It’s usually understood that UK companies must pay UK corporation tax. But we explain two common circumstances when a non-UK company can also be required to pay.
A UK company is generally subject to UK corporation tax on its worldwide income and gains. But in some circumstances an overseas company may also be subject to tax in the UK on all or part of its profits.
Permanent establishment
The profits of a non-UK resident company can be taxable in the UK when they are attributable to a permanent establishment through which a trade is carried on in the UK.
So what do we mean by a permanent establishment? This is when a company has either:
- a fixed place of business in the UK through which the business of the enterprise is wholly or partly carried on; or
- an agent who habitually exercises authority to conduct business on behalf of the enterprise in the UK.
A fixed place of business can include, but is not limited to:
- a place of management
- a branch
- an office
- a factory
- a workshop
The second part of the definition above requires that the business is carried on through this fixed place of business. This is typically where operations take place from which profits arise.
In the case of an agent, a permanent establishment may exist where an overseas company has an agent, who is not of an independent status, and who habitually exercises authority to conduct business on their behalf.
Importantly there is a specific exclusion where an agent is independent both legally and economically and is acting in the ordinary course of their own business.
If an overseas company only carries on preparatory and auxiliary activities in the UK, it won’t be considered as having a permanent establishment in the UK. These are narrow exemptions but can include the use of facilities for storage, display or delivery of goods, purchasing of goods, or collection of information for the company.
Where a company has a UK permanent establishment, part of that company’s profits –those that are attributable to the activities carried on in the permanent establishment – will be subject to corporation tax in the UK. The allocation of income and expenses attributable to the UK activities can be complicated and will depend on the exact circumstances.
Company residence
A company incorporated in the UK is generally tax resident in the UK and therefore subject to corporation tax on its worldwide income and gains.
In some circumstances an overseas company can be UK tax resident despite not being incorporated in the UK. This occurs when its place of central management and control is the UK. This is a concept derived from common law, rather than being defined in legislation and looks at the company’s highest level of decision-making.
In this case, as with a UK incorporated company, the overseas company may be subject to corporation tax on its worldwide income and gains.
Where board meetings take place often determines whether a company’s central management and control is in the UK. But if key decisions are made elsewhere, outside board meetings, this may also be taken into account.
Another important factor, as technology means businesses can operate from anywhere in the world, is whether directors or others exercising central management and control do so in person from the overseas jurisdiction or dial in to meetings remotely from the UK.
The double taxation factor
This case law rule for central management and control can cause difficulties where a company is deemed to be resident in the UK and also in another jurisdiction (under the laws of that country). In these cases it’s important to consider whether there is a double taxation treaty between the UK and that other country.
Some double taxation treaties include a tie-breaker clause to say that a dual-resident company is only treated as resident in the country of its ‘place of effective management’.
The place of effective management is not necessarily the same as where central management and control is exercised. What it means is the place where key management and commercial decisions necessary for the entity’s business as a whole are made.
But note, too, that many taxation treaties nowadays do not include a tie-breaker clause based on ‘place of effective management’. Instead they’re moving towards the ‘mutual agreement’ procedure. This requires that the competent authority in each jurisdiction (HMRC in the UK) decides by mutual agreement in which country the company will be resident.
What does this mean for you?
Where an overseas company is operating in the UK, it’s important for it to consider these rules and monitor its UK activities. If these constitute a UK permanent establishment, the overseas company must register for corporation tax in the UK and file a company tax return.
It’s also vital that companies follow strict corporate governance that monitors residency positions and ensures that a company (UK or overseas) does not inadvertently become resident in another jurisdiction.
If you would like further guidance on any of the issues covered in this article, please contact Tom Golding.
