A non-UK company can trade with UK customers without being subject to UK corporation tax. But once that company has activities in the UK that cross the permanent establishment (PE) threshold, the picture changes. The PE concept is the gatekeeper for UK source-country corporation tax on non-residents, and the threshold is more easily crossed than founders often realise — particularly in the post-pandemic era of remote employees and distributed teams.
The PE definition
UK domestic law defines a PE in CTA 2010 s1141 to s1149, but the controlling definition for treaty-protected non-residents is in the relevant double tax treaty, almost all of which follow the OECD Model. A PE is either a "fixed place of business" through which the business of the enterprise is wholly or partly carried on, or an "agency PE" arising where a dependent agent habitually exercises authority to conclude contracts in the name of the enterprise.
Examples of fixed-place PEs in the OECD Model include a place of management, a branch, an office, a factory, a workshop, and a mine or quarry. Specific exclusions cover purely preparatory or auxiliary activities, but the exclusions have narrowed under BEPS-driven treaty updates.
The fixed-place-of-business PE
The fixed place of business has three elements: there must be a place of business (premises, facilities, or installations), it must be fixed (a degree of permanence in time and location), and the business must be carried on through it. The first element is generally easy to satisfy; the second and third drive most disputes.
Permanence in time has been interpreted as six months or more in many treaties, although shorter durations can suffice if the activity is recurrent. A construction site PE typically requires twelve months of presence under the OECD Model (some treaties shorten this for construction).
Permanence in location does not require ownership or lease. A regularly used desk in a third-party shared office can be a fixed place of business if it is at the company's disposal. Home offices of remote employees have become a particular focus: HMRC will look at whether the employee uses the home office regularly for the foreign employer's business, whether it is at the employer's disposal (even if not legally), and whether the activities are more than preparatory.
The agency PE
Even without a fixed place, a non-resident company can have a PE through a dependent agent in the UK. The classic definition was an agent with habitual authority to conclude contracts in the name of the enterprise. Under post-BEPS treaty updates (incorporated through the Multilateral Instrument or MLI), the test widened to capture agents who "habitually play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise".
This expansion catches sales representatives whose negotiated terms are rubber-stamped by head office and is meant to combat structures where formal contracting was moved offshore while substance remained onshore.
Independent agents and the safe harbour
An "independent agent" acting in the ordinary course of business does not create an agency PE. The test is whether the agent is legally and economically independent of the principal and acts for multiple unrelated principals. The independent agent exclusion has tightened under BEPS: an agent acting exclusively or near-exclusively for one or related principals is treated as dependent.
What activities are excluded
The OECD Model lists activities that do not constitute a PE: storage, display, or delivery of goods; maintaining stock for processing by another enterprise; purchasing goods or collecting information; and any other activity of a preparatory or auxiliary character. Post-BEPS treaty updates added an "anti-fragmentation" rule preventing taxpayers from breaking up a single coherent business into multiple preparatory or auxiliary activities to escape PE status.
The preparatory or auxiliary test is qualitative: an activity is preparatory or auxiliary if it is materially less significant than the core business activities of the enterprise. Sales activities are rarely preparatory or auxiliary. Pure back-office support might be.
Remote workers and the post-pandemic question
The most common PE question we field involves a non-UK company that employs one or two UK-resident remote workers. Whether this creates a UK PE depends on the role and authority of those workers. A back-office administrative role almost certainly does not. A senior sales role with authority to negotiate and conclude contracts may well. The pandemic accelerated remote hiring without proportionate attention to the PE risks.
HMRC and the OECD published guidance in 2020 on the COVID-era exceptions, but those have lapsed. The current position is that remote-worker PE risk is fact-specific and increasing as patterns of working become permanent rather than emergency-driven.
What happens when a PE exists
A non-UK company with a UK PE must register for UK corporation tax, file annual UK returns, and pay corporation tax on the profits attributable to the PE. Profit attribution follows the OECD's Authorised Approach: the PE is treated as a separate enterprise dealing at arm's length with the head office, and a functional analysis determines its taxable profit.
Withholding tax positions can also shift. Where the UK PE exists, certain payments to the head office (such as royalties or interest) may be deductible at the PE level subject to transfer pricing, and dividends may flow more simply once the corporate-tax footprint is established.
How to manage PE risk
Non-UK groups expanding into the UK should make conscious choices: incorporate a UK subsidiary, register a UK branch, or accept the PE characterisation that follows from substance on the ground. Pretending the UK presence is not a PE when it is creates real exposure to backdated tax, interest, and penalties.
How PushDigits supports cross-border groups
Our tax planning team diagnoses PE risk for non-UK companies with UK staff or activities and supports formal UK incorporation, branch registration, or PE filings as appropriate. Our UK formations team handles the setup, and our UAE formations team coordinates where UAE groups are expanding into the UK.
If your overseas group has UK staff, sales activity, or regular meetings in the UK, book a PE risk review or contact our cross-border team.