The basic rule of UK corporation tax is that a UK resident company is taxed on its worldwide profits wherever arising, including those of any foreign branches. Credit relief is then given against the UK corporation tax for the foreign tax paid on the profits of foreign branches.
UK resident companies can however elect for profits of their foreign branches to be exempt from UK taxation. The exemption will apply to the branch’s trading profits, investment income connected with the branch and chargeable gains. The following profits, gains and losses are outside of the scope of the exemption:
A branch in this context is anything that constitutes a “permanent establishment” for UK corporation tax purposes. This will usually mean any fixed premises of the company that are located in a foreign territory, although certain agency arrangements can also be included even where there is no physical presence.
The new branch profits exemption will usually improve a company’s overall tax position where the rate of foreign tax is lower than the UK rate because the taxation of branch profits will usually be capped at the foreign tax rate, with no additional UK tax being levied.
In addition, where the foreign tax rate is higher than the UK rate, there may be an administrative advantage in treating the branch profits as tax exempt, instead of treating the profits as taxable in
the UK and then calculating the relevant double tax reliefs.
Find out more in our branch profits exemption guide, or contact us directly.