UK Government announces mandatory foreign permanent establishment exemption

Why should I read this?

The UK Government has announced that it will make it mandatory for the profits and losses of UK resident companies which are attributable to foreign permanent establishments (PEs) to be exempt from UK corporation tax (CT), in order to prevent losses attributable to foreign PEs from sheltering UK profits from tax.

The change will apply to most companies 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, the change will apply from 1 September 2026.

Currently, a UK resident company is subject to UK CT on the profits of its foreign PEs, and the losses of its foreign PEs are available to relieve the UK profits of the UK resident company or its wider group.

However, the UK resident company may make an irrevocable election, with the effect that future profits of its foreign PEs are not subject to UK CT and future losses of its foreign PEs cannot be used to offset the UK profits of the company for UK CT purposes. This elective treatment will now be made mandatory.

What should I do?

Affected businesses should consider the following actions.

• Review existing PE structures – UK resident companies with foreign PEs should review their current arrangements and assess the extent and financial impact of their use of foreign PE losses to shelter UK profits. This is particularly urgent for companies in the oil and gas sector, given the earlier implementation date of 1 September 2026.

• Consider alternative structures – Affected businesses should consider whether, subject to any anti-avoidance rules (see below) and wider commercial considerations, it would be beneficial to restructure their overseas operations prior to the mandatory foreign permanent establishment exemption coming into effect. For example, they could consider the impact of transferring their overseas PE into an overseas subsidiary.

• Monitor legislative developments – The government has indicated it will publish draft legislation during summer 2026. Businesses should carefully review the draft legislation and any further guidance from HMRC, in order to understand the detailed rules. Transitional rules in particular may have a significant impact on UK resident companies with foreign PE losses arising in pre-exemption periods.

Jubilee Easo, Co- Head of Global Energy, commented:

“In an economy where oil and gas companies are already impacted by the Energy Profits Levy, it will be important for them to assess the affect the mandatory regime will have on their businesses, and to consider how to build these changes into their strategic decisions.”

Nick Swiss, Head of Finance Group, commented:

“Cross‑border tax and regulatory developments are increasingly driving operational and structural change across the banking sector. These changes are expected to have significant impact, and are likely to prompt strategic restructuring by affected institutions.”

What else do I need to know about the mandatory foreign permanent establishment exemption?

Rationale for the change

Under the current rules, where a foreign PE exemption election has not been made, the losses of foreign PEs may relieve the UK profits of the UK resident company or its wider group. The UK government considers this impact is not being appropriately balanced by equivalent foreign profits being brought into the charge of UK CT, and therefore the UK is compensating some multinational groups for overseas losses through reduced CT on UK profits, without corresponding tax being collected on their foreign profits. This may be because:

• the UK profits are largely or fully sheltered by the availability of double taxation relief; or

• a multinational group may transfer a foreign PE into a subsidiary 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 UK government has identified the oil and gas sector as an example of an area where this effect is particularly significant, because groups generate very large foreign losses or are able to claim very large amounts of capital allowances in relation to their foreign PEs. (This is presumably the reason why the change is being implemented early in relation to the oil and gas sector.) The government notes that such structures can substantially reduce the UK CT liability of multinational groups, even where unusual market conditions result in unusual or elevated UK profits.

Implementation of the change

The application of the measure from 1 September 2026, for UK resident companies with foreign PEs that carry on activities in connection with the exploration or exploitation of oil and gas, 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.

The current PE exemption election requires the UK resident 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 are also brought into charge after the election is made if the anti-diversion rules are triggered.

• Under the amended regime, 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 also be repealed.

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

For more information on the mandatory foreign permanent establishment exemption

For more information, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts listed below.