INTM264430 - Non-residents trading in the UK: permanent establishment: domestic and treaty law: fixed place of business: ‘fixed’ condition

Fixed place of business permanent establishment – ‘fixed’ condition

A place of business is fixed if:

• it is established at a distinct place with
• a degree of permanence

Distinct place

The place of business needs to have a ‘specific geographical point’. It is immaterial how long an enterprise operates in another Country if it does not do so at a distinct place. But it is not necessary that equipment or plant be physically fixed to the ground before it constitutes ‘a fixed place of business’.

The OECD Commentary refers to the difficulties of determining a ‘single place of business’ where business activities are moved between locations. A single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to the business.

The concept of commercial and geographical coherence can be illustrated by a consulting firm that regularly rents out different rooms in a particular building as offices. The ‘office hotel’ is considered to be a single place of business of that firm since the building constitutes a coherent whole geographically and commercially.

Similarly, consider a painter who undertook a single contract for a single client to paint a multi-occupied building. The building as a whole can then be regarded as a single place of business for that work.

Conversely, an area where activities are carried on as part of a single project which constitutes a coherent commercial whole may lack geographic coherence to be considered as a single place of business. The Commentary gives the example of a consultant who works at different branches in different locations but pursuant to a single project for training the employees of a bank; each branch should be considered separately.

The Commentary gives another example in relation to paragraph 3 (construction projects) where parts of a substantial structure are assembled at different locations in a country and moved to a different location for final assembly. The activities performed at each place are part of a single project which constitutes a permanent establishment if the time criterion is met.

Degree of permanence

A PE can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. In looking at permanency the commentary says permanent establishments have not been considered to exist in situations where a business has been carried on in a country through a fixed place of business that has been maintained for less then 6 months (contrast with Article 5(3) which definitively states a 12 month duration for a building site or construction or installation project, see INTM264800).

One exception to the six month yardstick has been where the activities were of a recurrent nature; in such cases, each period of time during which the place is used needs to be considered in combination with the number of times during which that place is used (which may extend over a period of years).

Another exception has been made where activities constituted a business that was carried on exclusively in that country; in this situation, the business may have short duration because of its nature but since it is wholly carried out in that country, its connection with that country is stronger.

Migration of a company – the permanence test

Article 5 is phrased in terms of fixed place of business of the enterprise and makes no reference to the residence of that enterprise. When considering whether a place of business is fixed in time and location this means we consider the period of time that the place is at the disposal of the enterprise, regardless of the residence of the enterprise. This is particularly important in considering permanent establishments of recently migrated companies that were formerly UK resident and continue to carry on business at the same UK fixed place as when the company was UK resident. The degree of permanence test outlined in INTM264430 applies to the whole period that the place is at the disposal of the enterprise, not just from the time that the enterprise ceases to be UK resident.

Migration of a UK Enterprise to avoid PE and UK CT

This can be illustrated by the example of a UK-resident property development company that develops properties at one site in the UK. For a period of two years it develops the properties at the site but does not sell any of them. As the development phase nears conclusion the company moves its place of effective management out of the UK and ceases to be UK-resident. The non-resident enterprise continues to develop the properties at the site for a further six months during which it sells all the properties.

The degree of permanence test does not apply from the date of migration but from the date that the enterprise started to carry on its business at that property development site. That period of time is two years and six months and thus satisfies the 12-month permanency requirement for a building or construction site in Article 5 - the non-resident enterprise would still be within the charge to UK Corporation Tax as it was carrying on its trade through a fixed place of business permanent establishment in the UK.

Other points to note:

• Temporary interruptions of business activities do not cause a PE to cease to exist.
• Where a place of business which was, at the outset, designed to be used for such a short period of time that it would not have constituted a PE but it is in fact maintained for such a period that it can no longer be considered as a temporary one, it becomes a fixed place of business and can thus retrospectively be a PE.
• A place of business can also constitute a PE from its inception even though it existed, in practice, for a very short period of time, if as a consequence of special circumstances, e.g. death of the taxpayer, investment failure etc., it was prematurely terminated.
• A PE begins to exist as soon as the enterprise commences to carry on business through a fixed place of business. A period of preparation, as distinct from the real business activities, should not be treated as the business being carried out.
• The activity need not be permanent in the sense that there is no interruption of operation, but operations must be carried out on a regular basis.
• The PE ceases to exist with the disposal of the fixed place of business or with the cessation of any activity through it.

See INTM264800 regarding migration of company and its impact on the permanency test.