Policy paper

Corporation Tax — reform of the foreign permanent establishment exemption

Published 13 July 2026

Who is likely to be affected 

UK-resident companies with foreign permanent establishments (PEs) will be affected by this measure.  

General description of the measure 

This measure reforms the taxation of foreign PEs, making the elective exemption regime that applies to their profits and losses from UK Corporation Tax (CT) mandatory.   

This measure repeals the current ‘loss clawback’ rules and replaces them with a new transitional regime that prevents companies carrying losses and other amounts allocable to a foreign PE forward into a post transition period. It includes targeted anti-avoidance rules to counteract arrangements designed to undermine the reform. 

Policy objective 

This measure protects the UK’s territorial Corporation Tax base, preventing costs incurred overseas being used to reduce UK tax. 

Background to the measure   

The measure was announced on 21 May 2026. HMRC published a policy paper alongside that statement setting out the measure in more detail.  

The current elective regime allows companies who would otherwise pay UK tax on their foreign PE profits to opt out, while allowing those who incur upfront costs expanding overseas operations to obtain UK tax relief. Where companies do obtain significant UK tax relief upfront for overseas investment the current regime means that, in many cases, the UK will not secure proportionate future tax revenue from the corresponding profits. 

It is standard international practice to seek to protect against this outcome. Extending the current foreign PE exemption does this, while preserving the UK’s competitive, territorial Corporation Tax regime. 

Detailed proposal 

Operative date 

The measure will have effect for accounting periods beginning on or after 1 January 2027. Companies will be required to restrict their losses and exempt future profits and losses from that accounting period onwards.  

The measure includes targeted anti-avoidance rules: a purpose-based rule which will apply to arrangements made on or after 13 July 2026 and specific rules to prevent the impact of the reform being delayed by changing the length of accounting periods. 

Current law  

The current law providing for the elective exemption of the profits and losses of foreign PEs of UK-resident companies is found in Chapter 3A of Part 2 of Corporation Tax Act 2009. 

Proposed revisions 

Chapter 3A is amended so that it applies by default, rather than by election.  

Chapter 3A is amended to ensure that the term ‘permanent establishment’ is given its international meaning in all cases. 

Chapter 3A is amended to abolish the concept of ‘total opening negative amount’, which is replaced by a loss restriction which applies on transition to the new regime. 

Two new targeted anti-avoidance rule are introduced which is designed to counteract the effect of arrangements intended to provide a tax advantage by reducing the impact of the new loss restriction and rule which prevents delayed commencement of the new regime through the use of short accounting periods. 

Consequential amendments are made to reflect that the income of foreign PEs of UK companies will now be exempt from Corporation Tax. 

Summary of impacts 

Exchequer impact (£m) 

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
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The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event 

Macroeconomic impact 

This measure will be formally assessed once costings have been certified by the OBR but is not expected to have any significant macroeconomic impacts 

Impact on individuals, households and families 

This measure is expected to have no impact on individuals, households or families as it only affects businesses. 

Equalities impacts 

This measure only affects businesses, therefore it is not anticipated that there will be disproportionate impacts on any protected groups. 

Administrative impact on business including civil society organisations 

This measure is expected to impact cross-border companies with foreign permanent establishments by introducing a new transitional regime that prevents companies carrying losses and other amounts allocable to a foreign PE forward into a post-transition year. 

This measure is likely to increase one-off customer costs for some of the businesses affected. HMRC is working to understand these one-off costs and any other impacts, which will be formally assessed at a future fiscal event. The government is committed to keeping additional business burdens to a minimum in respect of this change.  

One-off costs are expected to include familiarisation with the measure and updating reporting processes. There are not expected to be any ongoing costs or savings, as companies are already required to allocate profits to their foreign PEs.  

This measure is not expected overall to impact businesses’ experience of dealing with HMRC, as it doesn’t significantly change or introduce tax admin processes or obligations. 

This measure is not expected to impact civil society organisations 

Operational impact (£m) (HMRC or other) 

HMRC systems already provide for PE exemption under the existing elective regime, so no substantial costs should be incurred implementing the measure. A review of other costs is ongoing. 

Other impacts 

Other impacts have been considered and none have been identified. 

Monitoring and evaluation 

The impact of the measure will be monitored through tax receipts and information contained in Corporation Tax returns. 

Further advice 

If you have any questions about this change, contact the Base Protection Policy team by email: foreignpepolicy@hmrc.gov.uk