INTM264460 - Non-residents trading in the UK: permanent establishment: domestic and treaty law: fixed place of business: activities specifically excluded within the definition of permanent establishment

Fixed place of business permanent establishment - activities specifically excluded from the definition of permanent establishment

The model treaty at Article 5(4) and domestic law at CTA2010/S1143(3) give some specific examples of what is not to be included in the term permanent establishment. These are listed in INTM264300.

In general, where the non-resident enterprise has a fixed place of business that is used only for storage, display or delivery of goods belonging to the enterprise, or for the purchase or collecting of information for the enterprise, such fixed place will not be a permanent establishment. A fixed place of business used solely for activities of a preparatory or auxiliary nature is also excluded.

Neither Article 5(4) nor CTA2010/S1143 say anything further on ‘preparatory or auxiliary’ so once again we need to consider the Commentary; this is detailed below.

Activities of a ‘preparatory or auxiliary character’

It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits by the enterprise that it would be difficult to allocate any part of the profit to the fixed place of business, for example a fixed place of business used solely for the purpose of advertising or for the servicing of a patent or a know-how contract (subject to below).

It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the enterprise as a whole.

Fixed place of businesses not within the scope of exclusion

The Commentary states the following activities cannot be of a preparatory or auxiliary nature:

• A fixed place of business which renders services not only to its enterprise but also directly to other enterprises, for example to other companies within the group.
• A fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise. The benchmark to gauge the activities against is that of the trade as a whole entity. So, for example, if the UK activities are no different to the essence of the trade, e.g. the UK personnel collect market research information and the non-resident company’s main trade is concerned with market research, then the activities in the UK would not be preparatory or auxiliary and there could be a permanent establishment in the UK.
• A fixed place of business, whose function is to manage the enterprise, even if it only covers a certain area of the operations of the concern, constitutes an essential part of the business operations of the enterprise.

Combination of activities of a fixed place of business that is preparatory or auxiliary

Subparagraph f) of Para 4 of Article 5 (see INTM264300) states that as long as the combined activity of a fixed place of business is merely preparatory or auxiliary a permanent establishment should be deemed not to exist.

If an enterprise maintains several fixed places of business engaged in activities that fall within subparagraphs a) to e) of Article 5(4) and provided that they are separated from each other locally and organisationally then subparagraph f) does not hold, as in such a case each place of business has to be viewed separately and in isolation for deciding whether a permanent establishment exists. However, the Commentary is clear that an enterprise cannot fragment a cohesive operating business into several small operations in order to argue that each is merely engaged in a preparatory or auxiliary activity; for example, an enterprise performing complementary functions such as receiving and storing goods in one place and distributing those goods through another etc. is not ‘separated organisationally’

A fixed place of business that engages in both exempt activities (per Article 5(4)) and other activities is regarded as a single permanent establishment and taxable as regards both types of activities.