ACCA Advanced Taxation (ATX) Practice Exam

If a UK-resident company has an overseas permanent establishment, will it be taxed in the UK?

1. No, it is only taxed in the foreign country

2. Yes, on worldwide profits

3. Yes, but only on profits made in the UK

4. No, it is exempt from UK corporation tax

The correct answer is: Yes, on worldwide profits

A UK-resident company is subject to corporation tax on its worldwide profits, which includes profits generated from both domestic and overseas sources. This means that even if the company establishes a permanent establishment abroad, it does not exempt the company from paying tax in the UK on the profits derived from that foreign establishment. The UK tax system operates on a principle of residence, meaning that the tax obligations of the company are determined by its residency status rather than the location of its operations alone. While the profits from the overseas permanent establishment may also be taxed in the country where it operates, the UK company will still be liable for corporation tax on those profits in the UK. However, tax relief mechanisms, such as double taxation relief, might apply to mitigate the risk of being taxed twice on the same income. Other options misrepresent the taxation principles applicable to UK-resident companies with overseas operations. Some suggest that the company would not be taxed in the UK at all, which overlooks the fundamental principle that UK companies are taxed on their total profits.