Taxation in the United Kingdom/Corporation tax/Residents and non-residents
As noted in Who pays corporation tax?, UK resident companies pay corporation tax on their worldwide profits, whereas, non-residents are only within the charge to corporation tax if they carry on a trade in the UK through a permanent establishment, and then, only on the profits attributable to that permanent establishment.
These means we need to consider the following:
- How do we decide if a company is UK resident?
- What is a permanent establishment?
- How do we attribute proits to that permanent establishment?
A company is resident in the United Kingdom if:
- it is incorporated in the UK; or
- it has its central management and control in the UK.
It is possible for a company to be both UK resident plus meet the residency requirements of another jurisdiction. Often there is a double tax convention between the UK and that other jurisdiction that has a residency clause. This clause typically provides that if a company is resident under the law of both contracting states, it shall be deemed to be resident only in the state where the company is effective managed. Generally the terms "effective management" and "central management and control" are synonymous. If there is no double tax convention, the company will continue to be taxed as a resident of both jurisdictions.
A company has a permanent establishment in a territory if, and only if:
- it has a fixed place of business there 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 there authority to do business on behalf of the company.
For this purpose a "fixed place of business" includes:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop;
- an installation or structure for the exploration of natural resources;
- a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
- a building site or construction or installation project.
A company is not regarded as having a permanent establishment in a territory by reason of the fact that it carries on business there through an agent of independent status acting in the ordinary course of his business. Also, a company is not regarded as having a permanent establishment in a territory by reason of the fact that:
- a fixed place of business is maintained there for the purpose of carrying on activities for the company, or
- an agent carries on activities there for and on behalf of the company,
if, in relation to the business of the company as a whole, the activities carried on are only of a preparatory or auxiliary character, which is taken to include:
- the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the company;
- the maintenance of a stock of goods or merchandise belonging to the company for the purpose of storage, display or delivery;
- the maintenance of a stock of goods or merchandise belonging to the company for the purpose of processing by another person;
- purchasing goods or merchandise, or collecting information, for the company.
Attributing profits to a permanent establishment
The profits attributable to a permanent establishment for the purposes of corporation tax are:
- trading income arising directly or indirectly through or from the establishment,
- income from property or rights used by, or held by or for, the establishment, and
- chargeable gains as described below.
For tax purposes, the profits attributed to the permanent establishment are the profits it would have made if it were a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with the non-resident company.
It is assumed for these purposes that the permanent establishment has the same credit rating as the non-resident company, and has such equity and loan capital as it could reasonably be expected to have if it were a distinct and separate enterprise. Tax deductions cannot exceed the amount of the costs that would have been incurred on this assumption, except that there are deductions for allowable expenses incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the United Kingdom or elsewhere. "Allowable expenses" means expenses of a kind in respect of which a deduction would be allowed for corporation tax purposes if incurred by a company resident in the United Kingdom.
The chargeable gains of a company not resident in the United Kingdom but carrying on a trade in the United Kingdom through a permanent establishment there include chargeable gains accruing to the company on the disposal of:
- assets situated in the United Kingdom and used in or for the purposes of the trade at or before the time the gain accrued, or
- assets situated in the United Kingdom and used or held for the purposes of the permanent establishment at or before the time the gain accrued or acquired for use by or for the purposes of the permanent establishment.
For this rule to apply, the disposal has to be made at a time when the company is carrying on a trade in the UK through a permanent establishment there.
There are special rules for attributing profits to non-resident banks, brokers, financial intermediaries and insurers.