UK Tax Changes to the Foreign Branch Election

The UK Government has announced significant reforms to the taxation of foreign branches (also known as foreign permanent establishments or PEs) operated by UK-resident companies. These changes represent a major shift away from the long-standing elective foreign branch exemption regime towards a mandatory exemption system.

Background

Since 2011, UK-resident companies with overseas branches have been able to make a Foreign Branch Exemption Election under the Corporation Tax Act 2009. Under the existing rules, companies could choose whether to:

• Include foreign branch profits and losses within the UK corporation tax system; or
• Elect to exempt foreign branch profits and losses from UK corporation tax.

Where an election was made, it applied to all foreign branches of the company and was generally irrevocable. Companies benefiting from the election avoided UK tax on future foreign branch profits but were also unable to claim relief for foreign branch losses against UK profits.

What Is Changing?

On 21 May 2026, HM Treasury and HMRC announced that the foreign branch exemption will become mandatory rather than optional. This means UK-resident companies will no longer be able to choose whether foreign branch profits and losses are included within the UK corporation tax regime.

Under the new regime:

• Foreign branch profits will automatically be exempt from UK corporation tax.
• Foreign branch losses will no longer be available to offset UK taxable profits.
• The existing election mechanism will effectively be removed for future periods.

Effective Dates

The changes will apply:

• From 1 September 2026 for companies with foreign branches engaged in oil and gas exploration and extraction activities.
• From 1 January 2027 for all other UK-resident companies with foreign branches.

Why Is the Government Making This Change?

The Government believes the current rules can create an imbalance. Under the existing system, companies that did not make an exemption election could sometimes claim tax relief in the UK for losses incurred by overseas branches while paying little or no UK tax on subsequent foreign profits due to double tax relief or business restructuring.

HMRC has stated that this can result in the UK effectively subsidising overseas losses without receiving corresponding tax revenue from future foreign profits. The reforms are intended to prevent this outcome and protect the UK tax base.

Impact on Businesses

The new rules are likely to have several implications for multinational groups:

Loss Relief Restrictions

Businesses will no longer be able to use foreign branch losses to reduce UK taxable profits. For companies that have historically relied on such relief, UK corporation tax liabilities could increase.

Simplification

As foreign branch profits will automatically fall outside the UK tax charge, companies may see reduced complexity in calculating foreign tax credits and double taxation relief.

Review of Overseas Structures

Many companies are expected to reassess whether overseas activities should continue to operate through branches or be carried on through subsidiary companies. The tax implications of each structure may now differ significantly.

Transitional Measures

The Government also plans to amend transitional rules to ensure that losses and other tax attributes generated before the exemption becomes mandatory cannot be used to shelter UK profits after the effective date. Existing rules relating to the recovery of pre-election losses, known as the “total opening negative amount” regime, are expected to be repealed. An anti-avoidance rule will also be introduced to prevent arrangements designed to accelerate the use of losses before the new regime takes effect.

Summary

The move from an elective to a mandatory foreign branch exemption regime is one of the most significant international corporation tax changes announced by the UK Government in recent years. From 2027, most UK companies will automatically be exempt from UK tax on foreign branch profits but will lose the ability to offset foreign branch losses against UK profits. Businesses with overseas operations should review their tax position, forecasts, and organisational structures ahead of the implementation dates to understand the full impact of the reforms.

For more information on the changes or for other international queries, reach out to our International Team or contact us on 01903 234094.