Foreign permanent establishment exemption to become mandatory from 2027

It has been announced that for most UK resident companies, it will be mandatory for profits and losses attributable to a foreign permanent establishment (“branch”) to be exempt from UK tax. This will be effective for accounting periods beginning on or after 1 January 2027, with detailed guidance to follow shortly.  Until now, such an exemption has been optional, and not taken up by many taxpayers.

The Government’s rationale is sound – branch losses have frequently been used to offset the UK company’s tax bill while the overseas market has been established.  However, once the branch becomes profitable, UK tax on those branches is for the most part forfeited because of the double tax relief granted for the foreign tax already charged on those profits.

What does this mean?

• Branch losses will no longer be available to offset profits from UK activities for accounting periods beginning on or after 1 January 2027.  Companies should consider whether this will materially impact their Corporation Tax charge, and also their payment schedule (for example, might this move them into quarterly instalment payments (“QIPs”)/the more accelerated QIP regime). It may also be a tax accounting consideration, where a deferred tax asset has been recognised in relation to unrelieved foreign tax carried forward.
• Companies have in the past largely considered permanent establishment risk an overseas compliance matter.  Going forward, for branches which are profitable, those profits will be outside the scope of UK taxation.  It is therefore timely to review how overseas activities are conducted, to confirm whether any overseas permanent establishments do in fact exist.
• For UK companies looking to expand abroad, the typical “branch vs subsidiary” analysis changes.

What isn’t changing?

• Whether or not an overseas permanent establishment exists is determined by the domestic legislation definition of that territory (although for many countries, this is based on the OECD Model Tax Treaty definition).
• Profits/losses must be attributed to a permanent establishment based on the activities they undertake, and using OECD transfer pricing principles.
• Whether or not a branch exists, operating overseas can still give rise to other tax issues e.g. VAT, customs, employment taxes

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