Taking a UK company into international markets can be straightforward commercially but much more complicated from a tax perspective. One concept that deserves particular attention is permanent establishment (PE). A UK company does not necessarily create a permanent establishment simply because it sells to customers overseas. However, establishing an office, employing people, or conducting significant business activities in another country can potentially create a taxable presence there.

For founders, the distinction matters because a permanent establishment can give another country taxing rights over profits attributable to the business activities carried on there. HMRC describes two broad circumstances in which a permanent establishment can arise under the international model: a fixed place of business and certain activities performed by a dependent agent. The precise rules depend on the domestic law and tax treaty of the country involved. This guide explains how permanent establishment works for UK companies operating overseas, including remote teams, overseas offices, agents, subsidiaries and international expansion.

What Is a Permanent Establishment?

A permanent establishment is, broadly, a sufficiently substantial business presence in a country that allows that country to tax profits attributable to the activities conducted through that presence. Under the standard treaty concept, a PE commonly involves:

1. a fixed place of business through which the company's business is carried on; or
2. a dependent agent who acts for the company in circumstances that satisfy the applicable rules.

HMRC describes a fixed-place PE as a place through which the business of an enterprise is wholly or partly carried on. Examples can include offices, branches and factories, although the exact definition depends on the applicable rules. A PE is therefore not simply another name for an overseas customer, employee or company. It is a tax concept used to determine whether a business has a sufficiently significant presence in another jurisdiction.

Does a UK Company Automatically Have a Permanent Establishment Abroad?

No. A UK company can sell products or services to customers in another country without necessarily creating a PE there. For example, a UK software company might have:

• a UK-incorporated company;
• a UK management team;
• servers hosted by a third-party provider;
• customers in France, Nigeria and Canada;
• no employees or office outside the UK.

Having foreign customers alone does not automatically create a permanent establishment in every country where those customers are located. The analysis changes when the company begins establishing a physical or operational presence abroad. For example, opening an overseas office where employees routinely perform core business activities is much more likely to require a PE analysis.

The Two Main Types of Permanent Establishment

1. Fixed Place of Business PE

A fixed-place PE generally requires three broad elements:

• a place of business;
• a sufficient degree of permanence;
• business activities carried on through that place.

HMRC's guidance explains that the place can include premises, facilities, plant or machinery, and that the business must be carried on through the location. Typical examples can include:

• an overseas office;
• a branch;
• a workshop;
• a factory;
• certain business premises;
• and, under some treaties, construction or installation sites lasting beyond a specified period.

The exact threshold varies between domestic laws and treaties.

Example

A UK engineering company wins contracts in Country A. It rents a permanent office there, employs engineers locally and uses the office to manage projects and perform core services. That arrangement deserves a detailed PE analysis because the company has a physical location through which part of its business is being carried on.

2. Dependent Agent Permanent Establishment

A company can potentially have a PE without maintaining its own traditional office. This is where dependent-agent PE (DAPE) rules become important. Under the traditional treaty model, an agent may create a PE where they habitually exercise authority to conclude contracts on behalf of the enterprise. HMRC's guidance also recognises the dependent-agent concept in its description of permanent establishment.

Modern treaty rules can go further. For UK domestic rules applying to chargeable periods beginning on or after 1 January 2026, HMRC's dependent-agent PE guidance reflects rules under which a person may create a PE where they habitually conclude contracts, or play the principal role leading to contracts being routinely concluded without material modification. This is particularly relevant to businesses that use overseas sales representatives.

Example

A UK software company has no office in Country B. However, it has a person permanently based there who:

• negotiates major customer contracts;
• routinely plays the key role in securing those contracts;
• works almost exclusively for the UK company;
• and performs activities that fall within the applicable dependent-agent rules.

The absence of an office does not automatically eliminate PE risk.

What Counts as a Fixed Place of Business?

A fixed place of business does not necessarily require the company to own property. HMRC explains that a business location can potentially qualify where premises or another space is sufficiently at the company's disposal. Ownership or a formal lease is not necessarily required. That means founders should look beyond property ownership. Potential questions include:

• Does the company have an office abroad?
• Does it have dedicated space at another company's premises?
• Are employees routinely working from a particular location?
• Is the location sufficiently permanent?
• Are core business activities carried on there?
• Does the company have control or practical use of the space?

A temporary visit to a client is generally a very different fact pattern from maintaining a permanent workspace from which the company's business is conducted.

Can a Home Office Create a Permanent Establishment?

Potentially, but not automatically. The rise of remote work has made this one of the most relevant questions for international founders. Suppose the founder of a UK company lives in another country and works from home. The fact that the founder uses a laptop from their house does not, by itself, answer the PE question. The analysis may depend on matters such as:

• whether the home is effectively at the company's disposal;
• how permanent the arrangement is;
• the nature of the business;
• what activities are performed there;
• whether the founder is carrying on core business functions;
• and what the relevant domestic law and treaty provide.

HMRC's fixed-place guidance focuses on whether there is a place of business at the enterprise's disposal and whether business is carried on through that location. For this reason, a founder who permanently manages a UK company from an overseas home office should not assume that the arrangement is automatically outside PE rules.

Does Hiring an Overseas Employee Create a PE?

Not necessarily. Employing someone abroad is not, on its own, a universal PE trigger. But the employee's role, workplace and activities can be highly relevant. Consider two employees.

Employee A: Customer support

The employee answers routine customer questions and performs limited administrative tasks.

Employee B: Sales executive

The employee is responsible for an overseas market, negotiates substantial commercial agreements and routinely plays a central role in securing contracts. The second situation may warrant much closer PE analysis. The important question is not simply: "Does the company have an overseas employee?" It is: What does that person actually do, and where do they perform those activities?

What About Overseas Contractors?

Contractors can also be relevant. A PE analysis should not necessarily stop at the question of whether someone is technically an employee. HMRC's guidance recognises that people working for an enterprise can include individuals who are not traditional employees.

An overseas consultant performing a narrow, independent service is not automatically a PE. But where an individual effectively performs the company's core business from a fixed location or acts as a dependent agent, the facts may warrant closer examination. This is why simply changing someone's contractual label from "employee" to "contractor" does not necessarily remove international tax risk.

Does an Overseas Subsidiary Create a Permanent Establishment?

Not automatically. This distinction is especially important for growing companies. Suppose a UK parent company establishes a separate subsidiary in Country C. The subsidiary is a separate legal entity and conducts its own business. The mere fact that the UK company owns or controls the subsidiary does not automatically mean the subsidiary is a PE of the UK parent.

HMRC's treaty guidance expressly notes that a foreign company controlling a UK subsidiary does not, simply because of that control, make the subsidiary a permanent establishment of the foreign parent. However, different conclusions can arise if the subsidiary also carries on the parent's business as a dependent agent. The same principle is relevant when considering UK companies expanding overseas. The subsidiary's actual functions matter.

Branch vs Subsidiary: Why the Difference Matters

A branch is generally an extension of the same legal company. A subsidiary is a separate legal entity. If a UK company opens a branch in another country, the foreign country may treat the branch as a permanent establishment of the UK company.

A subsidiary, by contrast, has its own legal identity, although its activities can still create PE or other tax issues for the parent depending on the circumstances. The choice between a branch and subsidiary therefore involves more than administrative preference. It can affect:

• corporate taxation;
• reporting;
• legal liability;
• profit attribution;
• withholding taxes;
• transfer pricing;
• financing;
• and compliance.

International expansion should therefore be structured around the business model rather than simply choosing the easiest registration route.

Does Having Overseas Customers Create a PE?

Usually, customers alone do not create a PE. This is particularly important for ecommerce, SaaS and digital businesses. A UK company can have customers around the world without automatically establishing a PE in every customer's country. For example, a UK SaaS company might sell subscriptions to thousands of customers across Europe while maintaining its management and operations in the UK.

That fact alone does not mean it has a PE in every European country. However, other issues may arise, including VAT, sales taxes, consumer law, data protection, local registration and corporate tax rules. PE is only one part of the international tax picture.

What Happens If a UK Company Has a Foreign PE?

A foreign PE can give the overseas jurisdiction taxing rights over profits attributable to the business carried on through that PE. The UK also has rules dealing with foreign permanent establishments of UK-resident companies. Historically, the UK has allowed a UK-resident company to make an election for profits and losses attributable to foreign PEs to be exempt from UK Corporation Tax, subject to the detailed statutory rules. HMRC's current guidance describes this elective foreign PE exemption.

However, the rules are changing. The UK government announced in May and July 2026 that the foreign permanent establishment exemption will be reformed so that, for most companies, the exemption becomes mandatory for accounting periods beginning on or after 1 January 2027. The reform is intended to prevent foreign PE losses from reducing UK taxable profits while exempting future profits and losses attributable to qualifying foreign PEs under the revised regime. This is an important development for UK companies expanding internationally.

Why the 2027 change matters

Under the existing regime, eligible companies can make an election to exempt foreign PE profits and losses from UK Corporation Tax. From accounting periods beginning on or after 1 January 2027, the government's announced reform is intended to make the exemption apply by default for most companies.

The transitional rules are detailed and include restrictions relating to losses and anti-avoidance provisions. Businesses with foreign branches should therefore review the rules that apply to their accounting periods rather than relying on older explanations of the UK foreign PE regime.

How Are Foreign PE Profits Attributed?

Once a PE exists, the question is not simply whether all of the company's profits become taxable in that country. The relevant question is generally: What profits are attributable to the permanent establishment? International tax rules use principles for attributing profits to the functions, assets and risks associated with the PE. For example, suppose a UK company has:

• £1 million of total worldwide profit;
• a UK operation generating most of its income;
• and a foreign branch carrying out a separate part of the business.

The foreign country would not necessarily tax the entire £1 million merely because the company has a PE there. The profits attributable to the PE need to be determined under the applicable domestic and treaty rules. This can become technically complex for businesses with significant intellectual property, financing arrangements, shared management or integrated international operations.

Permanent Establishment vs Tax Residence

These concepts are often confused, but they answer different questions.

A company can therefore be UK tax resident and have a PE abroad. It can also potentially have a foreign PE without becoming tax resident in that country. Understanding the distinction prevents many international structuring mistakes.

Real-World Examples for UK Companies

Example 1: UK SaaS company with overseas customers

A London-based SaaS company sells subscriptions to customers in Nigeria, Germany and Canada. All employees work in the UK and the company has no overseas premises. Likely issue: international VAT and other local taxes may need consideration, but foreign customers alone do not automatically create PEs.

Example 2: UK company opens an overseas office

The company establishes an office in France where employees develop products and manage local sales. Likely issue: the company should assess whether the office constitutes a French PE and how profits should be attributed to it.

Example 3: UK company uses an overseas sales representative

The representative works exclusively or predominantly for the UK company and routinely performs activities leading to contracts being concluded. Likely issue: dependent-agent PE rules should be examined.

Example 4: UK company creates an overseas subsidiary

The UK parent establishes a separate company in Kenya to provide local services. Likely issue: the subsidiary's own taxation, transfer pricing and potential activities on behalf of the parent need to be considered. Ownership alone does not automatically create a PE.

How UK Companies Can Reduce PE Risk

There is no universal checklist that guarantees a company will not have a PE. The legal test depends on the country and the company's facts. However, companies expanding overseas should consider the following.

Map where people actually work

Do not rely only on employment contracts. Identify where employees and contractors physically perform their functions.

Review overseas offices

Determine whether a location is genuinely temporary or functions as an ongoing place of business.

Analyse sales roles

Identify who negotiates contracts, who approves them and who plays the principal commercial role.

Separate parent and subsidiary functions

If you have an overseas subsidiary, document what it does for itself and what, if anything, it does on behalf of the UK parent.

Track long-term remote arrangements

A founder temporarily working abroad is different from permanently running part of the business from another country.

Review treaties

Domestic law and treaty rules can differ. Always check the agreement between the UK and the relevant country.

Reassess after expansion

Hiring the first overseas employee, signing a long-term office lease or establishing a sales operation can materially change the analysis.

Common Mistakes UK Companies Make

Mistake 1: "We have no overseas office, so there is no PE."

Incorrect. A PE can potentially arise through dependent-agent activities, and home-working arrangements can require analysis.

Mistake 2: "Our overseas contractor is not an employee, so there is no risk."

Employment status is not the only consideration. The contractor's actual activities and relationship with the company matter.

Mistake 3: "Our subsidiary automatically becomes our PE."

Not necessarily. A separate subsidiary is not automatically a PE simply because the parent owns it. The actual activities and relationship need to be assessed.

Mistake 4: "Having foreign customers means we have a PE."

Customer location alone does not establish a PE.

Mistake 5: "PE means the entire company pays tax abroad."

Usually the analysis concerns profits attributable to the PE, not automatically all worldwide profits.

Mistake 6: "The UK rules have not changed."

The UK's foreign PE exemption regime is scheduled for significant reform for most companies from accounting periods beginning on or after 1 January 2027.

A Practical PE Review for International Founders

Before expanding a UK company into another country, ask:

1. Will we have employees there?
2. Will they work from a fixed location?
3. Will we lease or control office space?
4. Will someone negotiate or conclude contracts there?
5. Will the overseas team perform core business functions?
6. Are we creating a branch or a separate subsidiary?
7. Does the UK have a tax treaty with that country?
8. What does that country's domestic PE legislation say?
9. How will profits attributable to the operation be calculated?
10. Could VAT, payroll, employment or other local taxes also apply?

This process is particularly useful before hiring an overseas sales team or allowing a founder to relocate permanently while continuing to operate the UK company from abroad.

Frequently Asked Questions

Does a UK company have a permanent establishment in every country where it has customers?

No. Having customers in another country does not, by itself, create a permanent establishment. The company generally needs to satisfy the applicable fixed-place, dependent-agent or other PE rules.

Can a UK company have a permanent establishment abroad?

Yes. A UK company can potentially have a foreign PE where it conducts business through a qualifying fixed place or through activities that meet the relevant dependent-agent rules.

Can working from home create a permanent establishment?

Potentially. A home office is not automatically a PE, but the permanence, availability of the location, nature of the business and activities carried out there can be relevant.

Can an overseas employee create a PE?

Potentially. An employee's presence alone does not automatically create a PE, but their functions, location, authority and involvement in the company's business can be important.

Does an overseas subsidiary create a PE for a UK company?

Not automatically. A subsidiary is a separate legal entity, and simply controlling it does not by itself make it a PE. However, the subsidiary's activities can produce a different result where it acts as a dependent agent or otherwise carries on the parent's business.

Is a branch the same as a permanent establishment?

No. A branch is a form of business operation, while permanent establishment is a tax concept. A foreign branch can constitute a PE, but the precise outcome depends on applicable law.

Does having a PE abroad mean I pay Corporation Tax twice?

Not necessarily. The country where the PE operates may tax profits attributable to it, while UK rules may provide an exemption or other treatment. The UK's foreign PE regime is also changing for accounting periods beginning on or after 1 January 2027.

Can a UK company avoid a PE by using contractors?

Not automatically. The individual's contractual status is only one part of the analysis. The contractor's actual activities, independence and authority can matter.

Should a UK startup worry about PE before expanding overseas?

Yes, particularly if it plans to hire overseas staff, establish an office, send senior employees abroad for extended periods, create a sales operation or have founders permanently manage the business from another country.

Conclusion

Permanent establishment is one of the most important concepts for a UK company expanding internationally. The basic principle is simple: selling to customers abroad does not automatically create a PE, but establishing a sufficiently substantial business presence can create tax obligations in the country where that presence exists. For most businesses, the two major areas to examine are a fixed place of business and dependent-agent activities.

For founders, the difficult part is that PE is based on facts rather than a single registration. An office, employee, contractor, home-working arrangement, sales representative or overseas subsidiary can each produce a different result depending on what the business is actually doing.

UK companies should also keep an eye on the UK's changing foreign PE rules. The government announced in 2026 that, for most companies, the foreign PE exemption will become mandatory for accounting periods beginning on or after 1 January 2027, with transitional and anti-avoidance rules also applying. For global founders using a UK company as their international business vehicle, the safest approach is to review expansion plans before the overseas operation is established.

IncorpUK can provide the UK company formation and management infrastructure for founders operating internationally, but questions about foreign permanent establishment, profit attribution and cross-border Corporation Tax require an assessment of the specific country and business model.