Foreign branch exemption—historic losses
Produced in partnership with Robert O’Hare of Squire Patton Boggs
Foreign branch exemption—historic losses

The following Tax practice note produced in partnership with Robert O’Hare of Squire Patton Boggs provides comprehensive and up to date legal information covering:

  • Foreign branch exemption—historic losses
  • Why are special rules required to deal with historic losses?
  • Total opening negative amount
  • Process for determining the TONA
  • TONA—matching
  • TONA—streaming
  • Procedural requirements for streaming
  • Practical effect of the streaming rules
  • Transfers of businesses of PEs
  • Conditions for the application of the anti-avoidance provision
  • More...

Foreign branch exemption—historic losses

Why are special rules required to deal with historic losses?

As further explained in Practice Note: UK taxation of foreign profits in a UK resident company, a company can use the losses generated in the trades carried on through its permanent establishments (PEs) to reduce the amount of UK tax due on its profits in certain circumstances.

However where a UK company:

  1. incurs losses in another territory, and

  2. obtains relief against tax in that territory for those losses (eg loss relief in a future year, similar to the UK carry forward of losses)

in the year in which loss relief is obtained, the UK credit for foreign tax would be reduced (and therefore the amount of UK corporation tax paid would be increased) because the credit is calculated only by reference to the amount of profits on which foreign tax is actually suffered (see Practice Note: Effect and limits of credit relief). In this way, under the default tax with credit system, the UK effectively claws back the benefit of the foreign loss.

With the introduction of the foreign branch exemption, the UK government was concerned that tax revenues would be lost because:

  1. the UK company would have the UK tax benefit of using the PEs' losses while the PEs are loss making, but

  2. the benefit of those losses could not be clawed back by

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