Setting up a UK subsidiary or registering a UK permanent establishment

Welcome to our comprehensive Doing Business in the UK article series, designed specifically for international businesses and investors looking to establish or expand their operations in the United Kingdom. This series aims to provide you with essential insights and practical guidance on navigating the UK business landscape.

Throughout this series, we will cover the initial setup of your business, understanding business taxes, and the process of registering a UK business. We will also delve into workforce setup, payroll, employment costs and international hiring considerations for businesses employing people in the UK. Finally, we also explore accountancy processes, compliance and management reporting requirements, and discuss the complexities of importing goods and services into the UK.

Do your business activities create a taxable presence, or permanent establishment (PE), in the UK?

To answer this question, it's key to understand that there are two ways in which a UK PE can be created - a foreign entity must either have:

A: A fixed place of business through which the business of the foreign entity is carried on; or
B: A dependent agent which possesses, and habitually exercises in the UK, authority to do business on behalf of the overseas company

Determining when a PE is created in the UK can be complex and depends on specific circumstances. We recommend seeking professional advice to ensure you do not face unexpected tax liabilities.

Case Study

A German manufacturer has no office or staff in the UK but sells to UK business customers via an independent third party. This would not usually give rise to a permanent establishment; on the assumption the third party is truly independent.

However, if the group subsequently decides to employ a sales director in the UK who has the authority to conclude contracts, this could create a permanent establishment.

The UK has anti-avoidance rules to prevent foreign businesses from artificially avoiding creating a UK PE. There are also specific rules for land transactions that can create a UK taxable presence, even if an overseas company has no UK PE. An overseas company without a UK PE might also still need to register for UK VAT.

Some groups choose to establish a UK presence immediately either through a UK PE or through incorporation of a new UK subsidiary company. This can be because they have long-term plans to trade in the UK, need to meet regulatory requirements or because their customers or UK Government contracts require it.

UK Establishment branch vs subsidiary

There are numerous options available, and advice should always be sought. The majority of overseas groups either operate through a registered UK Establishment, referred to as a Branch, or incorporate a company limited by shares, a UK subsidiary.

Branch - a UK establishment of an overseas company
An overseas company planning to expand into the UK may choose to set up a branch through which to carry on business. The Companies Act 2006 and the Overseas Companies Regulation 2009 are the main legislations governing UK Establishments of overseas companies.

Under the regulations, a foreign company must, within one month of opening a branch/commencing trade, register prescribed particulars of the foreign company and the branch with the Registrar of Companies, Companies House.
Subsidiary - a separate legal entity

Branch versus subsidiary - what to consider:

	Branch (UK establishment of an overseas company)	Subsidiary (Company limited by shares)
Legal liability	A branch is an extension of the overseas parent company. The overseas entity (head office) will be directly responsible for liabilities incurred by its UK branch and will need to execute all contracts made on behalf of the branch.	A subsidiary is a separate legal entity to the overseas parent company and provides limitation of legal liability. The corporate veil can only be pierced when there is impropriety.
Financial statements	An overseas entity that sets up a branch in the UK is required to file accounting documents translated into English and certified of that overseas entity, not the branch accounts, with Companies House for each financial period. This is due within three months from the date the document is required to be disclosed in accordance with its parent law.	Only the financial statements of the UK subsidiary need to be filed with Companies House. The statements are, typically, due within nine months from the accounting reference date i.e. the end of the accounting period.
Registered presence	Branches can be registered for corporation tax, VAT and run payrolls for employees.	From a commercial point of view, a subsidiary may signal a more permanent presence in the UK.
Registering the business	The overseas entity must, within one month of commencing trade in the UK, register its details with Companies House. The details include information in respect of the overseas company's issued share capital, directors and its business address in the UK. It must also submit a certified copy of its certificate of incorporation, memorandum and article of association or an equivalent, together with the latest set of financial statements if disclosed in the local jurisdiction. If not in English, they must be translated and certified.	Setting up a UK subsidiary can be done with Companies House, with no statutory clearances needed before starting the process. A registration form with the consent of at least one person willing to act as a director and confirmation from subscribers they wish to form the company for lawful purposes needs to be submitted together with a registered email address. While appointing a company secretary is not mandatory, the functions of a company secretary must still be performed and are often outsourced. A UK Limited Company can have just one Director who do not need to be UK residents. A minimum issued share capital of one share is required.
Confirmation statement	Lodging annual confirmation statement is not applicable for a UK establishment.	Lodging annual confirmation statement annually with Companies House within 14 days of the end of the review period is mandatory. Companies House may take action against the company and its directors for failing to file the statement.
Any corporate changes	Companies House will have to be notified within 21 days of any changes affecting the foreign entity or the UK establishment on the relevant forms when there are any changes, a filing fee may be applied.	Companies House will have to be notified within 14 to 30 days depending on the change. When a company must report changes, the relevant forms or resolutions must be submitted to Companies House together with any filing fee.