Chapter 2: Permanent establishments
Overview
3253.This Chapter determines what constitutes a permanent establishment in a territory of a company which is not resident in that territory. It is based on sections 148 and 152 of, and Schedule 26 to, FA 2003.
3254.The determination is in line with various internationally recognised characteristics commonly used in the United Kingdom’s double tax agreements.
3255.If a non-UK resident company trades in the United Kingdom through a permanent establishment here, it is chargeable to corporation tax on its “chargeable profits”. Section 19 of CTA 2009 defines “chargeable profits” as the trading income arising directly or indirectly through or from the permanent establishment and the other income and chargeable gains referred to in section 19(3) attributable to the permanent establishment in accordance with sections 20 to 32 of that Act.
3256.If a non-UK resident company is chargeable to tax in respect of any other income from a United Kingdom source, it is charged to income tax and its liability is limited in accordance with Chapter 1 of Part 14 of ITA. The extent to which the non-UK resident company is chargeable to tax in respect of such income may be limited by the terms of any applicable DTA.
Section 1141: Permanent establishments of companies
3257.This section sets out the basic tests for determining whether a company resident in a territory has a permanent establishment in another territory. It is based on section 148(1) and (2) of FA 2003.
3258.This section is not limited to permanent establishments in the United Kingdom of non-UK resident companies but also serves to determine whether a UK resident company has a permanent establishment in another territory. Under DTAs adopting the OECD model convention, primary taxing rights in relation to the profits of a trade carried on by a company resident in the territory of one of the contracting states, through a permanent establishment in the territory of the other contracting state, are accorded to the fiscal authorities of the other contracting state.
3259.Subsection (3) refers to the following three sections which set out circumstances in which there is no permanent establishment, notwithstanding that the conditions in subsection (1) are met.
Section 1142: Agent of independent status
3260.This section prevents a company which is not resident in a territory from being treated as having a permanent establishment in that territory merely because it carries on business in that territory through an agent of independent status there. It is based on sections 148(3) and 152 of, and paragraph 1 of Schedule 26 to, FA 2003.
3261.Subsection (2) introduces sections 1145 to 1151 which contain special provisions in relation to non-UK resident companies concerning transactions carried out through a broker in the United Kingdom, investment transactions carried out through an investment manager in the United Kingdom and Lloyd’s underwriting business.
Section 1143: Preparatory or auxiliary activities
3262.This section treats a company which is not resident in a territory as not having a permanent establishment in that territory if the activities carried on in that territory are only of a preparatory or auxiliary character. It is based on section 148(4) and (5) of FA 2003.
3263.Subsection (3) sets out a non–exhaustive list of activities of a preparatory or auxiliary character.
Section 1144: Alternative finance arrangements
3264.This section provides that a non-UK resident company that receives sums treated as alternative finance return is not treated as having a permanent establishment in the United Kingdom merely because of anything done by the counter–party to the alternative finance arrangements under which the return is paid or by any other person acting for the non-UK resident company in relation to the arrangements. It is based on section 148(5A) of FA 2003.
3265.Alternative finance return is defined in subsection (3) by cross–reference to the application of provisions, in identical terms, contained in Part 10A of ITA (which is insertedby Schedule 2 to TIOPA andapplies for income tax purposes) and in Chapter 6 of Part 6 of CTA 2009 (which applies for corporation tax purposes). See the transitional provisions in Schedule 9 to TIOPA and Schedule 2 to CTA 2009 which provide in like terms for the application of the treatment of sums received as alternative finance return for the purposes of that Part and that Chapter.
Section 1145: The independent broker conditions
3266.This section sets out the conditions to be met if a broker in the United Kingdom is to be treated as an agent of independent status for the purposes of section 1142(1), and therefore not a permanent establishment, in relation to a transaction carried out on behalf of a non-UK resident company by the broker. It is based on paragraphs 1(1) and 2 of Schedule 26 to FA 2003.
3267.In subsection (6) the words “(apart from this subsection)” have been added for the reasons given in Change 61in Annex 1.
Section 1146: The independent investment manager conditions
3268.This section sets out the conditions to be met if an investment manager in the United Kingdom is to be treated as an agent of independent status for the purposes of section 1142(1), and therefore not a permanent establishment, in relation to an investment transaction carried out on behalf of a non-UK resident company by the investment manager. It is based on paragraphs 1(1), 3 and 7(2) of Schedule 26 to FA 2003.
Section 1147: Investment managers: the 20% rule
3269.This section sets out the “20% rule” for investment managers. It is based on paragraph 4(1) of Schedule 26 to FA 2003.
3270.The 20% rule has two requirements. The first requirement is that the investment manager and connected persons must intend that any interest that they may have in the non-UK resident’s “relevant disregarded income” does not exceed 20% of that income. The second requirement applies if that intention is not fulfilled. The 20% rule continues to be met if the only reason why it is not fulfilled is because of matters outside the control of the investment manager or connected persons despite their having taken reasonable steps to mitigate the effect of those matters.
3271.In subsection (2) the term “relevant disregarded income” has been substituted for the term “relevant excluded income” which appears in paragraph 4(1) of Schedule 26 to FA 2003. The same substitution was made in section 819(2) of ITA which is also based on paragraph 4(1) of Schedule 26 to FA 2003.
Section 1148: Section 1147: interpretation
3272.This section defines three terms used in section 1147. It is based on paragraph 4(2) to (4) of Schedule 26 to FA 2003.
3273.Subsection (2) makes explicit that the accounting periods referred to in paragraph 4(2) of Schedule 26 to FA 2003 are those of the non-UK resident company.
3274.Subsection (3) adopts the term “relevant disregarded income” in preference to the term “relevant excluded income” in paragraph 4(3) of Schedule 26 to FA 2003. Section 821 of ITA, which is also based on paragraph 4(3) of Schedule 26 to FA 2003, similarly adopts the term “relevant disregarded income”.
3275.In subsection (3), a reference to “the total of the non-UK resident company’s income” has been substituted for the reference in paragraph 4(3) of Schedule 26 to FA 2003 to “the aggregate of such of the chargeable profits of the company”. See Change 62 in Annex 1.
Section 1149: Application of 20% rule to collective investment schemes
3276.This section modifies the 20% rule where the non-UK resident company is a participant in a collective investment scheme. It is based on paragraph 5 of Schedule 26 to FA 2003.
3277.This section applies at the level of the scheme itself, treating the scheme as if it were a non-UK resident company, see subsection (3).
3278.A minor drafting change has been made in subsection (3) by substituting reference to a non-UK resident company for the reference in paragraph 5(2) of Schedule 26 to FA 2003 to a company resident outside the United Kingdom. This has been done to clarify the assumption and in this context does not change the effect of the law. The same minor drafting change was made in section 824(3) of ITA.
3279.Subsection (4) applies to a scheme which, if it was assumed to be a non-UK resident company, would not be regarded as carrying on a trade in the United Kingdom. The 20% rule is treated as satisfied in relation to such a scheme.
3280.Subsection (5) applies to a scheme which, if it was assumed to be a non-UK resident company, would be regarded as carrying on a trade in the United Kingdom. The 20% rule applies to such a scheme with the modifications in subsection (6).
Section 1150: Meaning of “investment manager” and “investment transaction”
3281.This section defines the terms “investment manager” and “investment transaction” which underlie the independent investment manager conditions. It is based on paragraph 3(1), (3) and (4) of Schedule 26 to FA 2003.
3282.The transactions currently specified as “investment transactions” are set out in the Investment Manager (Specified Transactions) Regulations 2009 made under the powers in paragraph 3(3) and (4) of Schedule 26 to FA 2003 and which came into force on 12 May 2009.
Section 1151: Lloyd’s agents
3283.This section applies if a person in the United Kingdom acts as the members’ agent of a non-UK resident company which is trading as a corporate member of Lloyd’s or if the person acts as the managing agent of a Lloyd’s syndicate of which the non-UK resident company is a member. It is based on paragraphs 1(1) and 6 of Schedule 26 to FA 2003.
3284.This section provides that the members’ agent or managing agent is to be treated as an agent of independent status for the purposes of section 1142(1), and therefore not a permanent establishment, in relation to a transaction carried out on behalf of the non-UK resident company in the course of the non-UK resident company’s underwriting business at Lloyd’s.
Section 1152: Investment managers: disregard of certain chargeable profits
3285.This section applies if an investment manager falls to be treated as a permanent establishment in the United Kingdom of a non-UK resident company. It is based on paragraph 5A of Schedule 26 to FA 2003.
3286.The section provides that in the two cases specified in subsection (2) some or all of the profits derived from an investment transaction carried out by the investment manager on behalf of the non-UK resident company are disregarded when attributing profits to the permanent establishment.
3287.If Case 2 applies, the disregard is only of that part of the non-UK resident company’s income from the transaction to which the investment manager and persons connected with the investment manager are not beneficially entitled (see subsection (3)).
Section 1153: Miscellaneous
3288.This section explains when a person is to be regarded as carrying out a transaction on behalf of another and makes provision for a person part only of whose business is as a broker or investment manager. It is based on paragraph 7(1) and (4) of Schedule 26 to FA 2003.
3289.Paragraph 7(3) of Schedule 26 to FA 2003, which provides that section 839 of ICTA (connected persons) applies for the purposes of that Schedule, has not been rewritten. This provision is not required, as section 1176(1) applies section 1122 (rewriting section 839 of ICTA) for the purposes of this Act unless otherwise indicated.
