MTT41025 - Particular entities and adjustments: Permanent establishments: Attribution of profits to permanent establishment
Source: gov.uk (2025-08-05)


The underlying profits of a PE are taken from separate financial accounts of the PE or the underlying profits accounts of its main entity (see MTT41020 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt41020)). Where the underlying profits of a permanent establishment (PE) are taken from the underlying profits accounts of its main entity, adjustments are required to ensure the proper attribution of profits between the PE and its main entity. These adjustments are set out in section 159 of Finance (No.2) Act 2023.

There are four criteria under which a PE might be recognised for MTT purposes (see MTT10130 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt10130)). Profits will be attributed to a PE from its main entity in accordance with the criteria under which that PE is recognised.

For PEs recognised under section 232(2)(d) of the Act, the adjustments are still required even where the underlying profits are taken from separate financial accounts of the PE. This is set out in section 135(2)-(3) of the Act.

Note that amounts of income and expense are to be attributed under these rules regardless of whether the income is subject to tax or the expense is tax-deductible.

Permanent establishment recognised under section 232(2)(a)

Where a PE is taxed by a territory in accordance with a tax treaty, its underlying profits are to be adjusted so that they only reflect amounts of income and expense that are attributable to it in accordance with that treaty, and do not reflect amounts attributable to the main entity in accordance with that treaty.

Permanent establishment recognised under 232(2)(b)

Where a PE is taxed by a territory in a similar way to residents of that territory, in the absence of a tax treaty, its underlying profits are to be adjusted so that they only reflect amounts of income and expense attributable to it in accordance with the law of the territory in which it is located, and do not reflect amounts attributable to the main entity in accordance with the laws of that territory.

Permanent establishment recognised under section 232(2)(c)

Where a PE is located in a territory with no corporate income tax system, but where that territory would have taxing rights over that PE under the OECD Model Tax Convention, its underlying profits are to be adjusted so that they only reflect amounts of income and expense attributable to it in accordance with Article 7 of the OECD Model Tax Convention, and do not reflect amounts attributable to the main entity in accordance with that article.

Underlying profits of permanent establishment recognised under section 232(2)(d)

Where a PE does not meet any of the conditions of section 232(2)(a), (b) or (c), and the PE income is exempted by the territory of the main entity, its underlying profits must be determined only by reference to its relevant income and relevant expenses.

The ‘relevant income’ is the income of the permanent establishment that:
- is attributable to operations outside of the territory where the main entity is located, and
- is exempted from tax in the territory where the main entity is located.
The ‘relevant expenses’ are the expenses of the permanent establishment that:
- are attributable to its operations outside of the territory where the main entity is located, and
- are not deducted for tax purposes in the territory of the main entity.
Income and expenses that are not relevant must be removed from the figures in the accounts to arrive at the underlying profits of this category of PE.

Note that for this type of PE, these adjustments are required even where the underlying profits are taken from the separate financial statements of the PE.