Not in the UK? No tax? Think again.

It is a common assumption that if a business is based overseas, UK tax simply does not apply. After all, if you are not resident here, why would the UK have any claim over your profits?

In reality, the position is far less straightforward. One of the most frequently overlooked areas is the concept of a Permanent Establishment (PE) – a rule that can bring overseas businesses within the scope of UK taxation, even where they have no formal UK presence.

When overseas businesses become taxable in the UK

The concept of a permanent establishment is largely driven by Double Taxation Treaties (DTTs), although domestic law also plays a role. Broadly speaking, a PE is defined as:

‘A fixed place of business through which the business of an enterprise is wholly or partly carried on.’

This definition sounds straightforward but encompasses a wide spectrum such as:

• Offices or branches.
• Factories or workshops.
• Retail outlets or other fixed trading locations.

At a high level, the principle is simple. If a non-UK resident company carries on part of its business through a presence in the UK, it may create a PE here. Where that happens, the UK can tax the profits attributable to that UK activity.

This applies regardless of where the company itself is tax resident. A business headquartered overseas can still find itself subject to UK Corporation Tax if it has established a sufficient footprint in the UK.

The reverse is also true. UK companies operating abroad may trigger tax liabilities in other jurisdictions under the same principles.

Locker room talk – when a German locker became the talk of the German Supreme Court

In practice, the threshold for creating a permanent establishment can be much lower than many expect. It does not necessarily require a formal office, employees on payroll, or even ownership of premises.

A useful illustration comes from a decision of the German Federal Fiscal Court (Bundesfinanzhof).

The case involved a UK-based contractor working in the aviation sector. He was engaged as a subcontractor servicing aircrafts at a German airport. He was not German resident and remained treaty resident in the UK under the UK-Germany double tax treaty.

On the face of it, this looked like a typical cross-border engagement with no obvious German tax exposure. However, one detail proved decisive: the contractor was provided with a locker at the airport, used to store his tools, and labelled with his company’s name.

The German court held that this locker constituted a fixed place of business. On that basis, it amounted to a permanent establishment, and the profits relating to the German work were taxable in Germany.

It is a striking example. A locker – something most would view as incidental – was sufficient to create a taxable presence.

Why this matters

The German case represents an extreme end of the spectrum and not all jurisdictions would necessarily reach the same conclusion on similar facts. That said, it highlights an important point: the PE threshold is often much lower and much more fact-sensitive, than businesses assume.

For internationally mobile consultants, contractors, and companies with employees working abroad, this creates a real area of risk. Regular use of client premises, access to dedicated space, or even repeated activity in a single location can, in some cases, tip the balance.

The consequences are not trivial. Once a permanent establishment is established, the business may need to:

• Register for tax locally.
• Attribute profits to the PE.
• File local tax returns and comply with domestic rules.

A point for planning, not just compliance

Permanent establishment risk is not just a compliance issue – it is a planning consideration.

Each country has its own interpretation of the rules, influenced by domestic law, treaty wording, and local case law. What is acceptable in one jurisdiction may create a taxable presence in another.

For businesses operating internationally, particularly those deploying staff across borders or working on-site with clients, it is important to assess PE exposure on a country-by-country basis. This should form part of the upfront planning for any cross-border engagement, rather than being addressed after the fact.

Final thoughts

The idea that ‘no presence means no tax’ is increasingly outdated. In a world of mobile workforces and cross-border activity, tax authorities are looking closely at where value is created and permanent establishment rules are one of the key tools they use to do it.

Sometimes, that ‘presence’ is obvious. Sometimes, as the German case shows, it can be as small as a locker.

If you require assistance or have any questions about PE, please do get in touch with our excellent team of advisers.

Last updated: 27.04.2026