Advisory Project:

UK Permanent
Establishment Risk

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Index

1. What is PE?
2. What is Fixed Place of Business?
3. Example 1 explained with Germany - United Kingdom Income and Capital Tax Treaty (2010)
4. Example 2 explained with UK – Australian DTA definition of a PE
5. HMRC Guidelines to determine the activity preparatory or auxiliary
6. Corporate tax implications associated to UK PE

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What is Permanent Establishment ?
The term Permanent Establishment (‘PE’) is typically used to describe a location where a
non-resident company has sufficient presence to have a ‘taxable presence’ for corporate
income tax purposes, even though that company has not set up a legal entity in that
jurisdiction.

UK definition of a PE

The UK definition of a PE is set out in s1141 CTA 2010 which states a company has a
permanent establishment in a territory if (and only if):

• It has a fixed place of business there through which the business of the company is
wholly or partly carried on, or
• an agent acting on behalf of the company has and habitually exercises there
authority to do business on behalf of the company

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Fixed Place of Business
A fixed place of business includes a place of management, a branch, an office, a factory, a workshop, an installation or structure for the exploration of natural resources, a mine, oil or gas well, a quarry or other place of extraction of natural resources or a
building site or construction or installation project.

The place of business must be permanent. Generally speaking, a place of business will be a permanent establishment if it is used for at least six months, although the exception to this may be where a company has no other activities, in which case a
permanent establishment may be created if the place of business is used for less than six months.

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Example
Mount Corporation is in the process of agreeing a project in the UK for the calendar year 2023
which will last for approximately 3-4 months. The proposed project will require the business to lay a trenchless
pipeline in the southwest of England. The project is anticipated to be worth $5-7m.

To fulfil the contract, Mount will require specialist machinery which it is anticipated will be purchased by its
German subsidiary company, valued at $3-5m. the Machinery will be CE certified, and it is currently anticipated
that it will be imported to the UK alongside a trained crew of operators (4-6 people plus project manager) who will be
employed and resident in Germany. These highly skilled operators will come to the UK for the duration of the project
only and on completion they will return to Germany alongside all imported machinery.

The definition of a fixed place of business as set out in the UK domestic tax legislation includes amongst others:
“a building site or construction or installation project”
In respect of the above, we would anticipate the operations of Mount Germany will therefore be considered a fixed
place of business and subject to corporation tax as a UK permanent establishment of the German entity. It is
important to note that the UK legislation does not define the term of the contract in determining the fixed place of
business.

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Applicability of the Germany - United Kingdom Income and Capital Tax Treaty (2010)

• Provides a modification to the UK domestic definition of a fixed place of business such that:
A building site or construction or installation project constitutes a permanent establishment only if it lasts
more than twelve months.
• OECD model treaty commentary should be consulted when determining the application of this provision. In
this
respect the commentary observes that:
a. any office or work shop solely attributable to the construction/installation activity (and not for a number
of
such projects) should be considered part of the construction/installation when considering permanent
establishment;
b. the term construction is broader than that of the construction of buildings. It also includes (amongst
other things) laying of “pipe-lines and excavating and dredging”;
c. installation is not limited to installations related to construction projects and can include installation of
equipment;
d. the twelve month period includes any preparatory work in the country and will end when the work is
complete (or abandoned) and should not take into account time spent by the contractor on unconnected
sites/projects

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Example 2

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 UK – Australian DTA definition of a PE

• the fixed place of business should have a certain degree of permanency

• An employee of an Australian company working from their own home in the UK may constitute a
fixed place of business. Factors which may suggest a home office could be a fixed place of
business include a contractual requirement to work from that place, the home being a registered
business address, equipment being provided for working at that place etc.
• An Australian company will be deemed to have a UK PE if they have an agent who is acting on
behalf of the Australian company
• For an individual to give rise to a UK agency PE, they must be considered to be a “dependent
agent” of the Australian company

Exceptions to the definition

The primary exception is that the nature of the activities being carried on are ‘preparatory or auxiliary’
in nature. This term is not defined, but is taken to mean that the activities are not core business
activities.

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 HMRC Guidelines to determine the activity preparatory or auxiliary.

HMRC guidance outlines that where a non-UK resident company has a fixed place of business that is used
only for collecting information, such a fixed place will not be a PE.

•Furthermore, the guidance outlines two fundamental factors to consider when determining whether the
activities should be considered preparatory or auxiliary:

1.Are the services it performs so remote from the actual realisation of profits by the enterprise that it would be
difficult to allocate any part of the profit to the fixed place of business?

2.Does the activity of the fixed place of business form an essential and significant part of the enterprise as a
whole?

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 Q&A

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