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4.3. PE Force of Attraction Principle

There is no force of attraction under the UK domestic law.

The OECD Model Tax Convention, which is generally the basis on which UK tax treaties are concluded, prescribes that where an enterprise carries on business in the other Contracting State through a PE, its profits may be taxed in the other State to the extent that they are attributable to the PE.  The commentaries further clarify the position as the right that the other State has to tax does not extend to profits that the enterprise may derive from the State otherwise than through the PE.

The OECD’s Report on Attribution of Profits to Permanent Establishments states that there should be no automatic force of attraction of the profits to the PE and in the same way, there should be no automatic force of attraction to the head office of the enterprise.  The force of attraction of the profits to the PE principle was affirmed in the Indian case of ADIT v. Clifford Chance A Nos. 5034/Mum/2004, 5035/Mum/2004, 7095/Mum/2004, 3021/Mum2005, and 2061-61/Mum/2008] where the Special Bench of the Income Tax Appellate Tribunal held that the income of the UK law firm related to India would be taxable only to the extent attributable to services performed in India.