9th May 2012
An overseas group company which has a permanent establishment in the UK will be subject to UK corporation tax. This may be an issue if, for example, staff employed by a UK group company also act for an overseas group company, or if, in the UK, staff of an overseas parent oversee a UK subsidiary.
Liability to UK corporation tax
A company which is not incorporated in the UK will be liable to UK corporation tax if:
(i) It is managed and controlled from the UK, or
(ii) It has a permanent establishment in the UK. In this case only profits relating to the UK permanent establishment will be subject to UK tax.
In addition, a company which is not incorporated in the UK may be liable to UK income tax (as opposed to corporation tax) on UK source income, such as rental income from UK properties.
This is subject to relief under a relevant double tax treaty.
Is there a permanent establishment in the UK?
An overseas company may be regarded as having a permanent establishment in the UK if:
(i) It has a fixed place of business in the UK through which the business of the company is wholly or partly carried on, or
(ii) An agent acting on behalf of the company exercises authority in the UK to do business on behalf of the company.
Fixed place of business
A fixed place of business is interpreted widely for this purpose. A place of business of one company can be situated in the business premises of a second company, including another company in the same group, if some space is put at the disposal of the first company. It does not make any difference whether the company’s use is exclusive or shared, or whether the company owns, rents or even occupies the space illegally. For example, if a parent company uses an office in the headquarters of a subsidiary company to oversee that subsidiary for a period, this could be regarded as a permanent establishment of the parent company, as it would have office space at its disposal in the UK.
Business must be carried on wholly or partly “through” the fixed place of business
In order for there to be a permanent establishment, the business of the overseas company must be wholly or partly carried on “through” a fixed place of business.
Business will be carried on in the UK if there is significant economic activity in the UK which contributes to the making of profits of the overseas company. In order for business to be carried on “through” a permanent establishment in the UK, staff must work for the overseas company from the fixed place of business. Moreover, the activities in the UK must be a significant part of the company’s operations. The activities must not be merely of a preparatory or auxiliary nature. However, if the nature of operations at the fixed place of business is the same as the general purpose of the overseas company’s activities then this cannot be regarded as preparatory or auxiliary.
Which entity do the relevant staff in effect work for?
In deciding whether or not there is a permanent establishment, it may be necessary to consider whether staff based in the UK, and employed by the UK group company, are in fact working for the UK company or the overseas entity.
UK taxation implications if there is a UK permanent establishment
If there is a UK permanent establishment, then:
(i) Profits attributable directly or indirectly to the permanent establishment will be subject to UK corporation tax.
(ii) Capital gains arising on the disposal of assets situated in the UK used for the purposes of the permanent establishment will be subject to UK corporation tax.
Care may need to be taken to ensure that overseas group companies are not regarded as having a permanent establishment in the UK, as any profits attributable to the permanent establishment will be taxable in the UK.