Structure of the foreign branch exemption
Produced in partnership with Robert O’Hare of Squire Patton Boggs

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:

  • Structure of the foreign branch exemption
  • Purpose of the regime
  • Elective regime
  • How is the exemption achieved?
  • Foreign permanent establishments amount
  • Relevant profits and relevant losses
  • Specific types of income or expenditure
  • Anti-diversion rule
  • Anti-diversion in relation to accounting periods starting on or after 1 January 2013
  • Anti-diversion in relation to accounting periods starting before 1 January 2013
  • More...

Structure of the foreign branch exemption

Purpose of the regime

The purpose of the foreign branch exemption is to exempt from UK corporation tax the profits of the worldwide permanent establishments (PEs) of a UK resident company. Although the exemption is available in respect of the profits of PEs, this exemption is widely known (albeit technically incorrectly) as the foreign branch exemption, and that is the naming convention we have used here.

As further explained in Practice Note: UK taxation of foreign profits in a UK resident company, apart from this regime, a UK resident company will be:

  1. subject to UK corporation tax on its worldwide profits, including those arising in its PEs, and

  2. entitled to credit for (some or all of) the foreign tax paid on its profits

The existence of the foreign branch exemption, therefore, allows a UK resident company to choose (in relation to the UK tax treatment of its overseas PEs) between:

  1. maintaining a 'tax with credit' system, and

  2. making an election to enter an ‘exemption’ regime

Although it might seem that an exemption from tax is better than being subject to tax with a credit (which may or may not cover all of the UK tax due), this will not always be the case.

Of particular importance when deciding whether or not it will be beneficial to make the election, will be:

  1. the rules

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