UK foreign permanent establishment exemption: changes for multinational groups
On 21 May 2026, the UK Government announced significant changes to the foreign permanent establishment (PE) exemption regime, fundamentally altering how UK resident companies are taxed on overseas branch activities.
These changes are aimed at simplifying the rules and protecting the UK tax base, but they will have material implications for groups with overseas operations.
Currently, UK companies are taxed on foreign PE profits, with double tax relief where relevant. The company can choose to make an irrevocable election, meaning foreign profits are exempt but foreign losses cannot be used in the UK.
Where no election is made, groups may benefit from UK tax relief for foreign losses.
What is changing?
The following changes are expected to affect companies with accounting periods beginning on or after 1 January 2027. For UK-resident companies that conduct activities in relation to oil and gas extraction and exploration through foreign PEs this measure will apply from 1 September 2026.
Mandatory exemption for all foreign PEs
The key change is that exemption will become compulsory:
- Companies will no longer be able to choose whether to tax or exempt foreign branches
- Both profits and losses will sit outside the UK tax net
In effect, the existing election is being removed and applied universally.
Loss of UK relief for overseas losses
One of the most impactful changes is the removal of loss relief:
- Foreign PE losses will no longer reduce UK taxable profits
This addresses the Government’s concern that groups have been able to claim UK relief for overseas losses without bringing corresponding profits into charge.
As an example of what will change:
- A UK company has a loss making branch in Europe generating £2m of losses annually.
- Currently, losses may be offset against UK profits, reducing UK corporation tax
- From 1 January 2027, losses are ignored for UK tax purposes
The impact of this will be higher UK taxable profits and increased tax cost.
Transitional and anti‑avoidance rules
The new regime will include:
- Transitional provisions for existing loss pools
- Anti‑avoidance rules preventing:
- acceleration of loss claims, or
- restructuring to sidestep the new rules
What this means for your business
The impact will vary depending on your group profile, but key areas to consider include:
Loss utilisation
- Loss of UK relief may increase effective tax rates. Groups will need to reassess how foreign losses are used, as UK relief will no longer be available
- Forecasting models should be updated to reflect this
Structuring decisions
- The distinction between branch and subsidiary structures may become less tax driven as both will generally sit outside UK tax (subject to other regimes)
- Commercial and operational factors may now play a greater role in your decisions
Investment planning
- Groups with capital intensive overseas expansion (e.g. energy, infrastructure, tech scale ups) may be disproportionately affected
Forecasting and effective tax rates
- Removal of foreign loss relief may increase UK taxable profits and effective tax rates in the short term
Governance and compliance
- Systems will need to ensure:
- Correct identification of PE results
- Consistent exclusion from UK tax computations
While the move simplifies the regime and aligns the UK with international norms, it represents a clear tightening of relief availability.
For many groups, this will accelerate UK tax liabilities and require a rethink of cross-border structuring and forecasting. Early modelling is key to avoiding surprises.
How BKL can help
Our specialists in corporation tax are already working with businesses to:
- Model the cash tax and effective tax rate impact
- Review branch vs subsidiary structures
- Analyse existing foreign loss positions ahead of transition
- Support with restructuring, filings and correspondence with HMRC
If you would like to discuss how these changes affect your group, please get in touch with Kate Gott using the form below.
Contact Kate
Frequently asked questions: UK foreign permanent establishment exemption: changes for multinational groups
What is the UK foreign permanent establishment (PE) exemption and how is it changing?
The UK foreign permanent establishment (PE) exemption allows UK-resident companies to exclude overseas branch profits from UK corporation tax. From 1 January 2027, this exemption will become mandatory for all companies.
This means businesses will no longer be able to choose whether to tax or exempt foreign branch results. Both profits and losses from overseas branches will sit entirely outside the UK tax net, removing the current flexibility and simplifying the regime.
Can UK companies still claim relief for losses from overseas branches?
No, UK companies will no longer be able to claim relief for foreign branch losses against UK profits. From the effective date, overseas losses will be ignored for UK tax purposes.
This is a significant change for groups that have relied on foreign loss relief to reduce UK corporation tax. It may increase UK taxable profits and effective tax rates, particularly in early-stage or capital-intensive overseas operations.
When do the new foreign PE rules take effect?
The new rules are expected to apply to accounting periods beginning on or after 1 January 2027. However, for UK-resident companies involved in oil and gas exploration or extraction through foreign branches, the changes will apply earlier, from 1 September 2026.
Businesses with overseas operations should begin reviewing their structures and forecasts well in advance of these dates to manage the transition effectively.
How will the changes affect group tax planning and structuring decisions?
The removal of both the election and loss relief reduces the tax advantage of operating through overseas branches. As a result, the choice between a branch and a subsidiary structure is likely to become less tax-driven. Instead, commercial, legal and operational considerations may take precedence.
Groups may want to revisit their international structures to ensure they remain fit for purpose under the revised rules.
What happens to existing foreign loss pools under the new regime?
Transitional rules are expected to apply to existing foreign loss pools, although the precise treatment will depend on the final legislation.
In broad terms, businesses should not assume they can accelerate or preserve UK tax relief for these losses. Anti-avoidance measures will be introduced to prevent manipulation of loss positions before the new rules take effect, making early review and planning essential.
Will the changes increase a company’s UK tax bill?
In many cases, yes. The removal of foreign loss relief means that UK taxable profits may increase, particularly for groups with loss-making overseas branches. This can lead to a higher effective tax rate (ETR) in the short to medium term.
The impact will vary depending on the group’s international footprint, profitability profile, and existing tax position, but it is likely to be material for some businesses.
Are these changes aligned with international tax norms?
Yes, the move towards a mandatory exemption regime broadly aligns the UK with many other jurisdictions that exclude foreign branch profits from domestic taxation. However, the removal of loss relief represents a tightening of the rules and may reduce the UK’s flexibility compared to some alternative systems.
This shift reflects a policy focus on protecting the UK tax base and limiting perceived asymmetries.
What practical steps should businesses take now?
Businesses should start by modelling the impact on cash tax and effective tax rates under the new rules. This includes reviewing foreign loss positions, updating financial forecasts, and reassessing international structures. Companies should also ensure their systems can correctly identify and exclude foreign PE results from UK tax computations.
Engaging with advisers early can help identify risks, optimise structuring, and avoid unexpected tax costs.
Do the new rules affect all industries equally?
No, the impact will vary by sector.
Businesses with capital-intensive international expansion – such as energy, infrastructure, and technology scale-ups – may be disproportionately affected, as they often generate early-stage losses overseas.
Groups with established, profitable foreign branches may be less affected by the loss of relief but will still need to adapt to the mandatory exemption framework and updated compliance requirements.
Is it a misconception that removing the election simplifies tax planning?
Partly, yes. While removing the election simplifies the headline rules, it does not necessarily make tax planning easier. Businesses lose flexibility to optimise outcomes based on their specific circumstances, particularly where foreign losses are involved. The focus shifts from choosing a tax treatment to managing the commercial and financial consequences of a fixed regime, making forward planning and modelling even more important.
