to the rules on deduction of tax to be received by PEs. This provision does not apply generally to banks (within the meaning of CTA10/S1120) but will apply to transactions involving banks if those transactions are part of avoidance arrangements.