In May 2026, the UK government announced significant changes to the foreign branch exemption regime, which will fundamentally alter how UK companies are taxed on overseas branch profits and losses.
The reforms will make the exemption mandatory, removing the ability to use foreign branch losses against UK taxable profits.
What is the current foreign branch exemption?
The UK foreign branch exemption allows companies to elect to exclude profits and losses from overseas permanent establishments (PEs) from UK corporation tax.
If a company opts in:
- overseas profits are not taxed in the UK
- overseas losses cannot be used to reduce UK tax.
If a company opts out:
- overseas profits are taxed in the UK (double tax relief may be available)
- overseas losses can be used to reduce UK profits (subject to the application of the hybrid mismatch rules).
What is changing?
Under the proposed legislation, the UK government will introduce a mandatory foreign branch exemption, meaning all overseas branch profits and losses will be excluded from UK corporation tax calculations, regardless of election.
When enacted the changes will apply:
- from 1 September 2026 for oil and gas exploration and exploitation activities. Where the year-end differs, this will be achieved by deeming a period end of 31 August 2026
- for accounting periods beginning on or after 1 January 2027 for most UK companies.
Anti-avoidance legislation will also be introduced to prevent companies from:
- using carried forward branch losses against future UK profits either in the company or as group relief
- structuring arrangements to accelerate loss relief.
Most companies will be unaffected by the changes. However, the impact is expected to be particularly significant for UK areas of multinational groups and industries where overseas branch losses often arise during early-stage investment such as energy and natural resources.
Groups already navigating hybrid mismatch rules may find the changes a welcome simplification. Otherwise, those reporting under BEPS Pillar 2 may need to consider how the changes will affect their reporting.
What action could be taken now?
It should be noted draft legislation is still pending. In the meantime, affected businesses should take proactive steps to assess the tax impact of the foreign branch exemption changes, including:
- reviewing overseas permanent establishment structures
- modelling future corporation tax liabilities
- evaluating loss utilisation strategies under the new rules
- considering interaction with BEPS Pillar 2 and group tax planning.
Key takeaway
The UK’s proposed reform will make the foreign branch exemption mandatory, preventing companies from using overseas branch losses to reduce UK corporation tax. While simplifying compliance, the changes may increase tax costs for groups with significant international operations, particularly in capital-intensive sectors.
To discuss the new service and how best to prepare an application, please get in touch with your usual Crowe contact.
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