UK Taxation of Non-UK Branches: UK Government Announces Detail of Elective Exemption from UK Tax for Non-UK Branches of UK Companies

Sullivan & Cromwell LLP - January 13, 2011

On 9 December 2010, the UK government published draft legislation which, once enacted, will introduce an ability for UK-resident companies to make an irrevocable election to have their non UK branches treated as exempt from UK corporation tax, rather than taxable with credit for foreign tax, as currently.

The new regime is elective because some companies (e.g. in the oil industry) are likely to want to continue to be able to take advantage of the deferral benefit provided by being able to set branch losses against their UK profits under the current system. This benefit will be lost for companies making the election. However, such companies will benefit by no longer having to pay UK tax on branch profits to the extent that such tax exceeds the tax paid locally.

The exemption will apply to all branch profits and losses, including chargeable gains, but subject to some exceptions. In particular companies carrying on predominantly investment business will not qualify for exemption. In addition branches in many jurisdictions will have to consider broad anti-diversion rules.

A transitional rule will apply such that companies that have made losses in their branches prior to the date of the election will not be able to benefit from exemption until their branches have made enough corresponding profits subject to UK tax.

This announcement follows a period of consultation on this policy. Consultation is ongoing on the detail of the draft legislation, with comments sought by 9 February 2011. The legislation is expected to be enacted later this year as part of the Finance Act, with the ability to elect taking effect from a date to be specified in 2011.