---
title: What is a Permanent Establishment? A UK Tax Guide for 2026/27
description: "For an overseas company, understanding the concept of a Permanent Establishment (PE) is critical. And, creating a PE in the UK is the trigger that brings a non-resident company within the charge to UK Corporation Tax on its profits attributable…"
url: "https://www.accountingfirms.co.uk/knowledge-bank/what-is-a-permanent-establishment/"
updated: "2026-08-12"
category: Limited Company Tax
---

# What is a Permanent Establishment? A UK Tax Guide for 2026/27

For an overseas company, understanding the concept of a Permanent Establishment (PE) is critical. And, creating a PE in the UK is the trigger that brings a non-resident company within the charge to UK Corporation Tax on its profits attributable to that presence. So, the rules are based on the substance of a company's UK operations, meaning a taxable presence can be created far more easily than many businesses assume.

Well, this guide breaks down the UK's domestic definition of a PE, its interaction with international tax treaties, and the significant [tax consequences](https://www.accountingfirms.co.uk/blog/tax-consequences-of-illegal-dividends/) that follow.

## The UK Definition of a Permanent Establishment

The core UK definition is set out in section 1141 of the [Corporation Tax](https://www.accountingfirms.co.uk/blog/how-to-do-accounting-for-ecommerce-business/) Act 2010 (CTA 2010). Also, a non-resident company creates a PE in the UK if it meets one of two key tests.

### Test 1: The Fixed Place of Business

A company has a PE if it has a **fixed place of business** in the UK through which its business is wholly or partly carried on. This test involves three conditions, all of which must be met:

1. **A Place of Business:** There must be a physical location, such as premises or facilities. This can include an office, a branch, a factory, a workshop, or even a construction site. More importantly, it must be a physical place where the company's activities are conducted.
2. **It Must Be "Fixed":** The place of business must have a degree of permanence. A temporary or transient presence is not enough. For example, a construction project that lasts for more than 12 months may be considered fixed. Additionally, the place must be at the company's disposal, though this does not require legal ownership; a rented office or even space within another company's premises can qualify.
3. **The Business is Carried On Through It:** The [company must](https://www.accountingfirms.co.uk/blog/distributions-on-cessation-of-a-company/) perform its core business activities through this fixed place. Moreover, the presence must be more than just passive.

### Test 2: The Dependent Agent

Usually, a company can create a PE even without a fixed physical location. Yes, this occurs if an **agent acting on behalf of the company habitually exercises authority in the UK to do business on the company's behalf**.

Key elements of this test are:

- **The Agent:** This can be an employee or another person/company acting for the non-resident enterprise.
- **Authority to do Business:** Historically, this meant the authority to conclude contracts in the name of the enterprise. Moreover, an agent who repeatedly negotiates and signs contracts that bind the overseas company is a classic example of a dependent agent PE.
- **Habitual Exercise:** Generally, the agent must exercise their authority repeatedly, not just in isolated instances.
- **Independence:** An agent of independent status (e.g., a general commission agent or broker) acting in the ordinary course of their own business does not create a PE for their principal.

## Preparatory or Auxiliary Activities: A Key Exemption

Certain activities are specifically excluded from creating a PE, provided they are of a "preparatory or auxiliary character" in relation to the business as a whole.

Under section 1143 of CTA 2010, these can include:

- Using facilities for storage, display, or delivery of the company's goods.
- Maintaining a stock of goods for these purposes.
- Purchasing goods or collecting information for the company.

However, this exemption has been tightened to prevent abuse. Furthermore, anti-fragmentation rules now deny this exemption if a non-resident business splits up a cohesive business operation among related entities to avoid creating a PE. Of course, this ensures that if the combined UK activities would constitute a PE, they are treated as such.

## The Role of Double Tax Treaties

The UK's domestic PE definition is closely based on Article 5 of the OECD Model Tax Convention, which forms the basis of the UK's extensive network of double tax treaties. Additionally, where a treaty exists, its definition of a PE usually takes precedence. Surely, the treaty provides the rules for determining which country has the primary right to tax the profits of a multinational enterprise.

| UK Domestic Law (CTA 2010) | OECD Model Tax Treaty (Article 5) |
| --- | --- |
| Defines PE for [Corporation Tax](https://www.accountingfirms.co.uk/knowledge-bank/what-is-the-deadline-for-corporation-tax-for-a-limited-company/) purposes. | Defines PE to allocate taxing rights between two countries. |
| Two main tests: fixed place of business and dependent agent. | Similar tests form the basis of the UK's domestic law. |
| Contains anti-fragmentation rules for auxiliary activities. | The OECD model was updated to include similar anti-fragmentation rules. |

## Tax Consequences of Creating a PE

Once a PE is established, the non-resident [company is liable for UK Corporation Tax](https://www.accountingfirms.co.uk/blog/tell-hmrc-that-your-company-is-dormant/) on the profits attributable to that PE.

### The Separate Enterprise Principle

The profits are calculated according to the "separate enterprise principle". And, this means the PE is treated as if it were a distinct and separate company dealing wholly independently (at arm's length) with the main, non-resident part of the enterprise.

> **Corporation Tax Act 2009, section 21(1)** (1) The [profits of the non-UK resident company](https://www.accountingfirms.co.uk/knowledge-bank/a-permanent-establishment/) that are attributable to the permanent establishment are those that the establishment would have made if it were a distinct and separate enterprise which— (a) engaged in the same or similar activities under the same or similar conditions, and (b) dealt wholly independently with the non-UK resident company.

This attribution of profits is a complex area, often requiring detailed transfer pricing analysis to determine what an independent entity would have earned. For multinational groups, specific rules [allocate income and expenses to ensure the profits taxed](https://www.accountingfirms.co.uk/blog/allocating-income-for-tax-when-property-is-jointly-owned/) in the UK accurately reflect the PE's activities.

 

*For more detailed guidance, you should refer to HMRC’s International Manual, particularly the sections starting at INTM264000. The primary UK legislation is found in the [Corporation Tax](https://www.accountingfirms.co.uk/blog/how-to-file-corporation-tax-for-limited-companies/) Act 2010, sections 1141-1144, and the profit attribution rules are in the Corporation Tax Act 2009, sections 19-32. The OECD Model Tax Convention and its official commentary provide essential context for interpreting treaty provisions.*

## 2026 update: foreign PEs of UK companies

The rules above mainly address a **non-UK company operating in the UK**. A separate regime applies where a **UK-resident company operates through a permanent establishment overseas**.

In July 2026, the government published draft legislation to make the foreign permanent establishment exemption mandatory. For most affected UK companies, the proposed rules apply to accounting periods beginning on or after **1 January 2027**. Profits and losses attributable to a foreign PE would be left out of the UK Corporation Tax computation, subject to detailed transitional, anti-diversion and anti-avoidance rules. The current elective regime and loss-clawback rules are being replaced by a transitional restriction on losses and other amounts carried into the new regime.

For UK-resident companies conducting oil and gas extraction or exploration through foreign PEs, the announced start date is **1 September 2026**. A purpose-based anti-avoidance rule applies to arrangements made on or after 13 July 2026. Because the legislation was published in draft for consultation, businesses should check the enacted wording and commencement rules before relying on the reform.

- [HMRC: reform of the foreign permanent establishment exemption](https://www.gov.uk/government/publications/reform-of-the-foreign-permanent-establishment-exemption)
- [HMRC policy paper and commencement dates](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper)

## References

1. [Finance (No. 2) Act 2023, s 159](https://www.legislation.gov.uk/ukpga/2023/30/section/159)
2. [Corporation Tax changes to the definition of permanent establishment at 1](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=HM%20Revenue%20%26%20Customs%20Policy,which%20are%20normally%20low%20value%2C&text=HM%20Revenue%20%26%20Customs%20Policy,or%20auxiliary%20activities%2C&text=paper%20Corporation%20Tax,which%20are%20normally%20low%20value%2C&text=paper%20Corporation%20Tax,or%20auxiliary%20activities%2C)
3. [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)
4. [Corporation Tax Act 2010, s 1141](https://www.legislation.gov.uk/ukpga/2010/4/section/1141)
5. [Venture Capital Schemes Manual - VCM55040 - VCT: VCT qualifying holdings: meaning of 'permanent establishment' at 1](https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm55040#:~:text=Venture%20Capital%20Schemes%20Manual%20VCM55040,site%20or%20construction%20or%20installation&text=Venture%20Capital%20Schemes%20Manual%20VCM55040,and%20a%20building&text=%2D%20VCT,site%20or%20construction%20or%20installation&text=%2D%20VCT,and%20a%20building)