United Kingdom

UK incorporated companies are generally treated as UK tax resident. The exception to that general rule is that companies resident in the United Kingdom under domestic law but treated as solely resident in a different country under that country's DTT with the United Kingdom are not treated as UK tax resident for the purposes of UK domestic tax law.

Additionally, subject to the above exception, companies incorporated overseas are also treated as UK resident if their central management and control is situated in the United Kingdom. This means if the place of the highest form of control and direction over a company's affairs, as opposed to decisions on the day-to-day running of the business, is in the United Kingdom.

As noted above, following a consultation, the UK government announced in April 2022 that it intends to introduce a re-domiciliation regime, which will make it possible for companies incorporated outside the United Kingdom to move their domicile to and relocate to the United Kingdom. It is yet to be confirmed whether the new rules will also permit re-domiciliations of UK incorporated companies to other territories. This policy will require legislation to be enacted, but the government has stated that more detailed analysis and stakeholder engagement is needed before that is possible, and it has not yet given a timeline for the completion of those tasks.

Permanent establishment (PE)

For non-resident companies, the liability to corporation tax generally depends on the existence of any kind of PE through which a trade is carried on.  However, there are a number of exceptions to this general rule that apply to income and gains arising on UK property.  A non-UK resident company will be subject to UK tax on the following types of profit even if there is no UK PE:

• Trading profits attributable to a trade of dealing in or developing UK land.
• Gains that arise on the direct, and certain indirect, disposals of UK immovable property.
• Profits of a UK property rental business.

The meaning of PE for UK tax purposes is set out in statute; it is largely based on the OECD Model Tax Convention definition, but it is not identical in all respects. Subject to the terms of the relevant DTT, a non-resident company will have a PE in the United Kingdom if:

• it has a fixed place of business in the United Kingdom 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 authority to do business on behalf of the company in the United Kingdom.

A fixed place of business includes (but is not limited to) 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, quarry, or other place of extraction of natural resources; or a building, construction, or installation project. However, a company is not regarded as having a UK PE if the activities for which the fixed place of business is maintained or which the agent carries on are only of a preparatory or auxiliary nature (also defined in the statute). From 1 January 2019, this will not be the case where the non-resident has artificially fragmented their business operations to avoid coming within the charge to corporation tax.

The OECD, under Action 7 of its BEPS Action Plan, has recommended a widening of the scope of the PE definition in Article 5 of the OECD Model Tax Convention. It is intended that the amended definition will be incorporated into bilateral double taxation conventions via the multilateral instrument (MLI). The United Kingdom ratified the MLI in 2018, and it is now effective in relation to covered DTTs; however, the United Kingdom has only adopted limited elements of the PE articles in the MLI.

As part of the consultation HMRC launched in relation to the UK PE legislation (as well as other international tax matters) back in June 2023, HMRC focused on what the reference point should be for the definition of a PE in domestic legislation and the determination of the profits attributable to it. The options under consideration were:

• To define a UK PE and attribute profits by direct reference in domestic legislation to the PE and Business Profits Articles (usually Articles 5 and 7) in the relevant double taxation treaty, subject to certain restrictions. Where no treaty is in place, Articles 5 and 7 of the 2017 OECD Model could be used.
• To define a UK PE by reference to Article 5 and align PE attribution with Article 7 respectively of the current OECD Model, which would be subject to the relevant double taxation treaty.

One particular consequence of the second option would be the extension of the domestic definition of a PE for the first time as a result of the amended 2017 OECD Model wording in relation to “dependent agent” PEs, whereby:

• Such PEs would include someone who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”, without the need for them to actually conclude the contracts
• The “independent agent” exemption from PE status would not apply where “a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related”.

Although the UK signed up to the Multilateral Instrument (MLI) which implemented a range of tax treaty measures coming out of the BEPS project, it did not adopt the MLI measures in relation to dependent agent PEs, which would otherwise have incorporated the above amendments into a number of the UK’s treaties, depending on the treaty partner position in each case.  At this stage we are not aware that the UK intends to change its positions regarding the MLI and therefore the impact might be limited to situations where there is no double tax treaty or where a new treaty is negotiated to include the expanded definition, but the above changes would enable such a change in MLI policy to be implemented very quickly were this MLI policy position to change in the future.

Special rules exist to explain how the PE's profits should be evaluated for UK tax purposes (see the Branch income section for more information).