The line between paying American tax and paying none

Article 5 defines it as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Three elements do the work: a place, a degree of permanence, and business genuinely carried on through it.

Miss any one of the three and the definition fails. So a UK company can hold a US bank account and a US customer list. It can run a US telephone number too. None of that comes close to meeting the test.

Article 7 makes the consequence blunt. Business profits stay taxable only in the home State unless the enterprise carries on business through a permanent establishment in the other. Where it does, America may tax only so much of those profits as the establishment earned.

So the question runs binary at the threshold and proportionate afterwards. Crossing the line never hands America your worldwide profits. It hands America one slice, and the treaty documents set out how both sides read it.

Paragraph 2 names examples rather than limits. A place of management counts. So does a branch, an office, a factory or a workshop. So does a mine, an oil or gas well, or a quarry.

Notice what those have in common. Each is somewhere the business physically happens, which is the point the general definition had already made.

Note the wording too. The treaty says the term includes especially these things, not that it means them. So the list guides the definition rather than confining it.

Twelve months, and the treaty stays precise about it. A building site or a construction or installation project becomes a permanent establishment only if it lasts more than twelve months. A project finishing inside that window creates none, however large the contract happens to be.

So the calendar matters as much as the work does. Projects that overrun turn a non-taxable job into a taxable one. So careful contractors track the start date from the first day on site.

Paragraph 4 lists activities deemed not to create one. The list runs specific rather than general, and it rewards reading before you assume the worst about your own arrangements.

Each exclusion carries the word solely. So the moment a facility does anything beyond the listed purpose, the exclusion stops covering it.

Solely does more work in Article 5 than any other word in it. A warehouse that only stores and ships your goods falls outside the definition. That same warehouse, once it also takes orders or handles returns negotiations, no longer only does the listed things.

In practice we see this where a storage arrangement grows quietly over a couple of years. Nobody re-reads the paragraph, and the exclusion lapses without anybody ever deciding anything.

On its own, usually not. Paragraph 4 excludes facilities used solely for the storage, display or delivery of goods belonging to the enterprise. So a UK seller using an American fulfilment warehouse for exactly those purposes stays outside the definition on that ground.

Still, read the arrangement rather than the label on it. Where staff at the site negotiate, service customers or hold authority to commit the company, the analysis moves on to paragraph 5 instead.

Paragraph 5 reaches past buildings and into people.

Take someone acting for the enterprise who is not an independent agent. Suppose that person holds authority in America to conclude contracts binding the company. Suppose too that they habitually use it. The treaty then deems the enterprise to have one.

So no office is necessary at all. One employee working from a spare room, holding signing authority and using it regularly, produces the same result as a leased building would.

The treaty sets two conditions and joins them together. The person must hold the authority, and must habitually exercise it. A single contract signed once will struggle against the second limb, while a monthly pattern plainly satisfies it.

Note also that the contracts must bind the enterprise itself. A salesperson who negotiates terms but sends every deal to London for signature sits outside the paragraph as the treaty writes it.

Paragraph 6 protects genuine intermediaries. A broker creates none. Neither does a general commission agent, nor any other agent of independent status. One proviso applies: that person must act in the ordinary course of their own business.

Two tests sit inside that single sentence. The agent needs real independence, and the activity must fall within their ordinary business. An agent working almost exclusively for one principal tends to fail the first.

Not by itself, and paragraph 7 says so directly. Control between the two companies changes nothing at all here. One may own the other, or either may do business in the other's country.

Neither fact makes one company a permanent establishment of the other. That protection is real, and it is worth knowing before you restructure anything.

But that protection runs narrower than it looks. Suppose the subsidiary's people habitually conclude contracts binding the parent. Paragraph 5 then applies to the parent anyway. The corporate structure changes nothing at all.

The treaty writes no special rule for this, so the general test governs. A home office can amount to a fixed place of business. It does so where the enterprise carries on business through it. That turns on fact rather than on label.

Often the agent rule bites first in any event. Where the home worker signs contracts for the company, paragraph 5 settles the question without anybody needing to examine the spare room.

Only what the establishment earned. Article 7 treats the establishment as a distinct and separate enterprise. It then asks what profits such an enterprise would make. Those dealings assume full independence from the rest of the company.

Those profits include only what flows from the assets it used, the risks it assumed and the activities it performed.

So a small US presence attached to a large British business produces a correspondingly small American measure. The size of the group never enlarges the slice, a point that also shapes effectively connected income.

Article 7 allows deductions for expenses incurred for the purposes of the establishment. That expressly includes executive and general administrative expenses, whether the company incurs them in America or anywhere else.

So genuine head office costs supporting the US operation reduce the taxable figure. The treaty also expects the same method year by year, absent good and sufficient reason to change it.

Keep the evidence behind those allocations. A deduction for head office time is only ever as good as the record showing who spent it and on what.

Relief under Article 7 never applies itself. Say you conclude that you have none. Most companies then file a protective return on Form 1120-F. They disclose the position they have taken, and they keep the workings.

Doing nothing carries a specific and avoidable risk. Suppose the IRS later disagrees. An unfiled return leaves your deduction position much weaker. Meanwhile the treaty disclosure records your reasoning while it stays fresh.

Take an illustrative case. A Bristol engineering firm stores spare parts in a Texas warehouse. It sends two engineers over for a nine-month installation. It also pays a US agent who sells for several unrelated manufacturers.

Each strand falls outside on its own terms. Storage for delivery sits squarely in paragraph 4. Nine months falls short of the twelve-month threshold. And an agent serving many principals sits in paragraph 6.

Change one fact and the answer flips. Extend that installation to thirteen months and the project becomes a permanent establishment, with Article 7 then measuring what the site itself earned.

The commonest is treating a US subsidiary as a shield without ever reading paragraph 5. The second is assuming a warehouse stays safe automatically, when the exclusion depends entirely on what happens inside it.

After those comes the project that quietly slipped. A job quoted at ten months runs to fourteen, nobody revisits the treaty, and the return goes in on the original assumption. An EIN application often surfaces the question first.

First we map your facts against Article 5 paragraph by paragraph, because the answer turns on specifics rather than on general impressions. Then we tell you plainly which side of the line you sit on.

Where the answer is yes, we measure what America may tax under Article 7 and file on that basis. Start with our treaty relief service, or reach us through our contact page.