The UK Government has announced significant changes to the taxation of foreign permanent establishments (PEs) of UK-resident companies. According to a policy paper published by HMRC on 21 May 2026, they will become mandatory for most UK companies from accounting periods beginning on or after 1 January 2027. An earlier implementation date of 1 September 2026 will apply to companies engaged in foreign oil and gas exploration and extraction activities.
Key Change
Under the current rules, UK-resident companies may elect to exempt profits attributable to foreign PEs from UK corporation tax. Once made, the election is irrevocable and applies to all foreign PEs of the company. The new measure removes this choice by making the exemption compulsory. As a result, both profits and losses attributable to foreign PEs will generally be excluded from the UK corporation tax computation.
Government’s Rationale
The Government considers that the existing regime may allow certain groups to obtain UK tax relief for foreign PE losses without subsequently bringing corresponding foreign profits into the UK tax base. According to HMRC, this issue is particularly relevant for businesses generating substantial foreign losses or claiming significant capital allowances through overseas PEs, especially in the oil and gas sector.
Proposed revision
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.
Practical Implications for Businesses
Groups with foreign PEs should assess the impact of the reform on their tax position, forecasting models, and international structures. Businesses that currently benefit from UK relief for foreign PE losses may face higher UK taxable profits once the mandatory exemption applies. The changes may also reduce the tax significance of choosing between PE and subsidiary structures for overseas operations.
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