INTM432080 - TIOPA10 Part 4: how it works - Permanent Establishments

In law, a permanent establishment of a company is not a separate legal person from the company to which it belongs, but is part of it. Profits of the overseas permanent establishment of a UK company will be included in the total profits of that UK company. In the case of the UK permanent establishment of a non-resident company, CTA09/S5 brings the company within the charge to Corporation Tax in respect of its trade, but limits the chargeable profits to, broadly, the income arising directly or indirectly through or from the permanent establishment. See also the remarks below on the Business Profits Articles of double taxation agreements ('DTAs').

For the purposes of TIOPA10/Part 4, transactions between a permanent establishment of one company and another related company should be looked at in the first instance as if they were transactions between the company of which the permanent establishment is a part and the other company. Thus the legislation can apply to transactions involving permanent establishments. For example:

• transactions between the United Kingdom permanent establishment of a United States company and an associated overseas company or
• the overseas permanent establishment of a United Kingdom company and an associated overseas company or
• the overseas permanent establishment of a United Kingdom company and an associated United Kingdom company

will be caught, subject (in the normal way) to the exemptions of INTM432110 

Transactions between a company's head office and a permanent establishment or between different permanent establishments of the same company are not between separate persons and TIOPA10/Part 4 cannot apply. In this respect it should be noted that DTAs frequently include a 'Business Profits Article' which governs the treatment of transactions between a permanent establishment and its head office. Business Profits Articles vary from agreement to agreement, but, in general, the taxable profits of the permanent establishment will be those which it might be expected to make if it were a distinct and separate enterprise dealing with its head office at arm's length. In the case of the foreign permanent establishment of a UK resident company, the price put on transactions between the two will not affect the profits charged to UK tax, since the profits of the permanent establishment will be included in the company's total profits. Here the profits of the permanent establishment as determined in accordance with the Business Profits Article would only be relevant in determining the amount of double taxation relief available in respect of foreign tax on the profits of the permanent establishment.

For transactions between a UK company and the UK permanent establishment of an affiliate where the UK permanent establishment is within the charge to Corporation Tax, the basic rule did not apply in respect of the calculation of profits arising before 1 April 2004, but will apply for the purposes of calculating profits arising on or after 1 April 2004.