Jul 1

2026

Preparing for the mandatory foreign permanent establishment tax exemption

From accounting periods beginning on or after 1 January 2027, the UK’s foreign permanent establishment exemption is due to stop being a choice for most companies and become mandatory. That means a UK-resident company will generally exclude both profits and losses attributable to foreign permanent establishments from its UK corporation tax computation.

The change was announced on 21 May 2026. For UK-resident companies with foreign permanent establishments involved in oil and gas exploration or exploitation, the measure starts earlier, from 1 September 2026. Draft legislation is expected over the summer, so companies with overseas branches should model the impact now rather than waiting for the final wording.

A UK company expanding abroad can operate through a local subsidiary or through a branch, a route we cover in our guide to tax planning when expanding overseas.

What is actually changing

Since 2011, the foreign branch exemption has been elective. A UK company could choose to exempt the profits and losses of its foreign permanent establishments from UK corporation tax. That election was generally irrevocable and applied to all foreign permanent establishments of the company.

Many companies chose not to elect, especially where overseas branches were loss-making and those losses could reduce UK taxable profits. That choice is now being removed.

Who feels it most

The companies most affected are those that never elected into the exemption because they valued UK relief for foreign branch losses. Once the exemption is mandatory, new foreign PE losses will not shelter UK profits.

There is one helpful change. HMRC says the existing rule that can bring later exempt branch profits back into charge where there is a “total opening negative amount” will be repealed. However, transitional rules will restrict the use of pre-change losses and other attributes against UK profits arising after the effective date.

Working through which entities are exposed is the kind of due diligence worth doing early, and modelling the cash effect fits naturally with integrated financial planning.

The accidental branch you did not know you had

This is the part that catches smaller companies out. A permanent establishment is not only a formal branch with a sign on the door. It can arise where your company has a fixed place of business overseas or a person abroad who habitually concludes contracts for the company, depending on the facts and the relevant tax treaty.

Say you let a senior salesperson relocate to Spain and they regularly negotiate and close contracts there. You may have created a taxable presence without meaning to. That is one of the common tax mistakes that arise across borders. The same risk can sit inside ordinary cross-border payroll arrangements when staff move around.

Ireland and Northern Ireland

This is a UK corporation tax change, so it applies across the UK, including Northern Ireland. It does not apply to companies resident in the Republic of Ireland, which follow Irish rules on foreign branch taxation instead.

If your group has both UK and Irish companies operating abroad, you may be running 2 different branch regimes at once. The cross-border corporate tax advisers at our firm can help keep them straight.

What to do before the deadline

Start by mapping every overseas branch or possible permanent establishment, including informal arrangements created by remote staff, overseas offices, travelling agents or local representatives.

Then model profit and loss positions by country, so you know what UK relief may be lost and whether the structure still makes sense. Document pre-change losses carefully, because transitional and anti-avoidance rules are expected to be strict.

A quick example helps. Picture a UK engineering company with a German branch that has built up £300,000 of losses while developing its client base. Under the current regime, those losses may reduce UK corporation tax if no exemption election has been made. Once the mandatory exemption applies, new branch losses will sit outside the UK computation, and future branch profits will also be outside UK corporation tax.

Deciding whether to keep the branch, incorporate locally or restructure is exactly the kind of restructuring that comes up in mergers and acquisitions work. Our corporate restructuring support can model the options. Because HMRC may scrutinise how profit is split between the UK company and its branches, our forensic investigation specialists can help you stand behind your figures. For smaller firms unsure where they stand, our note on how tax accountants help small businesses is a good start.

You can read the detail in HMRC’s policy paper.

Frequently asked questions

What is a foreign permanent establishment?

It is a taxable business presence abroad, such as a branch, office or dependent agent arrangement, through which a UK company trades without setting up a separate local company.

When does the mandatory exemption start?

For most companies, it applies to accounting periods beginning on or after 1 January 2027. For relevant oil and gas foreign PEs, it starts on 1 September 2026.

Can I still use foreign branch losses?

New losses after the exemption applies will not be available against UK profits. Transitional restrictions are also expected for earlier losses and attributes.

Does this affect overseas subsidiaries?

No. This change is about foreign permanent establishments. A separate overseas subsidiary is taxed under its own rules.

Review your overseas structure with us

If your company trades abroad through a branch, or has staff working overseas, check your exposure before the rules bite. SCC’s Accountants can map your branches, model the loss impact and help you decide the right structure ahead of the deadline. Get in touch for a clear assessment.