Non-Residents Working on the UK Continental Shelf: Double Taxation Agreements - Permanent Establishment and Business Profits Articles
Most of the treaties listed in OT41530 contain provisions which restrict UK taxing rights over profits arising from a trade or business carried on in the UK by a “resident of” a treaty partner to those profits which are attributable to an actual permanent establishment situated in the UK. The wording of the provision varies between treaties and the appropriate treaty should be consulted where necessary. Unless the provision is itself overwritten (for example by an Offshore Activities Article - see OT42560) the extension of UK tax jurisdiction under CTA09\S1313, ITTOIA05\S874 and ITEPA03\41 may be nullified. It may therefore be necessary to consider whether the offshore activities constitute an actual permanent establishment under Article 5.
General Effects of Articles
Article 7(1) of the UK/Iceland DTA (SI1991/2879) demonstrates how the “Business Profits” Article may effect the scope of charge to UK tax by virtue of CTA09\S1313 on an Icelandic company.
Paragraph (1) follows exactly the wording of the OECD Model Convention. It provides that “the profits of an enterprise (of Iceland) shall be taxable only (in Iceland) unless the enterprise carries on business in (the UK - on an extended definition) through a permanent establishment situated therein”.
This will override CTA09\S1313 which would for example render an Icelandic company liable for UK tax if it merely derived profits from “exploration or exploitation activities” carried on in the UK Continental Shelf.
The UK/Iceland DTA requires not only that the Icelandic company should carry on business in the UK (on an extended definition) but also that it should carry on that business through a permanent establishment in the UK (again on an extended definition).
An Icelandic company which earns profits from carrying on “exploration or exploitation activities” in the UKCS will be “carrying on business in the UK” and discussion is therefore likely to centre on whether or not that company carried on business through a permanent establishment in the UK.
It is then necessary to consider Article 5 of the treaty. This also uses the words of the OECD Model Convention and
- defines the term “permanent establishment” (paragraph 1),
- gives a list of examples of permanent establishments (paragraph 2),
- deals expressly with projects etc. lasting for more than 12 months (paragraph 3),
- gives a list of exclusions from the general definition (paragraph 4),
- indicates how agents are to be regarded (paragraphs 5 and 6) and
- refers to the position of affiliated companies (paragraph 7).
The OECD Commentary provides guidance on how to apply each of the above paragraphs of Article 5.
It might be necessary to carry out a detailed fact finding into the arrangements made by the non-resident company to work in the UK Continental Shelf covering such matters as the location of premises, facilities or installations used to support or carry on the activities and in respect of any such items in the UK (on an extended definition) for what periods they were available, by whom they were provided and used respectively and the relationship between the company and the users and so on. The principles should then be applied to the facts to determine whether or not the company carried on business through a UK permanent establishment.