Permanent Establishment and UK Tax Exposure
Written and reviewed by the International Tax Accountants editorial team. Last reviewed 29 July 2026.
A permanent establishment is the threshold that decides whether a foreign company has enough presence in a country to be taxed there on the profits attributable to that presence. For a business operating across borders it is one of the most important concepts to get right, because crossing the threshold brings a filing obligation and a tax charge that would not otherwise arise.
There are two tests that matter for the United Kingdom. The domestic test decides whether a company has a permanent establishment under United Kingdom law. Where a treaty applies, the treaty test can narrow or refine that result. A business has to consider both, because a treaty can protect a company that would otherwise be caught by the domestic rule.
Whether a business has a permanent establishment turns on the domestic definition, what counts as a fixed place of business, how agents are treated, and the treaty position under the model convention, and once one exists corporation tax applies to it. Where profit then has to be attributed between the parts of a group, the same facts feed into transfer pricing.
The UK Domestic Definition
The domestic definition is at section 1141 of the Corporation Tax Act 2010. A company has a permanent establishment in the United Kingdom where it has a fixed place of business here through which its business is wholly or partly carried on, or where an agent acting on its behalf habitually concludes contracts or plays the principal role leading to the conclusion of contracts.
Sections 1142 and 1143 then set out the exceptions. Activity carried on through a genuinely independent agent acting in the ordinary course of its own business does not create a permanent establishment, and neither does a fixed place used only for activities that are preparatory or auxiliary. Those exceptions are as important as the definition itself.
Fixed Place of Business
The fixed place limb captures a physical presence through which business is carried on. The legislation gives examples including a place of management, a branch, an office, a factory, a workshop and a building or construction site. The common feature is a degree of permanence and a place at the company's disposal.
Not every presence counts. A location used only for storage, display, purchasing or the collection of information can fall within the preparatory or auxiliary exception, in which case it does not create a permanent establishment even though the company has premises here.
Dependent and Independent Agents
A company can create a permanent establishment through people rather than premises. Where a dependent agent habitually concludes contracts in the company's name, or habitually plays the principal role leading to contracts that the company routinely concludes without material change, the agent's activity can amount to a permanent establishment.
The independent-agent exception is the counterweight. An agent that is legally and economically independent, and that acts for the company in the ordinary course of its own business, does not create a permanent establishment. Whether an agent is dependent or independent is a question of the real relationship, not the label the parties give it.
Treaty Rules Under the OECD Model
Where a treaty applies, the permanent establishment concept follows Article 5 of the OECD model tax convention, as applied in HMRC's international manual. The Article covers the fixed-place test, the preparatory and auxiliary exceptions, and the distinction between dependent and independent agents, much as the domestic rule does.
One area needs particular care. Under the OECD model a building or construction site is a permanent establishment only if it lasts more than twelve months, but individual treaties vary and some use a shorter period such as six months. The applicable period always comes from the specific treaty, so the twelve-month figure should never be treated as universal.
Corporation Tax on a UK Permanent Establishment
Once a foreign company has a United Kingdom permanent establishment, it is chargeable to United Kingdom corporation tax on the profits attributable to it. The main rate of corporation tax is 25% on profits over £250,000, and the small profits rate is 19% on profits up to £50,000.
Between £50,000 and £250,000 marginal relief tapers the effective rate between the two. The profit attributed to the permanent establishment has to reflect the functions it performs and the risks it bears, which is where the attribution of profit and the pricing of intra-group dealings come together.