Foreign companies establishing a UK permanent establishment and UK corporation tax

For the majority of non-UK companies that begin to develop a UK customer-base the most significant "tipping point" will concern the level of UK activity which is possible without going so far as to establish a taxable presence. A non-UK company that maintains its control offshore may nevertheless become subject to UK corporation tax if it begins to carry on any part of its trade through a UK "permanent establishment". In that case, subject to the terms of an applicable double tax treaty, tax will be charged on its UK profits or, more likely, the profits it would have earned from its UK activity had all it business been undertaken on an arm's length basis in compliance with the UK's transfer pricing rules. A "permanent establishment" usually means a branch office or other fixed place of business, in which case there is seldom much doubt as to whether one has been established. However, a taxable presence may also be established simply by engaging one or more dependent agents who have the authority to conclude contracts on behalf of the foreign company and who regularly do so with customers in the UK. At first sight this might suggest that a company will be liable for corporation tax immediately if it puts employees or representatives "on the ground" in the UK. But, not every form of business activity performed in the UK, whether through a branch or a dependent agent, will trigger corporation tax liabilities. A company that may be considering engaging UK based personnel for the first time or even establishing a UK office on a speculative basis may be able to arrange its preliminary steps so as to delay the point at which tax registration, reporting and payment obligations may arise. Whilst a company is merely testing the UK demand for its products or services it may be possible to restrict the activity of its UK personnel so as to avoid crossing the trading threshold. So, for example, if the role of the agents is limited to marketing, so that any contracts being entered into are either on standard terms or executed outside the UK by the company rather than on its behalf by the UK agent, it should be possible to avoid trading at least until it becomes clear that there is a viable market for the company in the UK. Similarly, if the activities of the branch are limited to publicity, research and customer support, making it, in effect, a "representative office", actual trading and, consequently, UK corporation tax may be avoided. Careful structuring to avoid having a permanent establishment can lead to significant tax savings. Last month the Guardian newspaper alleged that despite having UK sales in excess of £3.3 billion Amazon pays no UK corporation tax because it carries on only an "order fulfillment" business in the UK with a Luxembourg entity being the legal supplier of goods.