Determining if there is a permanent establishment
The key questions for determining whether a company has a permanent establishment in the UK are as follows:
- Is there a fixed place of business in the UK?
- Is there a dependent agent in the UK?
- Are the activities undertaken 'preparatory and auxiliary'?
- Is a business carried on through the permanent establishment?
- If a Double Tax Agreement is in place, does a permanent establishment also exist under the provisions of this agreement?
Best practice to reduce the risk of inadvertently creating a permanent establishment in the UK
Fixed place of business:
- The non-resident company should not have a lease or rental agreement; and should not own property in the UK.
- The non-resident company should not have the right to use any premises in the UK – for example, premises that are owned by another group company, or an employee. Access to any such premises should be limited – for example, employees of the non-resident company should not be issued entry passes; and should be treated as visitors.
- The non-resident company should not regularly use the same premises, for example a stand at a trade fair or a particular hotel room.
- Employees of the non-resident company should not have business cards showing a UK address.
- The website of the non-resident company should not advertise a UK address (although a group website could show a UK address as belonging to a subsidiary).
- Any advertisements or stationery of the non-resident company should not show a UK address.
- All prices should be determined outside the UK, including any bulk discounts. Prices should only be communicated in the UK.
- Any price negotiation should take place outside the UK.
- Other contractual terms should be determined or negotiated outside the UK.
- Contracts with customers should not be signed in the UK. A permanent establishment should only be created if contracts are 'habitually' concluded in the UK, and employees of the non-resident company may therefore attend occasional meetings in the UK to discuss contractual terms without necessarily creating a permanent establishment in the UK. However, best practice would suggest that this should happen only where it is not possible to do otherwise.
- BEPS Action 7 consideration: UK personnel or overseas personnel present in the UK should limit UK activity to promotion and advertising and this will ensure that a permanent establishment is not created.
Preparatory and auxiliary activities:
- Where a fixed place of business or a dependent agent is unavoidable, the activities undertaken in the UK should be preparatory and auxiliary to the main trading activities of the non-resident company.
- BEPS Action 7 consideration: core business activities should not be fragmented either internally or between connected parties with a view to individually meeting the preparatory or auxiliary exception
- If a non-resident company has an employee based in the UK, the employee should not be given authority to negotiate or conclude contracts, otherwise a permanent establishment will be created. This restriction can be written specifically into the employment contract and followed in practice.
- Similar restrictions can be written into inter-company agreements if there is a risk that a subsidiary could be a dependent agent.
Disclaimer: This note does not contain a full statement of the law and it does not constitute legal advice. Please contact us if you have any questions about the information set out above.