Risk of creating a taxable Permanent Establishment in the UK

If you are supplying goods and services by taking orders from UK resident customers over the internet, but you are representing that the sales contracts are not “concluded” in the UK because the contracts have been negotiated with an entity based in Ireland or another low tax jurisdiction, then your organisation may be exposing itself to significant UK corporation tax liabilities.  You should be aware that there is currently substantial focus on the issue of “tax avoidance” in this manner following the UK Parliamentary questioning of certain high profile United States internet retailers and action being subsequently taken by the UK authorities in this matter.

If, for example, you have set up an Irish subsidiary where the rate of corporate income tax is much lower than that of the UK and contracts with UK customers have been drawn up with this Irish company, you need to consider whether you have “sales agents” on the ground in the UK.  Having “dependent” agents in the UK involved in the selling process could create a PE of the Irish company in the UK.  In that case profits derived from sales to UK customers  “attributable” to that PE under article 5 of most OECD-type tax treaties would trigger a corporation tax charge in the UK.

These targetted internet retailers have been arguing that their representatives in the UK are not making sales but only “procuring” interest or only getting involved in the early stages of the ordering process.  Therefore that does not make them sales agents.  Such arguments may not hold water going forward if it is found:

– These UK agents rely on your organisation for all or substantially all of their income – that makes them “dependent” rather than “independent” agents.

– The sales commission structure is “weighted” towards UK resident agents rather than overseas (e.g. Irish resident) agents. That indicates more selling activity at a higher level is taking place in the UK rather than in Ireland, i.e. more senior sales staff are based in the UK and are more likely to take “decisions” in the UK regarding the acceptability of client contracts.

–  You have labelled R&D, customer & IT support, buying, finance or other offices or functions in the UK but that is just a “guise” for selling activities to UK customers then the responsibilities, roles and functions of these departments will be put through intense scrutiny.

– One or more of your senior staff  (e.g. VP of Europe or Northern Europe Business Development Head) are resident in the UK rather than in Ireland, Luxembourg or another jurisdiction.  Remember, its not the “quantity” but the “quality” and level of seniority of the decision making process that counts.

– Day to day processes: occur substantially in the UK – UK agents handle calls or complaints from UK customers, these may be routed via Ireland but in substance the final decisions regarding refunds, returns of goods/products, potential customer litigation are taken by UK resident staff or agents.

–  Proposals for product pricing, sales catalogue changes, entering new areas of business, hiring of key staff and other important and strategic business matters “originate” in the UK although the formal decision making process takes place abroad.   The fact that directors based in Ireland or elsewhere seldom reject “recommendations” made by UK resident staff indicate a rubber stamping process abroad.

– Customers, third party suppliers and other business partners see your operations largely as UK based operations even though legal contracts are negotiated with overseas entities – the importance of commercial “substance” over legal “form”.  Examination of email exchanges between interested parties evidences this is indeed the case.

There are many other instances or examples indicative of sales-related activities taking place in the UK and outside the scope of this brief article.  If your circumstances broadly fit within this picture, then you should be concerned regarding a potential UK corporation tax liability and should seek suitable professional advice.