---
title: "A Permanent Establishment: A UK Tax Case Study for 2026/27"
description: For an overseas company, creating a taxable presence—a Permanent Establishment (PE)—in the UK can happen far more easily than many assume. A PE subjects the company to UK Corporation Tax on its attributable profits, a significant consequence that demands careful…
url: "https://www.accountingfirms.co.uk/knowledge-bank/a-permanent-establishment/"
updated: "2026-08-12"
category: Limited Company Tax
---

# A Permanent Establishment: A UK Tax Case Study for 2026/27

For an overseas company, creating a taxable presence—a Permanent Establishment (PE)—in the UK can happen far more easily than many assume. A PE subjects the company to UK Corporation Tax on its attributable profits, a significant consequence that demands careful planning. This case study demonstrates how routine expansion activities can inadvertently create a UK PE under both domestic law and double tax treaty principles.

## What is a Permanent Establishment?

A non-resident company becomes liable for UK [Corporation Tax](https://www.accountingfirms.co.uk/blog/tell-hmrc-that-your-company-is-dormant/) only if it has a PE in the UK. The UK's domestic legislation provides a clear two-pronged definition.

Under section 1141 of the [Corporation Tax](https://www.accountingfirms.co.uk/knowledge-bank/how-to-pay-corporation-tax-for-a-limited-company/) Act 2010, a company has a UK PE if:

1. It has a **fixed place of business** in the UK through which its business is wholly or partly carried on; **or**
2. An **agent** acting on its behalf habitually exercises authority in the UK to do business on the company's behalf.

This definition is closely aligned with Article 5 of the OECD Model Tax Convention, which forms the basis of most UK double tax treaties.

## The Case Study: Global Dynamics Inc.

- **The Company:** Global Dynamics Inc. is a successful software company resident in the United States.
- **The Plan:** It identifies the UK as a key growth market and decides to test the waters before committing to a full subsidiary.
- **The Action:** In April 2025, Global Dynamics hires a senior business development manager, Sarah, who is based in the UK. To support her, the company takes the following steps:
  1. It rents a small, dedicated office for Sarah within a serviced office building in Manchester. The contract is for 12 months.
  2. Sarah works from this office five days a week, meets clients there, and has business cards showing the Manchester [office address](https://www.accountingfirms.co.uk/knowledge-bank/what-is-a-registered-office-address-and-does-an-llp-need-one/).
  3. Crucially, Global Dynamics gives Sarah the authority to negotiate and sign contracts with UK clients on its behalf for software licenses up to £100,000. Sarah regularly concludes such contracts.

By the end of the 2025/26 [tax year](https://www.accountingfirms.co.uk/blog/good-timing-can-save-a-lot-of-tax/), Sarah had signed contracts worth £750,000. Global Dynamics believes that because it has no UK-registered company, it has no UK [tax liability](https://www.accountingfirms.co.uk/blog/in-with-the-new-basis-period-rules/). This assumption is incorrect. Let's analyse why.

## Analysis 1: The Fixed Place of Business Test

The first test is whether the Manchester office constitutes a "fixed place of business". A PE under this limb requires three conditions to be met: there must be a place of business, it must be "fixed", and the [company's business](https://www.accountingfirms.co.uk/blog/distributions-on-cessation-of-a-company/) must be carried on through it.

1. **A Place of Business:** The dedicated office in Manchester clearly qualifies. A fixed place of business can include an office, a branch, or a place of management. It must be a physical place where the company's activities are conducted.
2. **It must be "Fixed":** The term "fixed" implies a degree of permanence. The 12-month lease for the office demonstrates this stability. Even a space placed at the disposal of an enterprise within another company's premises can qualify. The key is a connection between the place of business and a specific geographical point with some permanence.
3. **Business Carried On Through It:** Sarah conducts core business activities—sales and contract negotiation—from the office. This is not a "preparatory or auxiliary" activity, such as merely storing goods or collecting information. Concluding contracts is a fundamental part of the business, not an ancillary function. Therefore, Global Dynamics is carrying on its business through this fixed place.

**Conclusion:** Based on these facts, Global Dynamics has created a PE in the UK under the fixed place of business test.

## Analysis 2: The Dependent Agent Test

Even if Global Dynamics had not rented a physical office, it would likely still have created a PE through Sarah's activities alone. This is assessed under the dependent agent test.

1. **Is Sarah an Agent?** Yes, she is an employee acting on behalf of her employer, Global Dynamics Inc.
2. **Does She Habitually Exercise Authority to Conclude Contracts?** Yes. Her role is specifically to negotiate and sign contracts, and she does this repeatedly, not just in isolated cases. This regular exercise of authority is sufficient to bind the enterprise to business activities in the UK.
3. **Is She an Independent Agent?** No. An independent agent (like a broker or general commission agent) acting in the ordinary course of their own business does not create a PE for their principal. Sarah, as a full-time employee, is economically and legally dependent on Global Dynamics.

**Conclusion:** Sarah's role and authority are sufficient to create a "dependent agent" PE, regardless of the existence of the fixed office.

## Tax Consequences of Creating a PE

Because Global Dynamics has a UK PE, it is now within the charge of UK [Corporation Tax](https://www.accountingfirms.co.uk/knowledge-bank/what-is-the-deadline-for-corporation-tax-for-a-limited-company/). The tax is levied on the profits attributable to that PE.

The calculation of these profits follows the **'separate enterprise principle'**. This means the UK PE is treated as if it were a distinct and separate company dealing wholly independently (at arm's length) with the US [parent company](https://www.accountingfirms.co.uk/knowledge-bank/how-do-spvs-help-in-isolating-financial-risk-for-parent-companies/). Profits must be attributed to the PE that it would have been expected to make if it were an independent entity engaged in the same or similar activities.

| PE Test | Application to Global Dynamics Inc. | Outcome |
| --- | --- | --- |
| **Fixed Place of Business** (CTA 2010, s 1141(1)(a)) | The company has a permanent, dedicated office in Manchester through which core sales activities are conducted. | **PE Created** |
| **Dependent Agent** (CTA 2010, s 1141(1)(b)) | Sarah, a UK-based employee, habitually exercises authority to conclude contracts on behalf of the US parent company. | **PE Created** |

This case illustrates that a corporate footprint for tax purposes is based on the substance of business operations, not just the legal form. Actions such as establishing a physical base or empowering a local agent with contractual authority can directly trigger a UK tax liability.

 

*For more detailed guidance on this topic, you should refer to HMRC’s International Manual, particularly the sections beginning at INTM264300, and the primary legislation in the Corporation Tax Act 2010. The OECD Model Tax Convention and its accompanying commentary provide essential context for interpreting double tax treaties.*

## References

1. [Corporation Tax changes to the definition of permanent establishment at 2](https://www.gov.uk/government/publications/corporation-tax-changes-to-the-definition-of-permanent-establishment/corporation-tax-change-to-the-definition-of-permanent-establishment#:~:text=from%20the%20copyright%20holders%20concerned,corporate%20tax%20base%20this%20measure&text=from%20the%20copyright%20holders%20concerned,to%20preserve%20the&text=This%20publication%20is,corporate%20tax%20base%20this%20measure&text=This%20publication%20is,to%20preserve%20the)
2. [Corporation Tax Act 2010, s 1141](https://www.legislation.gov.uk/ukpga/2010/4/section/1141)
3. [The reform of transfer pricing, permanent establishment and Diverted Profits Tax at 8](https://www.gov.uk/government/publications/the-reform-of-transfer-pricing-permanent-establishment-and-diverted-profits-tax/2002-reform-of-uk-law-in-relation-to-transfer-pricing-permanent-establishment-and-diverted-profits-tax#:~:text=loan%20relationships%20and%20derivative%20contracts,an%20indicator%20of%20independence%20the&text=loan%20relationships%20and%20derivative%20contracts,clear%20purpose%20as&text=into%20scope%20of,an%20indicator%20of%20independence%20the&text=into%20scope%20of,clear%20purpose%20as)
4. [The reform of transfer pricing, permanent establishment and Diverted Profits Tax at 8](https://www.gov.uk/government/publications/the-reform-of-transfer-pricing-permanent-establishment-and-diverted-profits-tax/2002-reform-of-uk-law-in-relation-to-transfer-pricing-permanent-establishment-and-diverted-profits-tax#:~:text=The%20amendments%20described%20above%20will,Pro%20fi%20ts%20to%20permanent&text=The%20amendments%20described%20above%20will,the%20Attribution%20of&text=result%20in%20consequential,Pro%20fi%20ts%20to%20permanent&text=result%20in%20consequential,the%20Attribution%20of)
5. [Trusts, Settlements and Estates Manual - TSEM10070 - Non-resident trusts: residence rules: professional trustees not resident in the UK - OECD Tax Model Convention at 1](https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem10070#:~:text=Trusts%2C%20Settlements%20and%20Estates%20Manual,the%20disposal%20of%E2%80%9D%20an%20enterprise&text=Trusts%2C%20Settlements%20and%20Estates%20Manual,business%20is%20%E2%80%9Cat&text=TSEM10070%20%2D%20Non%2Dresident,the%20disposal%20of%E2%80%9D%20an%20enterprise&text=TSEM10070%20%2D%20Non%2Dresident,business%20is%20%E2%80%9Cat)