Policy paper

Foreign Permanent Establishment Exemption — policy paper

Published 21 May 2026

General description of the measure

The government has announced on 21 May changes to the taxation of UK-resident companies who conduct part of their business through foreign permanent establishments (PEs).

For most companies, it will be mandatory for profits and losses attributable to a foreign PE to be exempt from UK tax for 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.

This measure will prevent losses attributable to foreign PEs from sheltering UK profits from tax, while maintaining an internationally competitive regime.

Current regime

A company resident in the UK operating abroad may do so through a subsidiary company in the other state or, alternatively, through a PE in that state.

Under UK law, a company is subject to UK Corporation Tax (CT) on the profits of its foreign PEs, but it may make an election to exempt the profits of its foreign PEs. The effect of this election is that future profits of the company’s foreign PEs are not subject to UK CT and future losses may not be used to offset the UK profits of the company for CT purposes.

Such elections are irrevocable and require the company to determine whether losses were made in the years prior to the election, in which case an equivalent amount of profits must be brought into charge in the years following the election. Profits will also be brought into charge after the election is made if the anti-diversion rules are triggered.

Case for change

Under the current approach, where an election has not been made, the foreign losses of a UK company are available to be used to relieve UK profits of the main company or the wider group.

This impact is not being appropriately balanced by equivalent foreign profits being brought into the charge of UK CT. In some cases this is because the UK profits are largely or fully sheltered by the availability of double taxation relief and in other cases a multinational group may subsidiarise a foreign PE at the point that it becomes profitable, which removes those profits from the charge to UK CT without the transfer of the PE business generally giving rise to a taxable gain.

The result is that the UK Exchequer is in some cases compensating multinational groups for costs/losses incurred overseas through reduced CT on UK profits, without corresponding tax being collected on their foreign profits.

This effect is particularly significant for groups which generate very large foreign losses or are able to claim very large amounts of capital allowances in relation to their foreign PEs, for example in the oil and gas sector. Where circumstances allow, these structures can substantially reduce the UK CT liability of multinational groups, even where unusual market conditions result in unusual or elevated UK profits.

It is standard international practice to seek to protect against this outcome. The current UK regime includes some protections that apply when a foreign PE exemption election is made, but these have limitations in practice.

Proposed revisions

The government will make the foreign PE exemption mandatory. These changes will be published in draft legislation over the summer and are intended to have effect for accounting periods beginning on or after 1 January 2027.

For UK-resident companies with foreign PEs that carry on activities in connection with the exploration or exploitation of oil and gas, this measure will commence from 1 September 2026. This prevents any losses arising in foreign PEs after that date from being offset or relieved against UK profits. This will be achieved by deeming the accounting periods of such companies to end on 31 August 2026, with the new regime applying from the following day.

Transitional rules will be amended such that losses and other attributes arising in years before exemption takes effect will not be available to relieve UK profits of the company or the wider group arising after the effective date.

The existing legislation taxing profits of an exempted foreign PE where there is a ‘total opening negative amount’ will be repealed.

These changes will be accompanied by an anti-avoidance rule intended to prevent arrangements which would seek to artificially accelerate the utilisation of such losses or other attributes or otherwise minimise the impact of these changes.

This change preserves the UK’s competitive exemption regime for the taxation of foreign PE profit which is simple and supports companies seeking to expand into foreign markets.