© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Article 7: Business profits
ARTICLE 7: BUSINESS PROFITS
Only taxable in State of residence, unless permanent establishment in other State
"(1) Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State." (Model Article 7)
Identifying profit attributable to permanent establishment
"(2) For the purposes of this Article and Article [23 A] [23 B], the profits that are attributable in each Contracting State to the permanent establishment referred to in paragraph 1 are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise." (Model Article 7)
Corresponding adjustments in other State
"(3) Where, in accordance with paragraph 2, a Contracting State adjusts the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall, to the extent necessary to eliminate double taxation on these profits, make an appropriate adjustment to the amount of the tax charged on those profits. In determining such adjustment, the competent authorities of the Contracting States shall if necessary consult each other." (Model Article 7)
No effect on income dealt with in other Articles
"(4) Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article." (Model Article 7)
- Business profits article does not exclude UK's right to tax deemed income based on that profit
"[78]...The transfer of assets abroad provisions deem the profits of ABP to be the income of the Appellants and then charge the deemed income of the Appellants to tax. However, those provisions charge the income to tax as income of a miscellaneous character and not as trading profits arising to the Appellants. The Appellants are not relieved against that tax under Article 7 of the Treaty because the UK is not taxing the profits of ABP but is taxing something different, namely, the deemed income of the Appellants. It is nothing to the point that the deemed income of the Appellants is computed by reference to the profits of ABP. It remains the case that the deemed income of the Appellants is not the profits of ABP; and it remains the case that the trading profits of ABP are taxed by Mauritius and not by the UK. The Mauritian tax authorities would have no more cause to complain that the Treaty is not being respected in this case than they would have if the profits of ABP were distributed to UK residents and taxed in their hands. In either case, the UK would be simply seeking to tax its own residents. Applying Bricom in this way, we give effect to the policy of the Treaty as described earlier and the Treaty is not used, impermissibly, to obtain double relief or to avoid tax. We would, moreover, observe that, if Mr Way were right in his submissions about the meaning of the Treaty, it would seem to follow that the UK would, in seeking to tax its residents under its anti-avoidance provisions (which Mr Way accepts that the UK undoubtedly does on and after 12 March 2008), be in breach of the Treaty. That is, in our view, a somewhat improbable conclusion." (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
RELATIONSHIP WITH OTHER ARTICLES
- Deemed employment under domestic law: apply Article 15 accordingly
"[8.5] In some cases, services rendered by an individual to an enterprise may be considered to be employment services for purposes of domestic tax law even though these services are provided under a formal contract for services between, on the one hand, the enterprise that acquires the services, and, on the other hand, either the individual himself or another enterprise by which the individual is formally employed or with which the individual has concluded another formal contract for services.
[8.6] In such cases, the relevant domestic law may ignore the way in which the services are characterised in the formal contracts. It may prefer to focus primarily on the nature of the services rendered by the individual and their integration into the business carried on by the enterprise that acquires the services to conclude that there is an employment relationship between the individual and that enterprise.
[8.7] Since the concept of employment to which Article 15 refers is to be determined according to the domestic law of the State that applies the Convention (subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise), it follows that a State which considers such services to be employment services will apply Article 15 accordingly. It will, therefore, logically conclude that the enterprise to which the services are rendered is in an employment relationship with the individual so as to constitute his employer for purposes of subparagraphs 2 b) and c). That conclusion is consistent with the object and purpose of paragraph 2 of Article 15 since, in that case, the employment services may be said to be rendered to a resident of the State where the services are performed." (OECD Commentary, Article 15)
See further F13. Employment (Article 15) on the employment/self-employment distinction.
PERMANENT ESTABLISHMENT
- Subsidiary not generally a PE
"A subsidiary company in the United Kingdom is not generally a permanent establishment of its overseas parent company. The subsidiary is not in law part of its parent company but is a distinct legal person. A permanent establishment is simply a part of an overseas company which is transplanted in the United Kingdom. Customers and employees all contract with the overseas company rather than with a separate legal person in the United Kingdom. Company letter-paper often indicates how the United Kingdom operations are organised; the registered number and place of registration of a United Kingdom company are often given at the head or foot of the paper." (DT 1923)
- Merely holding rights to the product of another's economic activity does not give the holder a PE
"[37] ...It is, however, common ground that Sulpetro's involvement with the Buchan Field did not give it a permanent establishment in the UK and so did not bring it within Article 7, despite the extended meaning given to the term "permanent establishment" by Articles 5 and 27A. Mr Prosser KC, appearing on behalf of HMRC, accepted that merely holding the rights of the kind with which this appeal is concerned does not amount to carrying on business here for the purposes of Article 7." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)
Additional deemed permanent establishments
- Oil extraction
"[36] Article 27A was inserted into the UK/Canada Convention by a Protocol agreed between Canada and the UK in April 1980: see the Double Taxation Relief (Taxes on Income) (Canada) (No 2) Order 1980 (SI 1980/1528). This makes further provision deeming involvement in oil extraction to amount to a permanent establishment. It provides that, for example, a Canadian resident who carries on activities in the UK "in connection with the exploration or exploitation of the sea bed and sub-soil and their natural resources" situated in the UK shall be deemed to carry on a business in the UK through a permanent establishment in the UK provided they do so for more than 30 days in a year. This Article does not come from the Model Tax Convention so was included by the Contracting States in addition to Article 5." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)