UK Budget would make foreign-branch corporation tax exemption mandatory

The proposal affects UK-resident companies operating through permanent establishments overseas. Chapter 3A of Part 2 of the Corporation Tax Act 2009 currently allows a company to elect for exemption adjustments that leave relevant foreign-branch profits and losses out of taxable total profits. The proposed measure removes that choice: future foreign-PE profits and losses would be exempt by default. Existing exclusions, including those for investment business and UK property business, are intended to continue.^[1][3]

Transition and loss restrictions

The reform also changes the transition into exemption. The current ‘total opening negative amount’ and related loss-clawback machinery would be removed. Instead, carried-forward income and capital losses, and certain other amounts allocated to foreign PEs, would be restricted so that pre-transition foreign-branch attributes cannot shelter later UK profits. HMRC says the historical lookback used for the transitional calculation has been reduced after consultation from six years to four.^[1][4]

Draft clauses published for consultation amend section 18A, omit section 18F and sections 18J–18O, and retain amended exclusions in section 18P. They would also determine PE status by the relevant double-tax treaty, or by the OECD model where no full treaty applies. A purpose-based anti-avoidance rule targets arrangements made on or after 13 July 2026, while a separate rule prevents companies delaying commencement by introducing short accounting periods ending between that date and 1 January 2027.^[4]

Prepare for mandatory treatment

For multinational groups, the immediate task is to identify UK companies with overseas branches, map each accounting-period start date, and quantify foreign-PE losses and other attributes across the four-year lookback. Groups should model the loss restriction, revisit branch-versus-subsidiary assumptions, and test transactions or accounting-period changes against the proposed anti-avoidance rules. Profit attribution and the continuing statutory exclusions require separate entity-level analysis.^[1][4]

This is a Finance Bill proposal, not enacted law. HMRC expects no new ongoing reporting obligation: affected companies would reflect the regime through existing Corporation Tax processes and returns. Final Finance Bill wording, the detailed transitional schedules and enactment should therefore be checked before implementation decisions are treated as settled.^[1][2]