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HMRC internal manual

Trusts, Settlements and Estates Manual

Non-resident trusts: residence rules: professional trustees not resident in the UK - OECD Tax Model Convention

Under the OECD Tax Model Convention of January 2003, Article 5 defines ’permanent establishment’ as a fixed place of business; a dependent agent of the non-resident is a deemed permanent establishment.

Fixed place of business

The OECD Commentaries on this Article state that for a fixed place of business to be a permanent establishment three conditions have to be met:

a) The existence of a “place of business” – that is, a facility such as premises, or in certain instances machinery or equipment;

b) This place of business must be “fixed” – that is, it must be established at a distinct place with a certain degree of permanence;

c) The carrying on of the business of the enterprise is through this fixed place of business. This means, usually, that persons who, in one way or another, are in a paid relationship with the enterprise (usually the personnel of the business) conduct the business of the enterprise in the State in which the fixed place is situated.

The Commentaries also state that in connection with conditions a) and b) above a place of business of one enterprise could be situated in the business premises of a second enterprise, including possibly an affiliated company, if some space were put at the disposal of the first enterprise. In considering whether a place of business is “at the disposal of” an enterprise it makes no difference whether that enterprise’s use is exclusive or shared, whether the enterprise owns, rents or even occupies a place illegally. According to paragraph 6.1 of the Commentaries temporary interruptions of activities do not cause a permanent establishment to cease to exist. Similarly where a particular place of business is used only for very short periods of time but such usages take place regularly over long periods of time, the place of the business should not be considered to be of a purely temporary nature.

The OECD commentary on article 5 at paragraph 42 discusses the applicability of the permanent establishment test in the situation where one subsidiary company (Company A) of a company or a group of companies provides services to another subsidiary company (Company B). These services are provided by Company A on its own premises and using its own personnel so neither premises or personnel are those of Company B. In this situation, because the place where these services are provided is not at the disposal of Company B and as it is not Company B’s business that is carried on through that place, Company A’s premises will not be considered as constituting a permanent establishment for Company B.

Dependent agent

If a non-resident company does not have a physical presence in the UK it can however still have a permanent establishment if it acts through an agent (other than an independent agent) and that agent has and habitually exercises authority to do business on behalf of a non-resident company. If a double taxation agreement is in place it is likely that there will be a slightly narrower requirement that the agent has and habitually exercises authority to conclude contracts on behalf of the non-resident company (depending on the precise wording used in the agreement). The habitual element is the equivalent of having a presence of not less than six months and limiting the charge to those who can conclude contracts again ensures that there is economic activity of some significance in the UK.