Donald Reid Group

What is a permanent establishment ?

When establishing a presence in the UK, international firms have the possibility of three different types of entity: representative office, branch or subsidiary. In this blog Daniel Reid, who specialises in working with international clients and inbound businesses at DRG Chartered Accountants outlines the characteristics of a permanent establishment.

What is a permanent establishment (branch)?

A permanent establishment is where as overseas company has established a corporation tax presence in the UK, either by having a fixed place of business from which the business operates or having a UK agent which habitually exercises the authority to business on behalf of the company.

The permanent establishment has no separate legal existence from the parent company. It will be subject to UK corporation tax on the profits of the parent company, which are attributable to that branch, and will be expected to apply the arm’s length principle to calculating the profits of the branch.

How do you define fixed place of business?

This is where the non-resident company has a fixed place of business - which could include a management office, factory, warehouse etc., generally for period of at least six months. However, there might not be a permanent establishment if the overseas company’s activities are limited to taking orders from UK clients, delivering goods to UK clients and purchasing goods from UK suppliers.

Your UK agent

If your agent habitually exercises authority to do business on behalf of the company, there might be a permanent establishment. If you wish to avoid setting up a permanent establishment in this manner, care should be taken in drawing up the employment contract, which forbids agents from negotiating or concluding contracts on behalf of the overseas company. However, there is an exclusion where the agent is independent for the non-resident company, both legally and economically

Online retailers, ecommerce  and cloud businesses?

With respect to ecommerce businesses, HMRC considers that a company which makes sales though their website does not have a permanent establishment even if the server on which is hosted is located in the UK. However the OECD specifies that the location of the server can determine whether a there is a permanent establishment.

Cloud based businesses, ISP providers, data warehousing etc. are treated differently from internet retailers. If these businesses have servers in the UK, they are viewed to have a permanent establishment in the UK.

Reporting requirements of a permanent establishment

  • Companies House registration
  • Registration with HMRC (Corporation tax, VAT, PAYE and NIC) plus annual reporting requirements
  • File the financial statements of overseas company at Companies House each year

The rules are complex and we do advise that you seek professional guidance early. You might also like to take a look at our blogs "Setting up in the UK - branch or subsidiary" and "Representative Office or Branch - beware of setting up a permanent establishment unintentionally".

If you would like to discuss setting up in the UK, please do get in touch with Daniel Reid by telephoning 01628 760 000.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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