Nobody decides to create a permanent establishment. It is a status that arrives as a consequence of ordinary commercial behaviour, usually behaviour that looked sensible and cheap at the time. A Dutch company hires a salesperson who lives in Manchester because that is where the customers are. A Dutch company lets a director work from his flat in London three days a week because the alternative is losing him. Neither step is put to the board as a structuring decision, and neither generates an invoice from an adviser.
Both can produce a British filing obligation, a British corporation tax charge and, in the worst version, an assessment covering years in which no return was made. The two routes are different in law and in the evidence they turn on. What they share is that the trigger is behaviour rather than intention, and that the domestic test changed for chargeable periods beginning on or after 1 January 2026.
What the charge actually reaches
Section 5 of the Corporation Tax Act 2009 sets the territorial scope. A non-United Kingdom resident company is within the charge to corporation tax on income where it carries on a trade in the United Kingdom through a permanent establishment there, and is taxed on the profits attributable to that establishment. Separate limbs bring in trading in or developing United Kingdom land, a United Kingdom property business and other United Kingdom property income, which follow their own rules.
Section 19 defines what is attributed. The chargeable profits are trading income arising directly or indirectly through or from the establishment, and income from property or rights used by, or held by or for, the establishment. Profits of a trade of dealing in or developing United Kingdom land, of a United Kingdom property business, profits consisting of other United Kingdom property income and profits from loan relationships or derivative contracts entered into for those purposes are excluded from this head, because they are charged elsewhere. The attribution itself is governed by sections 20 to 24, which apply the separate enterprise principle.
The rates are the ordinary ones. The main rate is 25 per cent and the small profits rate is 19 per cent. But the small profits rate is given only to a company that is UK resident in the accounting period, and so is marginal relief. A Dutch company is not UK resident, so the statute on its own would leave its establishment on the main rate. The statute is not on its own. The second paragraph of Article 24 of the 2008 convention requires that a permanent establishment be taxed no less favourably than enterprises of that state carrying on the same activities, and that article takes effect in the United Kingdom under section 6 of the Taxation (International and Other Provisions) Act 2010 despite anything in any enactment. HM Revenue and Customs accepts the consequence: the permanent establishment of the foreign enterprise will, if appropriate, be entitled to the small profits rate or marginal relief. The relief is narrower than that sounds, because the same guidance tests the limits not on the profits of the establishment but on the income and profits of the company as a whole, including other branches whether in the United Kingdom or elsewhere, and counts associated companies wherever resident, the statutory test there being control rather than residence. The lower limit is £50,000 and the upper limit £250,000, each divided by one plus the number of associated companies, and both are proportionately reduced for an accounting period of less than twelve months, which a first British operation almost always has. A Dutch group of any size is therefore back on the main rate, but by its worldwide figures rather than by its residence, and for a small standalone company the difference is real money. On the modest profit usually attributable to a British sales function the tax is small in absolute terms either way. The problem is rarely the tax. It is the discovery, several years in, that returns were due and were not filed, and that the group’s transfer pricing files say nothing about the establishment because nobody knew it existed.
The domestic test moved on 1 January 2026
The definition of permanent establishment for domestic purposes sits in Chapter 2 of Part 24 of the Corporation Tax Act 2010. As originally enacted in 2010, section 1141 gave two limbs and, on its own words, only two. A company had a permanent establishment where it had a fixed place of business through which its business was wholly or partly carried on, or where an agent acting on its behalf had and habitually exercised there authority to do business on behalf of the company.
Schedule 7 of the Finance Act 2026 substitutes a new second limb, with effect for chargeable periods beginning on or after 1 January 2026. The fixed place of business limb survives untouched, with its familiar list, which the section introduces without prejudice to the generality of the expression: a place of management, a branch, an office, a factory, a workshop, an installation or structure for the exploration of natural resources, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, and a building site or construction or installation project. The agency limb is rewritten in the language of the current OECD Model, and a new section 1140A ties the Chapter to Article 5 of the Model approved by the OECD Council on 18 November 2025 and to the Commentary on that Article.
Read the two versions side by side and the direction is clear. The old wording required an agent who had and exercised authority. The new wording catches a person acting on behalf of the company who habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the company, where those contracts are for the transfer of the ownership of, or the granting of the right to use, property the company owns or has the right to use, or for the provision of services by the company. Authority has been replaced by function. An agent who never signs anything, and who has no authority to sign anything, is now inside the test if the contract that follows is signed at home without being reopened.
From authority to principal role
That change is the single most important development for Dutch companies selling into the United Kingdom, because it converts a common and previously safe arrangement into a taxable presence.
The arrangement in question is familiar. A British based salesperson is engaged by the Dutch company, or by a British service company within the group. He identifies customers, negotiates price and terms, and agrees everything commercially. He then sends the file to Amsterdam, where a director signs the contract. Under the old test this was widely assumed to be comfortable, on the footing that the salesperson had no authority to conclude anything and the contract was made in the Netherlands. The assumption was always weaker than it looked, and the treaty section below explains why.
Under the new test the question is whether the contracts are routinely concluded without material modification. If the Dutch signature is a formality applied to terms already settled in the United Kingdom, the salesperson has habitually played the principal role leading to conclusion, and the domestic test is met. HM Revenue and Customs reads the principal role as leading the assignment so that one’s own actions result directly in the conclusion of a contract, or carrying out the majority of the activities that do, repeatedly rather than in isolated cases. The evidence that decides it is not the signature page. It is the negotiation record, the pricing authority in the sales handbook, and the number of occasions on which head office changed something material before signing.
The independent agent, and the closely related limitation
Section 1142 preserves the exception for an agent of independent status acting in the ordinary course of the agent’s business. Historically this was the answer for a group that engaged a British distributor or agency company rather than an employee, and being a subsidiary did not by itself make an agent dependent.
Schedule 7 inserts a limitation that closes much of that route. A person is not an agent of independent status where the person is closely related to the company and acts exclusively or almost exclusively on behalf of that company, or on behalf of that company and other companies to which the person is closely related. Close relation is a question of control on all the relevant facts and circumstances, and it is met in any event where the fifty per cent investment condition applies. A British subsidiary acting as agent for its Dutch parent and for nobody else is therefore not independent for the purposes of the domestic test, however carefully the agency agreement is drafted.
Schedule 7 also reworks the investment manager rules. It omits the twenty per cent rule in sections 1147 to 1149, repeals section 1152, which disregarded certain chargeable profits attributable to an establishment represented by an investment manager, and substitutes a new section 1150 under which an investment transaction is any transaction other than one whose subject matter is United Kingdom land or a commodity or other physical asset, subject to carve outs for a commodity derivative that does not result in physical delivery and for a derivative caught only because it tracks a qualifying index. The independent investment manager conditions in section 1146 now describe circumstances in which independent status is shown rather than the only way of showing it. Dutch fund and asset management structures using a British manager should treat this as a live change rather than a technical one, because the exemption they were built around no longer sits where it did.
The home office
The second route is quieter and generates no contracts at all. A fixed place of business does not have to be an office taken on a lease. HM Revenue and Customs puts the test as space at the disposal of the enterprise, exclusive or shared, owned or rented. A room in a residence used regularly for the company's business can qualify, and the question is whether the place is at the company’s disposal and whether the business is carried on through it.
Section 1143 provides the exception. There is no permanent establishment where, in relation to the business of the company as a whole, the activities carried on are only of a preparatory or auxiliary character and are not part of a fragmented business operation. Using facilities for storage, display or delivery of goods, maintaining a stock for those purposes or for processing by another person, purchasing goods and collecting information are the statutory examples, and that list too is expressed without prejudice to the generality of the term. The anti-fragmentation wording is the part that has teeth. Activities are fragmented where the company or a person closely related to it carries them on, at the same place or at different places in the same territory, where they constitute complementary functions that are part of a cohesive business operation, and where either the combined activity is not only preparatory or auxiliary or one of those functions already gives the company or the related person a permanent establishment there.
That wording is aimed at the group that spreads a single British function across several flats and several companies. A Dutch company with one director working from London on strategy, one contractor in Leeds handling customer relationships and a warehouse arrangement in the Midlands cannot analyse each in isolation. The test looks at the combination.
The treaty is narrower than domestic law
Domestic law is only half the answer. A Dutch company is protected by Article 5 of the 2008 convention, and Article 5 has not moved with it.
The synthesised text published by HM Revenue and Customs shows Article 5 in a form that predates the current Model. Paragraph 5 deems a permanent establishment where a person other than an agent of independent status acts on behalf of an enterprise and has, and habitually exercises, an authority to conclude contracts on its behalf, unless that person’s activities are limited to those in paragraph 4. That is the old authority test, not the principal role test. The Multilateral Instrument touches Article 5 in two places only. Paragraph 4 of Article 13 of the Instrument disapplies the preparatory and auxiliary exception in paragraph 4 where the same enterprise or a closely related enterprise carries on business activities at that place or at another place in the same state, and either the other place is already a permanent establishment or the overall activity resulting from the combination is not of a preparatory or auxiliary character, provided those activities are complementary functions forming part of a cohesive business operation. Paragraph 1 of Article 15 supplies the definition of a person closely related to an enterprise. Paragraph 5 is shown unmodified.
The practical consequence is a gap, and it runs in the taxpayer’s favour, but it is much narrower than the two texts suggest. Double taxation arrangements have effect despite anything in any enactment, so a company that is inside the domestic test and genuinely outside Article 5 is not charged on its business profits. The difficulty is deciding who is genuinely outside it. HM Revenue and Customs reads the old authority test as reaching authority in fact, so that a person authorised to negotiate all the elements and details of a contract in a way binding on the enterprise exercises that authority here even if the contract is signed by another person elsewhere. The arrangement described above does not escape on that reading. Where the British salesperson settles every commercial term and the Dutch signature is a formality, the published position is that authority is exercised in the United Kingdom, so paragraph 5 of the treaty applies alongside the domestic test rather than saving the company from it. The convention makes that sharper still by speaking of authority to conclude contracts on behalf of the enterprise rather than in its name. What is left of the gap is the person who truly cannot bind, most obviously a dependent commission agent who contracts in his own name on terms that do not bind the principal, and the company whose head office genuinely reopens terms. Both are positions to be taken deliberately and supported, and a group that has never considered the point is not in a position to do either.
Two other features of Article 5 are worth noting. A building site or construction or installation project is a permanent establishment only if it lasts more than twelve months, which is longer than many groups assume. And paragraph 7 confirms that control between related companies does not of itself constitute either company a permanent establishment of the other, which disposes of the argument that a British subsidiary is a branch of its Dutch parent merely because it is owned by it.
What actually protects a Dutch company
The instinct in most groups is to solve this with a document. An agency agreement is signed reciting that the agent has no authority to bind, or a home working policy records that the flat is not at the company’s disposal. Neither survives contact with the evidence if the evidence says otherwise.
What protects a Dutch company is the shape of the activity. Where a British person negotiates, the contracts should genuinely be reviewed and sometimes changed before signature, and there should be a record of the occasions on which that happened. Where a British subsidiary provides services, it should be paid on an arm's length basis for what it does and should not be the sole customer facing party. Where a director works from London, what he does there should be capable of description as preparatory or auxiliary without straining, and it should not be one element of a British operation spread across several places.
The change of test on 1 January 2026 is not a reason to unwind British arrangements. It is a reason to establish which of the two routes a given arrangement is closest to, and to know before an inspector asks whether the treaty is doing the work or the group is simply hoping the question is never put.
This article is informational and does not constitute tax, legal or investment advice. Each engagement is subject to scope and applicable regulation.