UK-resident companies operating through overseas branches should review how foreign branch profits and losses are currently treated for Corporation Tax.
The government announced on 21 May 2026 that it intends to make the foreign permanent establishment exemption mandatory. For most companies, the policy is intended to apply to accounting periods beginning on or after 1 January 2027.
An earlier start date of 1 September 2026 is planned for UK-resident companies whose foreign permanent establishments carry on activities connected with oil and gas exploration or exploitation.
However, the detailed draft legislation is still expected. Businesses should therefore avoid assuming that every aspect of the final regime is settled and should review the position based on their own activities, loss history and group structure.
The current announcement is set out in HMRC’s Foreign Permanent Establishment Exemption policy paper.
Who should review the change
The measure is relevant to UK-resident companies that conduct business overseas through a permanent establishment rather than through a separate foreign subsidiary.
A permanent establishment may include a fixed overseas place of business through which the UK company carries on its activities. The precise position depends on the relevant facts, UK tax rules and any applicable double tax agreement.
The planned change may be particularly important where:
- A foreign branch is currently making losses
- Foreign branch losses have previously reduced UK taxable profits
- The business has not elected into the existing exemption
- Overseas tax is relieved through double taxation relief
- Historic losses or other attributes remain available
- The company operates several overseas branches
- A sale, investment or group reorganisation is being considered
Companies that already elected into the exemption may be more familiar with the broad outcome, although they will still need to consider the final legislation and any revised transitional provisions.
Why the treatment of losses matters
Under the current regime, a UK-resident company is generally within the scope of UK Corporation Tax on the profits of its foreign permanent establishments.
A company may make an irrevocable election to exempt future foreign PE profits. Once the exemption applies, future foreign PE losses are also generally excluded and cannot be used to relieve UK profits.
Where no election has been made, foreign branch profits may remain within the UK Corporation Tax computation, with double taxation relief potentially available for overseas tax. Foreign branch losses may also be available to reduce UK profits, subject to the applicable rules.
The government’s policy is intended to prevent foreign PE losses from sheltering UK profits where corresponding foreign profits may not produce an equivalent UK tax charge.
For businesses with profitable UK activities and loss-making overseas branches, the planned mandatory exemption could therefore have a material effect.
The outcome will not be the same for every company. It will depend on factors such as:
- The territory in which each branch operates
- The pattern of branch profits and losses
- The amount of foreign tax paid
- The availability of double taxation relief
- Existing elections
- Historic losses and other tax attributes
- The final transitional provisions
What remains subject to detailed legislation
The GOV.UK policy paper describes the government’s intended approach, but draft legislation is still expected.
The announcement indicates that transitional rules will be amended so that losses and other attributes arising before the exemption takes effect will not be available to relieve later UK profits of the company or wider group.
It also says that:
- Existing total opening negative amount legislation will be repealed
- Anti-avoidance provisions will be introduced
- The changes are intended to apply from the announced dates
The detailed drafting will determine how these provisions work in practice.
Businesses should therefore model the potential effect using the policy announcement, but revisit that analysis once the draft legislation and supporting guidance are available.
A practical review for businesses with overseas branches
A focused review should begin with the current facts rather than assumptions about whether the change will be favourable.
1. Confirm the overseas structure
Identify whether the overseas activity is conducted through:
- A foreign permanent establishment
- A separate overseas subsidiary
- An agent or representative
- Another form of commercial arrangement
The foreign PE exemption does not apply in the same way to a separate subsidiary.
2. Check the current tax treatment
Confirm whether the company has previously made a foreign PE exemption election.
Because the current election is generally irrevocable, it should not be described as a choice that can be changed from year to year.
The business should retain evidence showing:
- Whether an election was made
- When it took effect
- Which branches are affected
- How foreign branch results are reflected in the tax computation
3. Review branch profits, losses and tax payments
The company should be able to separate each branch’s results from its UK operations.
That includes understanding:
- Historic and forecast profits or losses
- Foreign taxes paid
- Double taxation relief claimed
- Capital allowances or similar attributes
- Amounts that may be affected by transitional provisions
Incomplete branch records can make it difficult to model the impact accurately.
4. Model more than one outcome
Until the legislation is finalised, modelling should be treated as indicative.
Businesses may need to compare:
- The current treatment
- The position under the announced mandatory exemption
- The effect of losing access to foreign branch losses
- The potential impact of revised transitional rules
- The wider cash-tax effect across the group
The aim is not to predict the final outcome with certainty. It is to identify where the company may be exposed and what further information is needed.
5. Keep the board informed
The board should understand whether the change could affect:
- Forecast Corporation Tax payments
- Cash-flow planning
- The economics of an overseas operation
- Group reporting
- Investment or disposal decisions
- Transaction due diligence
International tax should not sit only within the year-end compliance process if it could affect wider commercial decisions.
What buyers and investors may ask
Where a transaction is being considered, buyers and their advisers may review:
- The legal and tax structure of each overseas operation
- Whether the activities create a permanent establishment
- The treatment of foreign profits and losses
- Historic exemption elections
- Double taxation relief calculations
- Unresolved overseas tax exposures
- The likely effect of the planned mandatory regime
A well-documented position does not guarantee a particular valuation or transaction outcome. It does, however, make it easier for management to explain the position and respond to due diligence questions.
Avoid assuming the change is automatically positive or negative
For a profitable foreign branch, exemption from UK Corporation Tax may appear beneficial, particularly where overseas profits would otherwise create an additional UK charge.
For a loss-making branch, the removal of UK relief for foreign losses may be less favourable.
That comparison can still be too simplistic. The final effect may depend on overseas tax rates, double taxation relief, group arrangements, historic losses and the final legislation.
Businesses should therefore avoid relying on general conclusions. The relevant question is how the planned regime applies to their own permanent establishments and expected pattern of profits and losses.
Final thought
The government has announced a clear policy direction, but the detailed legislation will determine how the mandatory foreign PE exemption operates in practice.
Companies with overseas branches should begin by confirming their current structure, election history, branch results and double taxation relief position. They can then model the possible effect and update that work once the draft legislation is published.
Early preparation cannot guarantee a particular tax outcome. It can help the board understand the potential exposure, improve the quality of its records and avoid dealing with the issue for the first time during a tax filing or transaction.
At Accendo, we support growing businesses with Corporation Tax and advisory work focused on financial clarity, practical planning and well-supported decisions. For companies operating through overseas branches, an early review of the current structure, election history, branch results and double taxation relief position can help identify potential exposure before the rules take effect.
Accendo supports growing businesses with advisory work focused on financial clarity, practical planning and well-supported decisions.
This article is for general information only and reflects the policy position announced at the date of publication. It should not be treated as legal, accounting, tax, transaction or investment advice. Specific advice should be obtained based on the company’s circumstances and the final legislation.
