Branch profits exemption

20 July 2022 / Insight posted in Practical guides

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:

  • Profits or losses of a trade of dealing in or developing UK land (or which would be if the company were non-UK resident);
  • Gains or losses which, if the company were non-UK resident, would be gains or losses on disposals of direct and/or indirect interests in UK land;
  • Profits or losses of a UK property business, or profits consisting of other UK property income (with effect from 6 April 2020, subject to transitional provisions);
  • Profits or losses arising from loan relationships or derivative contracts to which the company is a party for the purposes of its UK property business or to generate other UK property income (with effect from 6 April 2020, subject to transitional provisions).

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.