Profits earned by permanent establishments in the United Kingdom, owned by foreign companies, are subject to the same tax rates as domestic companies.

There are specific rules for determining how profits attributable to these permanent establishments should be calculated, treating them as if they were independent entities that negotiate on equal terms with their parent companies and related parties. The UK adopts the OECD Authorized Approach to the allocation of benefits.

The application of these rules will depend on existing tax agreements between the United Kingdom and other countries. In addition, certain agreements, such as internal loans between permanent establishments and the parent company or royalty payments, may be excluded from this evaluation. In particular, strict rules apply for banks to avoid the inappropriate allocation of low-yield loans to their permanent establishments in the United Kingdom.

Recently, the United Kingdom updated its definition of the principle of a separate company, requiring that the benefits attributed to permanent establishments be equivalent to those obtained by an independent company with similar activities and under comparable conditions. This includes a detailed analysis of the functions, assets and risks of the EP and the parent company, in accordance with the AOA.

As a result of these changes, several specific provisions in British tax legislation (Foreign Trade Act 2009) will be amended or eliminated, including rules on related party transactions, tax deductions and special rules for banks and financial institutions. However, the rules for insurance companies will continue to apply the principle of a separate entity, with adjustments to maintain regulatory consistency.

The government has opened a public consultation on these reforms, which will be in effect until July 7, 2025. The final legislation, incorporating the comments received, is expected to be introduced in Finance Bill 2025-26 and will take effect in 2026.

Finally, tax withholding generally does not apply to the transfer of benefits from an EP in the United Kingdom to the company's parent company.