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HMRC internal manual

International Manual

Transfer Pricing: Transactions and Structures: business structures: marketing and distribution - commissionaires: practicalities

Practical issues

The previous page (INTM441040) introduced the concept of commissionaire arrangements. Here, we consider some practical points which case teams may encounter.

Identifying a commissionaire arrangement

There are a number of ways to recognise that goods are being sold in the UK using a commissionaire.

  • The accounts for a buy/sell distributor may actually state a change in activities to that of a commissionaire. There may be a reorganisation, whereby the activities of a subsidiary that used to manufacture and distribute goods are transferred to two new companies, one carrying out a limited risk form of manufacture, the other being a commissionaire.
  • If an existing buy/sell distributor changes to a commissionaire, there will be a big drop in turnover, as the turnover for the company will now be the commission it receives, not the actual sales value of the goods themselves. The turnover may well be described as commission, as opposed to sales.
  • There will be no stock (or only very small amounts).
  • There should be no sales debtors or purchase creditors.

Does the commissionaire structure achieve its tax aim in the UK?

There are two important points to consider when looking at a selling structure in the UK which involves a commissionaire.

True commissionaire arrangements are not generally found at arm’s length in the UK. It is not the traditional way of selling in the UK, where businesses that sell finished goods will do so by buying products, holding those products as stock, promoting and selling them to customers. Typically, the distributor buys the products from the manufacturer and then sells them to third party customers, bearing all the risks associated with buying, holding and selling stock, and the additional financial costs of carrying the stock. The distributor will also incur costs of getting the goods to the customers and promoting, marketing and selling the products.

There may actually be more than one person who is taxable in the UK in respect of profits made from selling goods in the UK.

Civil law applies in many European countries, such as France, Belgium and Germany. However the UK (and other countries) has a common law system. Under the common law of agency, the nearest equivalent to commissionaire is an undisclosed agent. Under common law, when an undisclosed agent enters into a contract, he binds the principal, and in theory the customer could sue either the agent or the principal - there is a contractual relationship between the principal and the customer. We summarise these differences in the diagrams below.

Commissionaire arrangement - civil law


Undisclosed agency arrangement - common law


In the UK, it is possible that a commissionaire is legally an undisclosed agent, with the potential to bind the principal. This is an important concept as it can have a bearing on whether the principal would be treated as trading in the UK through a permanent establishment.

Is there a UK domestic charge on the foreign principal?

One potential approach to the use of commissionaire structures is to argue that the principal is trading in the UK through a permanent establishment (‘PE’) and hence that the foreign company is chargeable to CT in the UK on its trading profits under CTA09/S5. The measure of profits is the trading income arising directly or indirectly through the PE, together with any income from property or rights used by, or held by or for that PE.

Attribution of profits to the permanent establishment

If it can be established that the principal is trading in the UK through a PE, the next step is to consider what the profits of that PE are. Case teams should review carefully any claims that the PE is not entitled to any profits in addition to those already taxed on the commissionaire. Although the attribution of profit to the PE is determined under the arm’s length principle it does not fall under the transfer pricing legislation of TIOPA10/Part 4. The attribution of profit is governed by the double taxation agreement between the UK and principal’s country of residence.

The argument is often put forward that if there is a PE in the UK, the income of the PE should be equivalent to the income earned by the commissionaire, as this is the limit of the activity in the UK. The commission paid to the commissionaire should be deducted from the income earned by the PE - with the net result that no additional profit to be allocated to the PE.

Detailed guidance on the attribution of profits in these cases can be found at INTM260000 onwards. The PE can be performing activities in addition to those of the commissionaire. The principal, through the UK commissionaire, is participating in the selling activity in the UK; the selling activity is the source of the profits of the PE. In the example, the profits included in the accounts for the principal are derived from the inventory and debtor functions and risks and the residual profit. Attribution of profit between a principal and a PE in another country involving the transfer of function and risk cannot be dictated by a legal agreement alone - there must be a detailed consideration of whether in fact the risks and functions lie with a PE or the principal overseas.

Once the functions and risks have been allocated between the PE and the home territory of the principal, appropriate profits can be allocated to those functions and risks. It will be simpler to establish a reward for the activities, which relate to ownership of the assets, such as managing and insuring stock. A cost-plus method could be used, leaving the balance of the profits from the overall selling activity to be allocated to the PE.

The questions of whether there is a PE of the principal trading in the UK, and if so the profits that should be attributed to the PE are very complex issues.

The OECD guidelines on the attribution of profits to a PE say that there should be no automatic force of attraction of profits to the PE. In the same way, there should be no automatic force of attraction to the head office of the enterprise. Only a careful examination of the facts will show whether functions are carried out by the PE in the UK or by the rest of the entity overseas.

Arm’s-length reward earned by the commissionaire

As well as taxing the principal on its profits that can be attributed to its PE in the UK, the UK commissionaire must be rewarded on an arm’s length basis.

In any selling operation, the most important function and area of risk is the marketing and selling of the goods. This is recognised by distributors, as sales personnel are usually much better rewarded than people carrying out other functions, such as chasing debts or ordering the products. Without the means to sell the goods, without the relationship with the customers, without the experience and strategy to attract new customers - the rest of the activities of the whole selling operation are unlikely to generate significant profit.

The attribution of profits between the PE and the rest of the non-resident company follows the arm’s length principle and the principles set out in the chapter on gathering evidence to establish the arm’s length price, from INTM485000 onwards. It is unlikely that independent parties will be found who will be comparable agents - simply because it would be very unusual (if not unknown) for such agents to sell the volume of goods involved in the enquiry. Independent distributors should be considered as comparables. Overall, there is one trading activity - selling goods in the UK. This will partly be carried out by the UK company as commissionaire, partly by the principal through a PE in the UK, and partly by the principal in its country of residence. It is the arm’s length profit of all the functions carried out in the UK that should be taxable in the UK - whatever entity carries out these functions.


In the above example it might be established that the activities (functions and risks) fall as follows:

A Commissionaire - marketing, selling, distribution
B Permanent establishment - selling, risks of bad debts and stock obsolescence
C Principal - managing debts and stock

The majority of the activities and risk are in the UK, either through the commissionaire or the PE of the principal. Rather than trying to separate out all three separate profit centres, it will be much easier to separate the costs of activities such as debt management and stock management (to the extent that there are staff outside the UK who carry out these activities) and agree an arm’s length reward for those activities.

This will avoid the subjective exercise of trying to establish an arm’s length price for the activities of the commissionaire. Some businesses selling goods in the UK have extensive after sales support, ranging from advice at the end of a telephone to onsite visits by engineers. In the case of large IT businesses, the number of staff involved in this type of activity can outweigh those involved with the actual selling activity. These functions are likely to stay in the UK following a change from a classic buy/sell distributor. When looking at comparables for these cases, teams should satisfy themselves that they provide the same level of after sales support, or that adjustments can be made to reflect material differences.