© 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
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"(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
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"(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
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"(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
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"(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)
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- 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)
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