Corporate residence permanent establishment and profit allocation after an owner manager relocates
Angelo Chirulli FCA ADIT TEP
This article develops the international issues introduced in Moving to Italy while keeping a UK Limited Company.
The original case involved a move from the United Kingdom to Italy. The underlying problem is not Italian. It arises whenever the person who directs or delivers a business begins doing so from another country.
The destination could be within Europe, in the Gulf, in North America or in Asia. The legal details will change, sometimes sharply. The recurring questions do not: where is the company resident, has it created a taxable business presence abroad, and how much profit belongs to each jurisdiction?
For a founder-led company, these questions can arise quickly because the shareholder, director, principal decision-maker and principal fee-earner may be the same person. When that person relocates, several of the company’s most important functions may relocate at the same time even though its incorporation, bank account and client contracts remain in the United Kingdom.
Incorporation is only the first residence rule
A UK-incorporated company is normally UK resident under domestic law. The United Kingdom may also regard a foreign-incorporated company as resident where its central management and control is exercised in the UK. Those rules answer the UK domestic question.
The destination country applies its own law. It may look to effective management, head office, central administration, place of management, ordinary management, the location of senior executives or another connecting factor. The terminology and threshold differ, but many systems are concerned with the place from which the company is actually directed rather than the address printed on its invoices.
The same company can therefore satisfy the domestic residence tests of two countries. That is not a theoretical anomaly. It is the predictable result where one state relies on incorporation and another relies on management.
The treaty outcome is not uniform
A double tax treaty may resolve dual residence, but the mechanism must be checked treaty by treaty. Three broad patterns are now encountered.
| Treaty position | How residence is addressed | Practical consequence |
| Objective tie breaker | Residence is allocated by a factual criterion, commonly the place of effective management | The evidence must support one location. A formal board process may fail if decisions are made elsewhere. |
| Competent authority process | The two tax authorities seek agreement, often considering effective management, incorporation and other relevant factors | There may be no automatic treaty residence until agreement. Access to treaty benefits can be restricted in the interim. |
| No effective treaty solution | There is no treaty, or no applicable mechanism that produces a single residence | Domestic residence may continue in both states, leaving relief to unilateral law, specific treaty articles or a dispute process. |
The Multilateral Instrument has moved many treaties towards a competent-authority solution for dual-resident entities. Where Article 4 of the MLI applies, the authorities endeavour to agree a single treaty residence after considering the place of effective management, place of incorporation and other relevant factors. The result depends on both jurisdictions’ MLI choices and the text of the particular covered treaty. Other treaties continue to use an objective place-of-effective-management test.
This distinction matters. Under an objective tie-breaker, the company and each tax authority apply the treaty test to the facts. Under a competent-authority mechanism, a company may need a formal bilateral determination. In the absence of agreement, treaty relief or benefits may be unavailable except to the extent permitted by the authorities.
A relocation plan that says only the treaty will resolve it has not completed the analysis. It has postponed the difficult question.
Permanent establishment risk survives the residence analysis
Even if the company remains treaty-resident in the United Kingdom, its activity abroad may create a permanent establishment. Residence asks where the company belongs. Permanent establishment asks whether it carries on sufficient business in another jurisdiction for that jurisdiction to tax an attributable share of its profits.
The familiar categories are a fixed place of business and a dependent agent. Some treaties also contain service-PE rules, while construction and natural-resource activities can have their own thresholds. Modern treaties and MLI modifications may treat a person who habitually plays the principal role leading to contracts as sufficient, even where the final signature is applied elsewhere. Older treaties can use narrower language.
Remote working has made the fixed-place question more prominent. The OECD’s 2025 update to the Model Tax Convention includes guidance on when cross-border work from a home office can create a taxable presence. The guidance does not make every home a PE, nor does it rewrite every existing treaty. It reinforces the need to examine permanence, the business use of the location, why the individual works there and the commercial importance of the activities performed.
The risk is highest where the relocated person is the business. A founder who negotiates, designs the service, approves pricing, manages delivery and maintains client relationships from one overseas location presents a different case from an employee who occasionally works abroad for personal convenience and performs a limited internal role.
Different businesses move in different ways
The legal tests are common, but the factual centre of gravity depends on the business model.
| Business model | Functions that may relocate | Likely international tax focus |
| Founder consultancy | Client origination, fee negotiation, technical delivery and strategic decisions | Residence, home-office PE and attribution of most or all entrepreneurial profit |
| Technology company | Product strategy, software development, IP management, sales and fundraising | Residence, PE, DEMPE functions, transfer pricing and equity remuneration |
| Trading business | Procurement, contracting, inventory control and customer fulfilment | PE, customs, import VAT, inventory ownership and supply-chain profit |
| Holding company | Investment selection, financing, governance and disposal decisions | Residence, beneficial ownership, treaty access, substance and withholding taxes |
The analysis must follow the functions that generate value in the particular business. A registered office, outsourced company secretary and local accountant may support compliance. They do not replace the people who decide, sell, develop, finance and control the enterprise.
Profit attribution is not a payroll calculation
Once a foreign PE is identified, the next question is not simply how much local salary or office cost should be deducted. The relevant treaty normally permits the host state to tax the profits attributable to the PE. The analysis treats the PE, within the applicable treaty framework, as if it were a distinct and separate enterprise performing its functions, using its assets and assuming its risks.
That requires a functional and factual analysis. Which people win and manage customers? Who controls commercial and financial risks? Where is intellectual property developed and exploited? What capital and other assets support the activity? Which decisions are genuinely made by the head office and which are made locally?
For an owner-managed services company, the overseas activity may account for much more than the founder’s remuneration and home-office expenses. Conversely, the presence of the founder abroad does not justify moving all profit if substantive employees, assets, risk control and delivery remain in the United Kingdom.
Where an overseas subsidiary is used instead of a branch, the analytical route changes but the underlying discipline remains. Transactions between the UK company and the subsidiary must be priced on an arm’s-length basis under the applicable transfer-pricing rules. A contract that labels the subsidiary a routine service provider will carry little weight if its personnel control the key risks or create the group’s valuable intangibles.
Four operating models are commonly available
An internationally mobile founder normally has four broad structural choices. The appropriate route depends on the intended duration of the move, the existing UK substance, the location of customers and staff, regulatory requirements and the assets that would need to move.
The first is to retain substantive UK management and limit the overseas activity. This can work where the relocation is temporary or the founder’s overseas role is genuinely constrained. It requires actual decision-making capacity in the United Kingdom and careful control of the activities performed abroad.
The second is to keep the UK company and recognise a foreign branch or PE. This may be proportionate where the company remains genuinely UK-resident but carries on material business in one other country. It brings local registration, accounting and profit-attribution obligations without creating a separate legal entity.
The third is to establish a local subsidiary. This can provide a clearer platform for local employees, customers, licences and banking. It also introduces intercompany pricing, funding, withholding-tax, distributable-reserve and possibly controlled-foreign-company questions. A subsidiary does not automatically prevent the parent from having its own PE in the same country if the parent’s business is carried on through the subsidiary’s premises or personnel.
The fourth is to migrate the company’s tax residence or transfer the business into a foreign company. This may align residence with long-term commercial reality, but it can trigger exit taxes, valuations, contract transfers, financing changes and corporate-law work. The destination country’s entry basis may not match the value on which the United Kingdom imposes an exit charge, creating timing or basis mismatches.
Exit tax and entry basis must be modelled together
A change of treaty residence can cause a UK-incorporated company to become treaty non-resident under section 18 of the Corporation Tax Act 2009. Its English legal identity and Companies House obligations continue, but its UK corporation tax status may change.
HMRC’s migration guidance identifies possible exit charges for chargeable assets, loan relationships, derivatives, intangible fixed assets and trading stock. In a modern services or technology company, the important value may sit in goodwill, contractual rights, software, data, know-how or customer relationships that do not appear at their current value in the accounts.
The destination jurisdiction may provide a market-value step-up, a historic-cost basis, a limited step-up or no corresponding basis recognition. The UK exit computation and the foreign entry computation should therefore be modelled as one transaction. Reviewing them separately can produce an unexpected future gain, a trapped loss or economic double taxation.
Personal and operational taxes do not wait for the residence answer
The founder’s work abroad can trigger payroll withholding, employer registration and social-security obligations before the corporate-residence analysis has been resolved. Immigration and employment law may restrict the work that can legally be carried out. Directors’ fees, employment income, bonuses, share options and dividends can follow different treaty articles and domestic rules.
Indirect taxes require their own analysis. VAT or GST registration, fixed-establishment status, place-of-supply rules, import taxes and customs obligations do not simply follow the corporate income tax conclusion. A company may have no income-tax PE but still have local payroll or indirect-tax obligations, or vice versa.
Banking, insurance, data protection, licensing and local company-law requirements can also determine which tax structure is commercially usable. A theoretically efficient model that cannot employ staff, contract with customers or operate a bank account is not an operating model.
Digital records reveal where management occurred
International management is now unusually easy to reconstruct. Email chains show when terms were agreed. Electronic signatures record location and time. Banking systems identify who approved payments. Calendars, messaging platforms, document histories, travel data and access logs can show where decisions were prepared and made.
Board minutes remain important, but they must record a process that actually occurred. A quarterly meeting in the United Kingdom will not carry the analysis if the overseas founder has already negotiated the contract, fixed the price and committed the company. Equally, remote participation from abroad does not automatically transfer residence if an informed and independent board in the United Kingdom makes the decision after genuine consideration.
Governance should be designed around authority and conduct. It should not be treated as a collection of documents intended to produce a predetermined residence label.
The historic period cannot be solved prospectively
A new subsidiary, revised board protocol or branch registration changes the future. It does not remove exposure that arose between the founder’s move and the restructuring.
The historic review should establish a defensible chronology, apply the domestic rules of each jurisdiction, identify the relevant treaty version and MLI modifications, test residence and PE, attribute profits and reconcile the resulting tax computations. Payroll, social security, VAT or GST, withholding tax and foreign-asset reporting should be reviewed in parallel where relevant.
If two jurisdictions tax the same profits inconsistently, foreign tax credits may provide relief. Where the taxation is not in accordance with the treaty, a mutual agreement procedure may be required. Neither mechanism cures incomplete facts or inconsistent filings. The residence analysis, transfer-pricing position, accounts and disclosure narrative must describe the same business.
The decision should be made before the person moves
A founder does not need to close a UK company merely because he or she relocates. Nor is a foreign subsidiary automatically required. The right answer depends on what will remain commercially in the United Kingdom and what will move with the founder.
The useful pre-move question is therefore not whether the company can be kept. It is which people will make the strategic and operational decisions, where the revenue-producing work will be performed, which assets and risks will sit in each country, and how the resulting structure will be documented and reported.
Once those matters are decided, the legal entities, governance, contracts, remuneration and compliance framework can be built around the intended business. If they are left unanswered, the structure will instead be determined retrospectively by emails, bank approvals, customer negotiations and the actions of the founder after the move.
The company may remain incorporated in the United Kingdom. Its tax footprint, however, will follow where the business is actually directed and carried on.
Vectigalis AC Tax Limited advises internationally mobile founders, owner-managed businesses and corporate groups on tax residence, permanent establishments, transfer pricing, business migration and cross-border operating structures.
For a confidential preliminary discussion: angelo@vectigalistax.co.uk
This article is for general information only and does not constitute tax, legal or accounting advice. The analysis depends on the facts, jurisdictions, applicable treaty, MLI positions and relevant tax periods.