INSIGHT

Permanent establishment risk in the UK 

Sean O’Sullivan, Adam Dunnett • November 20, 2025

---

How post-pandemic working patterns and heightened tax authority focus are creating new challenges for international businesses 

The landscape of permanent establishment (PE) risk has fundamentally shifted in recent years. What once seemed like straightforward rules for international businesses have become increasingly complex, with tax authorities worldwide sharpening their focus on this area as a key revenue source. 

For companies expanding into the UK market, understanding and managing PE risk isn’t just about compliance – it’s about protecting your business from potentially severe financial and reputational consequences that can derail your growth plans. 

Why permanent establishment has become a hot topic 

Tax authorities globally are under increasing pressure to maximize revenue collection, particularly following the financial strains of the pandemic period. PE rules offer an attractive target because they can generate substantial backdated tax assessments, penalties, and interest charges from businesses that may have unknowingly triggered these obligations. 

The UK’s HM Revenue and Customs (HMRC) has joined this global trend, taking a more aggressive approach to identifying and pursuing PE cases. This shift means that activities which might have flown under the radar a decade ago are now likely to attract scrutiny. 

Understanding the fundamentals 

Permanent establishment occurs when a foreign company has sufficient presence or activity in the UK to create a taxable presence, even without formally establishing a UK entity. If HMRC determines that a PE exists, your overseas company becomes subject to UK corporation tax on the profits attributable to that establishment. 

The challenge lies in the fact that PE determination is largely based on facts and circumstances, with significant gray areas that require careful judgment. What’s considered “sufficient presence” can vary dramatically based on your specific situation and the current interpretation of tax authorities. 

Key risk factors in today’s environment 

Fixed place of business: the office trap 

One of the most common PE triggers is maintaining a fixed place of business in the UK. This doesn’t just mean traditional office space – even renting a desk at a co-working facility or using serviced offices can create PE risk. 

Many companies fall into this trap when they decide to “test the waters” in the UK market. The logic seems sound: rent a small office space, hire a local salesperson, and see how the market responds. However, the moment you sign that lease agreement, you’ve potentially created a permanent establishment. 

The dependent agent problem 

Having employees or contractors who can bind your company through contract negotiations creates significant PE risk. This is particularly problematic for technology companies or service providers who send senior staff to the UK to help close deals – authorities are interested in anyone who is fundamental to the overall sales negotiation and securing process, looking beyond potential ‘rubber stamping’ exercises of treating someone solely responsible just because they act as end signatory on the agreement 

The risk isn’t limited to obvious sales roles. Even technical consultants or project managers who have authority to make commitments on behalf of the parent company can trigger PE status. The key factor is whether they can create legal obligations for your overseas entity. 

Senior personnel and decision-making authority 

The presence of founders, directors, or other key decision-makers in the UK substantially increases PE risk. Tax authorities view this as evidence that important management decisions are being made within the UK, which supports an argument for taxable presence. 

This has become particularly relevant as many international companies have embraced hybrid working models post-pandemic. A US company founder who splits time between New York and London, working remotely from various locations, may inadvertently create PE issues for their business. 

The post-pandemic permanent establishment landscape 

The shift to remote working has created entirely new PE risk scenarios that many businesses haven’t fully considered. Tax authorities have successfully argued in several cases that employees working from home can create PE risk when their home effectively becomes a place of business for the overseas employer. 

Consider this scenario: a German software company employs a developer who moves to the UK and continues working remotely. If this employee’s home is used for client calls, contract negotiations, or other business activities that generate revenue for the German company, it could potentially create UK PE risk. 

These situations were virtually unheard of before 2020, but they’re now a significant consideration for any business with internationally mobile employees. 

The financial reality of getting it wrong 

The consequences of unrecognized PE can be severe. HMRC doesn’t just assess current year taxes – they can go back several years, creating substantial backdated liabilities. More concerning is how they calculate the taxable profits. 

Tax authorities tend to take an aggressive stance on profit attribution. Rather than applying a simple formula based on the UK operation’s size relative to the global business, they often argue for higher profit allocations based on the strategic importance of UK activities. 

For example, if your UK-based employee is a director or key decision-maker, HMRC might argue that they represent a disproportionately valuable part of your business, warranting a much larger share of global profits being allocated to the UK for tax purposes. 

Beyond the immediate tax implications, there are penalties, interest charges, and the reputational risks associated with tax authority investigations. For businesses with investors or those considering future fundraising, unresolved tax issues can create significant complications. 

Taking a pragmatic approach to risk management 

The goal isn’t to eliminate all PE risk – that’s often neither practical nor commercially sensible. Instead, successful international businesses take a risk-aware approach that balances commercial objectives with tax exposure. 

Regular risk monitoring 

PE risk isn’t static – it evolves as your business activities change. A company that starts with low-risk market research activities can quickly move into higher risk territory as they hire staff, rent office space, or grant local personnel more authority. 

Regular PE risk reviews should be part of your international expansion planning, particularly during periods of rapid growth or operational changes. 

Strategic considerations for international expansion 

Timing your entity formation 

Understanding PE risk helps you make better decisions about when to establish a formal UK entity. Rather than waiting until you’re forced to by tax obligations, you can proactively choose the optimal timing based on your business needs and risk tolerance. 

Some companies choose to establish UK entities early in their expansion to eliminate PE concerns entirely. Others prefer to operate under alternative models for initial market testing, then formalize their presence once they’ve proven market viability. 

Structuring for compliance 

When PE risk becomes material, there are several strategies for managing it: 

• Establishing formal UK entities to house local activities 
• Implementing clear protocols around contract signing authority 
• Creating documentation trails that support your chosen structure 
• Regular training for staff on activities that might increase PE risk 

The compliance imperative 

Given the increased focus from tax authorities, businesses can no longer afford to ignore PE risk or assume they’ll fly under the radar. The combination of enhanced data sharing between tax authorities, improved tracking systems, and pressure to increase revenue collection means that PE issues are more likely to be identified and pursued. 

This isn’t about fear-mongering – it’s about recognizing that the risk-reward calculation has fundamentally changed. What might have been acceptable risk five years ago may no longer be prudent given the current enforcement environment. 

For growing businesses, particularly those with investors or governance requirements, getting ahead of PE issues demonstrates proper tax governance and risk management. 

Moving forward strategically 

The key to managing PE risk successfully lies in understanding it as part of your broader international expansion strategy, not just a compliance issue to be managed separately. When properly planned, your approach to PE risk can actually support your commercial objectives while maintaining full compliance. 

This requires working with advisors who understand both the technical tax rules and the practical realities of international business expansion. They should be able to provide pragmatic guidance that helps you achieve your commercial goals while managing tax risks appropriately. 

Planning your UK market entry? Contact BPM’s international tax team to assess your permanent establishment risk profile and develop strategies that support your expansion objectives while maintaining full compliance with UK tax requirements.