What is a permanent establishment (PE)?

A PE is a fixed place of business or a dependent agent that creates a taxable presence for an overseas company in the UK. Profits attributable to the PE are subject to UK corporation tax. A permanent establishment (PE) is a concept used in double taxation treaties to determine whether an overseas company has a taxable presence in the UK. A PE is created in two main ways: (1) Fixed place of business — a physical presence in the UK (e.g., an office, branch, factory, workshop, or mine/oil well) through which the business is carried on. The place must be at the disposal of the business and the business must be carried on through that place. (2) Dependent agent — a person in the UK who habitually concludes contracts on behalf of the overseas company, or habitually plays the principal role leading to the conclusion of contracts. An independent agent (e.g., a genuine commission agent acting in the ordinary course of business) does not create a PE. If a PE exists, the profits attributable to the PE are subject to UK corporation tax. Certain activities are exempt (preparatory or auxiliary activities) and do not create a PE. Relevant legislation: Corporation Tax Act 2009, Sections 18-19 (PE for UK tax); OECD Model Convention, Article 5 (PE definition in treaties). Example: An overseas company opens a sales office in London to sell its products to UK customers. The office is a fixed place of business, and the business is carried on through the office. This creates a PE, and the profits attributable to the London office are subject to UK corporation tax. Common mistake: Assuming that a PE requires a formal branch or subsidiary. A PE can be created by a modest physical presence (e.g., a serviced office or even a hotel room used regularly) or by a dependent agent.

What activities are exempt from creating a PE?

Preparatory or auxiliary activities are exempt, including: warehousing, display of goods, information collection, market research, and other preparatory/auxiliary activities. These do not create a PE if they are not part of the core business. Certain activities are exempt from creating a PE if they are preparatory or auxiliary in nature. The exempt activities (based on the OECD Model Convention, Article 5) include: (1) Using facilities solely for storage, display, or delivery of goods. (2) Maintaining a stock of goods solely for storage, display, delivery, or processing by another enterprise. (3) Maintaining a fixed place of business solely for purchasing goods or collecting information. (4) Maintaining a fixed place of business solely for advertising, supplying information, or scientific research. (5) Any other activity that is preparatory or auxiliary in character. To qualify for the exemption, the activity must be preparatory or auxiliary to the core business — it must not be part of the income-producing activities. For example, a warehouse used solely for storing goods before delivery is exempt, but a sales office that actively sells products is not. The exemption has been narrowed in recent treaty updates, and specialist advice is needed to determine whether a specific activity qualifies. Relevant legislation: OECD Model Convention, Article 5(4) (exempt activities); specific UK bilateral treaties. Example: An overseas manufacturer maintains a UK warehouse solely for storing goods before delivery to UK customers. The warehouse does not conduct any sales activity. This is a preparatory/auxiliary activity and does not create a PE. If the warehouse staff also negotiate and conclude sales contracts, a PE may be created. Common mistake: Assuming that any storage or display activity is exempt. The exemption only applies if the activity is genuinely preparatory or auxiliary — if it contributes directly to the core business, it may create a PE.

What is the difference between a dependent agent and an independent agent?

A dependent agent acts on behalf of the overseas company and habitually concludes contracts, creating a PE. An independent agent acts in the ordinary course of their own business and does not create a PE. The distinction between a dependent agent and an independent agent is crucial for PE purposes: (1) Dependent agent — a person who acts on behalf of the overseas company and is not independent of the company. A dependent agent creates a PE if they habitually conclude contracts on behalf of the company, or habitually play the principal role leading to the conclusion of contracts. The agent is considered dependent if they are financially or economically dependent on the company (e.g., a dedicated sales representative who works exclusively or almost exclusively for the company). (2) Independent agent — a person who acts in the ordinary course of their own business and is independent of the overseas company. An independent agent does not create a PE, even if they conclude contracts on behalf of the company. The agent is considered independent if they act for multiple principals, bear their own commercial risk, and are not financially or economically dependent on any single principal. The distinction depends on the degree of control, exclusivity, and financial dependence. A genuine commission agent or broker acting for multiple clients is generally an independent agent. Relevant legislation: OECD Model Convention, Article 5(5)-(6) (dependent and independent agents); specific UK bilateral treaties. Example: An overseas company uses a UK sales agent who works exclusively for the company and habitually concludes sales contracts. This is a dependent agent, and a PE is created. If the same agent also works for several other companies and acts as a genuine commission agent, they may be an independent agent, and no PE is created. Common mistake: Assuming that using any agent avoids PE risk. If the agent is dependent (works exclusively or almost exclusively for the company), a PE may be created.

How are profits attributed to a PE?

Profits are attributed to a PE based on the functions performed, assets used, and risks assumed by the PE. The PE is treated as a separate entity for profit attribution purposes, and the arm's length principle is applied. When a PE exists, the profits attributable to the PE are subject to UK corporation tax. The profit attribution follows the 'Authorised OECD Approach' (AOA): (1) Functional and factual analysis — identify the functions performed, assets used, and risks assumed by the PE. (2) Separate enterprise principle — treat the PE as a separate entity from the overseas company. (3) Arm's length principle — apply the arm's length principle to transactions between the PE and the rest of the company. (4) Attribution of profits — attribute profits to the PE based on the functions, assets, and risks. Significant people functions (SPFs) are key — the profits are generally attributed to the location where the key decision-makers and risk-takers are based. If the PE performs only routine functions (e.g., warehousing), it may only earn a routine return. If the PE performs significant functions and assumes significant risks, it may earn a higher return. The profit attribution can be complex and requires specialist advice. Relevant legislation: OECD Model Convention, Article 7 (business profits — PE profit attribution); OECD Report on the Attribution of Profits to Permanent Establishments. Example: An overseas bank has a London branch (PE) that conducts trading activities. The branch has its own traders, risk managers, and support staff. The profits attributable to the branch are determined by the functions performed (trading), assets used (trading book), and risks assumed (market risk). The branch is treated as a separate entity and earns an arm's length return for its activities. Common mistake: Attributing all UK revenue to the PE without considering the functions, assets, and risks. The profit attribution must follow the AOA and reflect the PE's actual contribution to the profits.

How can I manage PE risk for my overseas business?

Strategies for managing PE risk include: structuring UK activities to fall within the preparatory/auxiliary exemption, using independent agents, ensuring contracts are concluded outside the UK, and seeking specialist advice on cross-border operations. Managing PE risk is essential for overseas businesses with UK activities. Key strategies: (1) Structure UK activities to fall within the preparatory/auxiliary exemption — ensure that UK activities are genuinely preparatory or auxiliary (e.g., market research, information collection) and do not form part of the core income-producing business. (2) Use independent agents — engage genuine independent agents (e.g., commission agents acting for multiple principals) rather than dependent agents who work exclusively for the company. (3) Conclude contracts outside the UK — ensure that contracts with UK customers are negotiated and concluded outside the UK (e.g., at the overseas headquarters) to avoid creating a dependent agent PE. (4) Limit the duration of UK presence — short-term or occasional presence may not create a PE (subject to the specific treaty provisions). (5) Document the position — maintain documentation showing that UK activities do not create a PE, in case of HMRC enquiry. (6) Seek specialist advice — PE risk is complex and fact-specific, and specialist advice is essential for businesses with cross-border operations. Relevant legislation: OECD Model Convention, Article 5 (PE); specific UK bilateral treaties; HMRC International Manual. Example: An overseas software company wants to sell to UK customers without creating a PE. It uses an independent UK commission agent (who also acts for other software companies), ensures all contracts are negotiated and concluded at its overseas headquarters, and does not maintain a physical office in the UK. This structure should avoid creating a PE, but specialist advice is needed to confirm. Common mistake: Assuming that not having a UK subsidiary avoids PE risk. A PE can be created by a modest physical presence or a dependent agent, even without a formal subsidiary.

International Tax › Corporate

Permanent Establishment (PE) Risk

A permanent establishment creates a taxable presence in the UK for overseas businesses. Understand what creates a PE, the fixed place and agent tests, and how to manage PE risk.

Book a Consultation +44 (0) 800 211 8657

A permanent establishment (PE) is a fixed place of business or a dependent agent that creates a taxable presence for an overseas company in the UK. If an overseas business has a PE in the UK, the profits attributable to the PE are subject to UK corporation tax. Understanding what creates a PE and how to manage PE risk is essential for overseas businesses operating in the UK.

What Creates a PE

A PE is created in two main ways: (1) Fixed place of business — a physical presence in the UK (e.g., an office, branch, factory, workshop) through which the business is carried on. (2) Dependent agent — a person in the UK who habitually concludes contracts on behalf of the overseas company. A PE creates a taxable presence, meaning the profits attributable to the PE are subject to UK corporation tax.

The Fixed Place of Business Test

A fixed place of business requires: (1) A physical place (e.g., premises, equipment). (2) The place must be at the disposal of the business. (3) The business must be carried on through that place. Certain activities are exempt (preparatory or auxiliary activities, such as warehousing, display of goods, or information collection) and do not create a PE.

The Dependent Agent Test

A dependent agent PE is created when a person in the UK: (1) Habitually concludes contracts on behalf of the overseas company. (2) Is not an independent agent acting in the ordinary course of their business. An independent agent (e.g., a genuine commission agent) does not create a PE. The distinction between dependent and independent agents is important for businesses using agents or representatives in the UK.

Managing PE Risk

Overseas businesses should assess their UK activities for PE risk. If a PE exists, the profits attributable to the PE must be reported and taxed in the UK. Strategies for managing PE risk include: structuring UK activities to fall within the preparatory/auxiliary exemption, using independent agents rather than dependent agents, and ensuring contracts are concluded outside the UK. Specialist advice is essential for businesses with cross-border operations.

Key Points

What You Need to Know

A PE creates a taxable presence in the UK for overseas businesses
A PE can be a fixed place of business or a dependent agent
Preparatory or auxiliary activities are exempt and do not create a PE
An independent agent does not create a PE (unlike a dependent agent)
Profits attributable to a PE are subject to UK corporation tax

Expert Answers

International Tax Frequently Asked Questions

Detailed answers with legislation references, practical examples and common pitfalls.

Explore More

All International Tax Topics

Statutory Residence Test (SRT)Non-Dom Reforms April 2025 Overseas Workday Relief (OWR)Split-Year Treatment Double Taxation Treaties Transfer Pricing Permanent Establishment (PE)Controlled Foreign Companies (CFC)Withholding Tax on Cross-Border Payments Inbound Property Investment Outbound Expansion Structuring Cross-Border Employment Taxation Diverted Profits Tax (DPT)Anti-Hybrid & Mismatch Rules Corporate Interest Restriction Exit Charges & Company Migration Cross-Border Trust Taxation

Need Specialist International Tax Advice?

Our tax advisers can help you navigate international tax with clear, practical advice tailored to your circumstances.

Book a Consultation Call +44 (0) 800 211 8657