The Government has announced that, for accounting periods beginning on or after 1 January 2027, profits and losses attributable to a foreign permanent establishment (PE) of UK‑resident companies will be exempt from UK corporation tax. Further detailed guidance is expected to be released in due course.
A foreign PE is broadly an overseas taxable presence through which a UK company operates, which may arise through a fixed place of business, such as an office, branch or construction site or, in some cases, through a dependent agent operating in that territory.
The exemption to UK corporation tax has historically been optional and not widely used and this change makes the exemption mandatory.
The Government’s aim is to simplify how overseas branch profits are taxed and create a more consistent approach between losses and profits.
While businesses have often been able to use early-stage overseas losses to reduce UK tax liabilities, profits arising later have frequently been sheltered by double tax relief. Moving to a mandatory exemption is intended to provide a clearer and more consistent framework.
For businesses with overseas operations – or those considering international expansion – this represents an important shift in how profits and losses are taxed.
What does this mean in practice?
Overseas losses will no longer reduce UK tax liabilities
From 2027, as the exemption applies automatically, losses arising in overseas branches will no longer be available to offset against UK taxable profits.
For businesses entering new overseas markets, this could increase Corporation Tax liabilities in the early stages, and impact cashflow. It may also affect tax payment profiles, potentially bringing businesses within quarterly instalment payments (QIPs) and accelerating payments becoming due.
Deferred tax positions may also need to be reviewed where overseas branch losses have previously been recognised.
Example
A UK company opens a branch in Germany and incurs losses of £200,000 during its first year of trading. Under the new rules, those losses would no longer be available to reduce the company’s UK taxable profits, resulting in a higher UK Corporation Tax liability than under the current regime.
Greater focus on permanent establishment (PE) risk
PE risk has historically been seen as an overseas compliance issue. Going forward, it will also be a key UK tax consideration.
Where a foreign PE exists, profits attributable to that branch will fall outside the scope of UK Corporation Tax. Businesses should ensure they understand whether their overseas activities create a PE – and where profits should be taxed.
Revisiting international expansion plans
For businesses planning to expand overseas, more thought may be needed from the outset as to whether a branch or subsidiary is created.
Reviewing proposed structures early can help ensure the most appropriate approach is adopted from both a commercial and tax perspective.
What isn’t changing?
Determining whether a PE exists
The existence of a PE will continue to be determined by local domestic law, typically aligned with the OECD Model Tax Convention. In broad terms, a PE arises where a business has
- a fixed place of business through which activities are carried on, or
- a dependent agent in the territory who habitually concludes, or plays a principal role in concluding, contracts.
Allocating profits and losses
Profits and losses must still be attributed to the branch based on the activities performed, in line with transfer pricing principles.
Other international tax obligations
Operating overseas can still give rise to a range of tax obligations, including VAT, customs duties, payroll taxes and local corporate tax compliance requirements, regardless of the structure adopted.
What should businesses be doing now?
Although the changes do not take effect until 2027, early planning will be important to avoid unexpected tax and cashflow impacts.
- Modelling the impact on future tax liabilities and cashflow
- Reviewing existing overseas operations and permanent establishment positions
- Assessing whether current operating structures remain appropriate
- Reviewing deferred tax positions and tax payment profiles
- Ensuring finance and leadership teams understand the upcoming changes
Get in touch
As with many international tax developments, the detail will matter. Acting now can help businesses avoid unexpected tax costs and ensure their international structures remain fit for purpose when the new rules take effect.
If you would like to discuss how these changes could affect your business or your international growth plans, our international tax team would be happy to help. Get in touch with Andy by clicking the button below.
