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 tax 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 in the Consultations and proposals – ongoing in the significant developments section 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 whilst retaining their legal personality. The expert panel that was subsequently convened to explore the options and advise the government on how best to establish a UK corporate re-domiciliation framework published its report on 14 October 2024. The report suggests how various components of the regime could work and, most notably, strongly supports the introduction of a two-way re-domiciliation regime to allow UK companies to re-domicile outside the United Kingdom as well as those registered outside the United Kingdom to become a UK company. Whilst the panel has made quite detailed proposals, it recommended that there should be further consultation once the government has decided on more detailed proposals. The government intends to consult in due course on a proposed regime design.

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 trading 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, recommended a widening of the scope of the PE definition in Article 5 of the OECD Model Tax Convention, with the intention that the amended definition would 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 HMRC’s TP/PE/DPT consultation on draft legislation, the proposed draft legislation aims to align the UK's PE rules with the latest international consensus, simplifying and modernising the legislation. Key changes include:

• Definition of PE: The statutory definition of a PE in section 1141 CTA 2010 will be revised to more closely align it with the wording in the OECD Model Tax Convention (MTC) 2017 version. 

The proposed changes include clarifications such that UK law should be interpreted consistently with Article 5 of the OECD MTC. The definition of a fixed place of business now limit building sites or construction projects to those lasting more than 12 months, matching the OECD standard. The rules for dependent agent PEs (DAPE) have been updated so that a dependent agent is someone who habitually concludes contracts or plays a principal role in their conclusion, closely following the OECD definition, though the UK retains flexibility regarding contracts not being in the name of the overseas enterprise to address situations under UK common law involving undisclosed agency arrangements.  This definition remains subject to adjustment under the UK’s double tax treaty network. 

The independent agent exemption in section 1142 CTA 2010 has been clarified to better reflect the OECD’s narrowed criteria as seen in Article 5(6), particularly regarding agents who are closely related to the company and act almost exclusively on its behalf. The definition of “closely related” within section 1143 has also been revised to more closely match the OECD’s Article 5(8), with the UK retaining a specific 50% investment condition.

• Attribution of profits: Amendments to Part 2, Chapter 4 CTA 2009 to give certainty that relevant OECD documents can be relied upon to interpret the 'separate enterprise principle,' including the 2010 OECD Report on the Attribution of Profits to Permanent Establishments. The attribution of profits to PEs will now be governed by rules that mirror Article 7(2) of the 2017 OECD MTC (see the Branch income section for more information).

• Investment Manager Exemption (IME): Revisions to the IME, which is widely relied upon in certain subsectors of the asset management industry, to ensure it remains fit for purpose. Proposed changes include the removal of the '20% test' and the charging provision in section 1152, and updates to SOP 1/01.
• Capital gains: Certain assets in the UK are taxed under the capital gains tax regime (as opposed to the IFA legislation noted earlier).  Upcoming changes to TCGA 1992, Part 1, Chapter 2 include the simplification of the capital gains rules for PEs to better align with treaty equivalents, focusing on the connection of gains to the UK PE.  

Although the United Kingdom 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; consequently, the impact might be limited to situations where there is no DTT 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).

As noted in the Significant developments section, the consultation will run until 7 July 2025, after which the government will analyse and publish a response to the views expressed by stakeholders. These views will feed into the drafting of the final legislation, which the government intends to include in Finance Bill 2025-26 so is likely to be effective at some point during 2026.