Foreign permanent establishment exemption to become mandatory

The government has confirmed that UK-resident companies operating through foreign permanent establishments (PEs) will be required to treat profits and losses attributable to those PEs as exempt from UK corporation tax. This changes the current position, under which the company must elect for the exemption to apply.
The measure intended to prevent companies that have not made an election from using foreign PE losses and other deductions, such as capital allowances, to reduce UK taxable profits without an equivalent amount of future foreign profit being brought into charge.

For most companies, the change will take effect for accounting periods beginning on or after 1 January 2027. For companies in the oil and gas exploration or extraction activities through foreign PEs, it will take effect from 1 September 2026.

What does the draft legislation provide?

Draft legislation was published on 13 July 2026 and is open for technical consultation until 13 September 2026. The draft provisions set out the proposed commencement, transitional and anti-avoidance rules.

Under the draft provisions:

• oil and gas companies using foreign PEs will be treated as ending an accounting period on 31 August 2026, with a new period beginning on 1 September 2026;
• companies in other sectors will generally enter the new regime from the beginning of their first accounting period starting on or after 1 January 2027, with no change to their usual tax reporting periods;
• transitional rules will restrict the use of foreign PE losses and other attributes arising before the exemption takes effect against UK profits arising afterwards;
• anti-avoidance measures will counter arrangements intended to accelerate the use of losses or other reliefs before the new rules apply; additional provisions will address attempts to delay entry into the regime by creating short accounting periods.

The anti-avoidance provisions may apply to arrangements that come into being on or after 13 July 2026, as well as arrangements initiated earlier but committed to, confirmed or formalised on or after that date. Companies considering transactions or changes before the main commencement date should therefore take advice before proceeding.

Companies which have already elected to exempt profits and losses of their foreign PEs should not be affected by the move from an elective to a mandatory regime itself. However, they should still consider whether any of the wider draft provisions have implications for their circumstances.

Companies that have not made an election should assess the potential impact now, particularly where their foreign PEs are loss-making, generate significant capital allowances or hold substantial carried-forward reliefs.

How we can help

Moore Kingston Smith can help companies and groups prepare for the proposed changes. Our support includes:

• reviewing existing PE and subsidiary structures;
• analysing foreign PE losses, capital allowances and other reliefs;
• assessing the effect of the transitional and anti-avoidance provisions;
• advising on restructuring and financing arrangements;
• modelling the potential tax and cash flow implications.

Please contact our corporate and business tax specialists or energy, mining and renewables team to discuss how the proposed rules may affect your organisation.