Since July 2011, a UK-resident company operating overseas through a PE has been able to elect for the profits and losses of the foreign PE to be exempt from UK CT. This is often referred to as the ‘foreign branch exemption’. Where an election is made, the PE’s profits are not brought into account, and its losses are not relieved, for the purposes of UK CT. 

Mandatory exemption regime 

On 21 May 2026, the government announced that the foreign branch exemption will be made mandatory  for accounting periods beginning on or after 1 January 2027. Where the company carries on activities in relation to oil and gas extraction and exploration through a foreign PE, the measure will apply from 1 September 2026. This will be achieved by deeming the company’s accounting period to end on 31 August 2026. 

Associated changes

Further:

• the transitional rules will be amended to prevent losses and other amounts arising before the exemption takes effect (the effective date) from being offset against UK profits of the company or the wider group arising after the effective date;
• the existing legislation taxing profits of an exempted foreign PE where there is a ‘total opening negative amount’ will be repealed; and
• an anti-avoidance rule will be introduced to prevent arrangements seeking to “artificially accelerate” the utilisation of the losses or other amounts, or to “otherwise minimise the impact of these changes”.

Case for change

The government says that the changes are necessary as, in some cases, the impact of allowing relief for losses in the UK “is not being appropriately balanced by equivalent foreign profits being brought into the charge of UK CT”. 

The government adds that the effect of this “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”. 

Next steps

The government says that draft legislation providing for the changes will be published over the summer.

Further information

• Section 18A-18S, Corporation Tax Act 2009
• INTM280000 - Foreign Permanent Establishments of UK Companies: contents - HMRC internal manual - GOV.UK