It has been five years since the end of the transition period following Brexit and the loss of passporting rights meant that many UK brokers had to set up subsidiary companies in the EU to continue to transact European business.
In this article we include a reminder of two common circumstances of when a non-UK company can be required to pay UK corporation tax. And also consider how things such as expansion and working practices can impact this over time.
Residence
A company that is UK tax resident is subject to corporation tax on its worldwide income and gains.
A company incorporated overseas is generally tax resident in the jurisdiction in which it is incorporated, and not in the UK.
In some circumstances an overseas company can be UK tax resident despite not being incorporated in the UK. This occurs when its place of central management and control is the UK. This is a concept derived from common law, rather than being defined in legislation and looks at the company’s highest level of decision-making.
In many cases the board of directors will meet where the company is resident, and where those meetings happen can be important in determining the place where the real business is carried on. But don’t forget that, if the directors are dialling in to meetings remotely, their location is where they are physically based. And what if the directors are simply exercising decisions made by another person or if decisions have already been made before the meeting?
Businesses need to understand and identify the forum through which the central management and control of their EU subsidiaries is exercised, and ensure that this is being exercised in the home jurisdiction in the EU and not from the UK.
Permanent establishment
The profits of a non-UK resident company can still be taxable in the UK when they are attributable to a permanent establishment (PE) through which a trade is carried on in the UK. This is something that many brokers will be more familiar with, having set up branch arrangements in the UK when first incorporating their EU subsidiaries.
So, what is meant by a PE? Also commonly referred to as a branch, this is when a company has either:
- a fixed place of business in the UK through which the business of the enterprise is wholly or partly carried on; or
- an agent who habitually exercises authority to conduct business on behalf of the enterprise in the UK.
A fixed place of business can include, but is not limited to:
- a place of management
- a branch
- an office
The second part of the definition above requires that the business is carried on through this fixed place of business. This is typically where operations take place from which profits arise.
In the case of an agent, a PE may exist where an overseas company has an agent, who is not of an independent status, and who habitually exercises authority to conduct business on their behalf.
It is worth noting, that the definition of a PE for tax purposes is not the same as that of a branch from a regulatory perspective. Although having a regulated branch in the UK is a strong indication that the overseas company would have a UK PE, not having a registered UK branch does not mean that the company does not have a UK PE.
Where a company has a UK PE, part of that company’s profits – those that are attributable to the activities carried on in the PE – will be subject to corporation tax in the UK.
Allocation of profits
When a foreign broker operates a UK branch, tax rules require that the branch is treated as if it were a separate business. The cross-border dealings between the UK branch and its head office should be arm’s length. This principle, known as “transfer pricing,” ensures that the income and profits (or potential loss) reflect the real economic activity happening in the UK.
In practice, this means looking at what the UK branch actually does in terms of economic substance: the clients it serves, the staff it employs, the assets (like IT systems) it uses, and the risks it manages. If the UK branch handles client relationships, negotiates policies, and earns commissions, those activities generate value—and the branch should be allocated a fair return for them. The analysis also considers who controls key decisions.
Importantly, the UK branch isn’t allowed to book artificial charges, like paying interest or royalties to its head office, because these don’t reflect real transactions. Instead, the goal is to mirror what an independent broker in the UK would earn for similar transactions and business activities.
This approach aligns with international standards set by the OECD and ensures that tax is paid where the business activity truly happens—keeping things fair and transparent.
As the business grows and responsibilities shift between jurisdictions, the way income and profits (or losses) are allocated should be revisited. Changes in client mix, technology, or decision-making can alter where value is created, so regular reviews help ensure compliance and fairness.
How we can help
If you would like advice on any of the issues raised in this article, our experienced Corporate Tax team can provide practical and tailored solutions.
Please contact our Corporate Tax Partner, Tom Golding and Transfer Pricing Director Farhan Azeem.
