Broadly speaking, companies incorporated in the United Kingdom are considered to be tax residents in the United Kingdom. However, there is an important exception: when a company is considered resident in another country exclusively under an Avoidance of Double Taxation (CDI) Agreement with the United Kingdom, it is not considered a tax resident in the United Kingdom for local tax purposes. In addition, companies incorporated abroad can be considered tax residents in the United Kingdom if their management and central control are located in the United Kingdom. This determination is based on where key strategic decisions are made, and not where the business is managed on an operational or daily basis.

As part of its strategy to increase the competitiveness of the British business environment, the UK government announced in April 2022 its intention to create a redomiciliation regime, which would allow foreign companies to move their domicile to the United Kingdom without losing their original legal personality.

A panel of experts, meeting to study this proposal, published its technical report on October 14, 2024. The report strongly supports the introduction of a two-way regime, which would allow both foreign companies to re-domicile in the United Kingdom and British companies to move their legal address out of the country. Although the report includes detailed recommendations, it has been suggested that the government hold a new public consultation before defining the final legislative framework.

The government has expressed its intention to consult in due course on the detailed design of the new regime, which positions the United Kingdom as a potentially more attractive jurisdiction for the international relocation of corporate groups.

Permanent Establishment in the United Kingdom

Tax Obligation for Non-Resident Companies

A non-resident company is subject to Corporate Tax in the United Kingdom when doing business through a Permanent Establishment. However, there are exceptions to this general rule. Non-resident companies are also taxed, even without PE, in the following cases:

• Benefits derived from the exploitation or development of land in the United Kingdom.
• Capital gains from the direct (and in certain cases indirect) disposal of real estate located in the United Kingdom.
• Income from the leasing of British property.

Legal Definition of Permanent Establishment

British legislation incorporates a definition of EP that is based on the OECD Model Convention, although it is not identical in all its aspects.

A non-resident company will have an EP in the UK if:

1. It operates through a fixed place of business in the United Kingdom (headquarters, office, workshop, mine, construction work longer than 12 months, etc.).
2. A dependent agent usually acts on your behalf, entering into contracts or playing a major role in concluding them.

Exclusions: It is not considered EP if the activities are merely ancillary or preparatory. As of January 1, 2019, this exclusion does not apply when there is artificial fragmentation of operations to avoid taxes.

Alignment with the OECD and Proposed Legislative Changes

As part of the effort to modernize its tax regime, the United Kingdom is consulting amendments to harmonize its PE legislation with international standards, especially the 2017 OECD Model Convention, and some elements of the Multilateral Instrument (MLI).

Main Proposed Changes:

Revision of Article 1141 of the 2010 CTA to update the definition of EP:

• Construction projects considered EP only if they last more than 12 months.
• EP per dependent agent (EPAD): Includes agents who play a key role in negotiating contracts, even if they are not formally acting on behalf of the company.
• Maintaining the flexibility of British common law for cases of undisclosed representation.

Independent agent: The conditions for applying the exemption of Article 1142 are reinforced, in line with Article 5 (6) of the OECD. The definition of “closely linked” in Article 1143 is revised to better conform to Article 5 (8) of the OECD (including the threshold of 50% participation).

Attribution of benefits: Part 2, Chapter 4 of the 2009 CTA is updated to reflect the principle of a separate company and Article 7 (2) of the OECD Model, based on the 2010 Report on Profit Allocation. Investment Managers (IME): Provisions of Article 1152 are amended, eliminating the “20% test” and revising SOP 1/01 to ensure its current relevance.

Capital gains: The rules of the 1992 TCGA are adjusted to connect profits to an EP in the United Kingdom in a more clear and consistent way with the treaties.

Relationship with the Multilateral Instrument

The United Kingdom ratified the Multilateral Instrument in 2018, but adopted only a few elements on EP. It has not implemented the expanded rules on dependent agents, which means that the application of the new definition depends on:

• The existence or absence of an applicable tax treaty.
• If new CDIs are negotiated that incorporate the proposed changes.

However, changes in domestic legislation would allow for rapid implementation if the United Kingdom were to decide to change its position on these aspects of the MLI in the future.

Next Legislative Steps

The HMRC public consultation on these reforms will be open until July 7, 2025. Subsequently, the government is expected to publish its response to the comments received and to draft the corresponding legislation.

The objective is to include the reforms in the Finance Bill 2025-26, so the new regulations are likely to take effect during 2026.