The UK currently operates an elective corporation tax exemption for the profits and losses of foreign permanent establishments of UK-resident companies. An election is irrevocable and applies to all a company’s foreign PEs. Profits and losses of the foreign PEs are calculated in line with the relevant treaty or, if there isn’t one, the OECD Model Treaty.
On May 21, 2026, the UK government announced that it would introduce legislation to make the exemption mandatory.[1] This is proposed to apply for accounting periods beginning on or after January 1, 2027, except for companies engaged in oil and gas exploration and extraction, for which it would apply from September 1, 2026 (irrespective of their ordinary accounting periods). Draft legislation will be published over the summer.
The measure is aimed at preventing the use of tax reliefs generated abroad to shelter UK profits. The government is concerned that some UK companies are using large amounts of relief generated by their foreign PEs (whether from losses or capital allowances) to reduce their UK CT liabilities, but when the foreign PEs become profitable they are not bringing those profits into the UK tax charge. The government has identified two reasons for this: that the profits are sheltered by double taxation relief; or that the PE is converted to a subsidiary, avoiding any ongoing UK charge on the profits and not triggering an immediate UK charge on the conversion. The government notes: “This effect is particularly significant for groups which generate very large foreign losses or are able to claim very large amounts of capital allowances in relation to their foreign PEs, for example in the oil and gas sector. Where circumstances allow, these structures can substantially reduce the UK CT liability of multinational groups, even where unusual market conditions result in unusual or elevated UK profits.”
Following the government announcement, losses and other attributes arising before the effective date of mandatory exemption would not be available to set against UK profits arising after the effective date. The government plans an anti-avoidance rule to prevent artificial acceleration of losses and attributes.
At present the regime “recaptures” profits for corporation tax purposes if a company makes the exemption election for a branch that has been making losses over a period of (broadly) up to six years. (The exemption is disapplied until profits equivalent to the accumulated losses have been taxed in the UK.) This recapture does not presently apply, however, where the foreign branch is converted to a subsidiary. The government has said that it will repeal the recapture mechanism. This should benefit groups with existing foreign branches which have generated losses.
This is a marked shift in policy from that of the coalition government when it introduced the foreign branch exemption, in particular in the attitude to the oil and gas sector. A discussion document of July 2010 explained: “Oil and gas … Exploration activity routinely makes losses in its early stages, and there is a significant risk that an exploration project will not lead to a successful outcome. These characteristics make loss relief for foreign branch activity particularly important for the sector.” For that reason the government decided not to make the exemption compulsory. That point must still hold, but the government is apparently now more concerned by the lack of UK tax receipts when projects are successful.
Other sectors with similar profiles of high initial expenditure that may be eligible for capital allowances include mining and major infrastructure. While banks and insurers often operate abroad through branches, they are less likely to be materially affected by the change.
Multinationals (especially those in the oil and gas sector) operating businesses through foreign permanent establishments of UK companies should review their branch arrangements. If they have material tax attributes in non-exempt branches, they should begin thinking about which attributes from around the group they may need to prioritise – and have a close eye to the detail of the legislation when it comes out. If they expect to generate material tax reliefs in non-exempt foreign branches over the coming months, they may wish to focus on how to maximise their availability to shelter foreign rather than UK profits in future periods.