Changes to Corporation Tax on Foreign Permanent Establishments

Overview

The UK government has recently announced a significant change to how overseas branch operations are taxed. This essentially exempts both the profits and losses arising from foreign permanent establishments (PE’s) from UK Corporation Tax

The current position

Generally, where profits arise in an overseas PE, those profits are first subject to tax overseas, then subject to tax in the UK with credit given for the overseas tax deducted. This is subject to any double taxation agreements between the UK and the foreign country.

Losses arising in the overseas PE can also be offset against UK profits.

Currently, it is possible to elect for profits and losses of the overseas PE to be exempt from corporation tax (subject to some anti-avoidance rules regarding foreign controlled companies).

This election is irrevocable and must be made in advance of the Corporation Tax period.

What’s changed?

From 1^st January 2027 this election is becoming mandatory for most companies.

For UK-resident companies that conduct activities in relation to oil and gas extraction and exploration through foreign PEs this measure will apply from 1 September 2026.

The government has made this change as they believe that while losses often flow back to the UK (reducing UK tax revenue) the profits often do not or are otherwise sheltered from UK tax (for example due to double tax relief or incorporating oversea companies once the branch becomes profitable).

Who is affected?

Any company which operates overseas via either a subsidiary or a PE should review their current business structure, particularly if their overseas activities do not generate profits.

How can Ad Valorem help?

Our UK tax team are happy to support with the UK tax implications of these changes and work with other overseas tax advisers to ensure that the business continues to operate tax efficiently.

(E) enquiries@advaloremgroup.uk (T) 01908 219100 (W) advaloremgroup.uk