Foreign ‘branch’ exemption - overview

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Foreign ‘branch’ exemption - overview
  • Chargeable gains
  • Anti-avoidance
  • Transitional rules where overseas losses relieved against UK profits

Finance Act 2011 inserted into CTA 2009 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 ‘permanent establishment’ is now used in UK tax law to refer to those overseas operations of a company which were previously described as a ‘branch’.

CTA 2009, Part 2, Chapter 3A

Where an election is made under these rules, the profits and losses of all of a UK company's PEs will be exempt from UK corporation tax.

CTA 2009, s 18A

The calculation of the amount of exempt profits and losses is not straightforward. The calculation initially follows the rules in Article 7 of the OECD Model Tax Treaty (or, where the UK has a treaty in place with the relevant jurisdiction, the equivalent rules in that treaty) to determine the initial attributable profits or losses. Chargeable gains are included and notional capital allowances are then deducted, as are certain interest payments. All available claims and elections that would reduce the profits are assumed to have been made.

CTA 2009, ss 18C–18D

This is a complex calculation and unlikely to be simpler than the calculations required for credit relief.

The election applies to a company only. Where the company is part of a group, that election will not affect any other UK companies within the group and each group company can choose whether or not to make t

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