Syllabus A4. Corporation Tax A4d. The corporation tax liability

A4di/ii. Permanent establishment

Syllabus A4di/ii)

Assess the impact of the OECD model double tax treaty on corporation tax
Evaluate the meaning and implications of a permanent establishment

What is a permanent establishment?

The  rules  that  apply  to  the  taxing  of  overseas  income earned by UK Resident companies  are  set  out  in  the Organisation for Economic Co-operation and Development Model (OECD).

Trading overseas:

The normal provision in tax treaties is that an overseas country will usually tax income arising in its country from the commercial operation of a UK resident company if:

1) A trade is carried on within its boundaries
2) The profits are derived from a permanent establishment set up for that purpose

Permanent establishment

The term “permanent establishment” within an overseas country includes a place of management, a branch, an office, a factory, a workshop or any mine. 

A UK resident company that possesses a permanent establishment trading within an overseas country will normally be charged to tax on its overseas profits arising by UK HMRC and the overseas authority under their own tax code.