UK Trends and Developments Contributed by: Russell Warren and Michael Langan, King & Spalding LLP
Proposed Reform to the PE Definition and IME Permanent establishment Following a consultation in 2023, the UK plans to update its definition of permanent establishment (PE). The new rules align more closely with Article 5 of the OECD Model Tax Convention on Income and on Capital. This results in the broadening of the “dependent agent” concept so that it captures a person acting on behalf of a non-resident company who “habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company”. Investment management exemption This is countered, to some extent, by the broaden - ing of the Investment Management Exemption (IME). The IME allows non-resident investors to appoint UK- based investment managers without creating a UK PE. These rules will be amended to remove elements which have created uncertainty for the overseas inves - tor community, such as the removal of the requirement that the UK investment manager could not be entitled to more than 20% of the non-resident’s profits. Carbon Border Adjustment Mechanism Introduced by the 2025 Budget, the Carbon Border Adjustment Mechanism (CBAM) will come into effect on 1 January 2027 and will be implemented by sec - ondary legislation that is subject to consultation at the time of publication of this report. The CBAM will affect importers in the aluminium, cement, fertilisers, hydrogen, and iron and steel sec - tors, as well as downstream producers that use these goods. It will apply when such goods are imported into the UK and will be payable by the importer. The CBAM payable will be calculated by, broadly, mul - tiplying the imported emissions by the CBAM rate and deducting the relevant imported embodied emission by the effective carbon price. The deduction there - fore provides relief for any overseas carbon pricing scheme that meets certain criteria.
The CBAM rate is the tax rate that will be set with reference to the effective carbon pricing mechanism, the UK Emission Trading Scheme. If the value of the CBAM relevant imports exceeds the GBP50,000 minimum, the importer will be required to register with HMRC. Much like the VAT registration rules, the GBP50,000 minimum will be tested on a 30-day look-forward basis and a 12-month look-back basis. The Abolition of the Non-Dom Regime History On 6 April 2025, the UK’s non-domiciled tax rules were abolished. These had been in place for over 200 years and afforded “non-doms” an exemption from UK tax for income and gains held outside the UK. The non-dom regime allowed those who were not domiciled in the UK to elect to be taxed only on their UK-source income and gains. Income and gains aris - ing outside the UK were not taxed in the UK unless they were remitted to the UK. In a nod to the slightly archaic nature of the regime, an individual could assert non-dom status if, broadly, their father was born outside the UK or, more oner - ously, if they could establish a domicile of choice out - side the UK. This regime came to an end at the end of the 2024/25 tax year. New FIG regime The non-dom regime was replaced by the Foreign Income and Gains (FIG) regime. This regime is available to any individual (including those born in the UK) who become UK tax resident after ten consecutive years of non-residence. For the first four years of UK tax residence, these indi - viduals can claim relief from UK tax on foreign income and gains. After that period individuals (who may have previously had non-dom status) will be subject to UK tax on their worldwide income and gains.
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