The UK provides an elective exemption from UK corporation tax for the profits of an overseas permanent establishment (PE) of a UK company (other than certain insurance companies). The term ‘foreign permanent establishment’ is used in UK tax law to refer to those overseas operations of a company which were previously described as a ‘branch’.

The Government has published a policy paper, draft legislation and an explanatory note providing for the exemption to become mandatory for UK resident companies. The changes will generally apply for accounting periods beginning on or after 1 January 2027. The draft legislation also includes provisions intended to prevent companies delaying the commencement of the mandatory regime by using short accounting periods.

Under the proposed transitional rules, losses and other amounts attributable to a foreign PE arising before the exemption becomes mandatory will generally not be available to be carried forward to post-transition periods. The existing legislation (see below) taxing profits of an exempted foreign PE where there is a ‘total opening negative amount’ will be repealed. Targeted anti-avoidance