If your business operates through overseas branches, or you are based outside the UK and have a permanent establishment here, recent announcements regarding Foreign Branch Exemption from the UK Government could have a direct impact on how your profits and losses are taxed. Here is what you need to know.
What is the Foreign Branch Exemption?
The Foreign Branch Exemption (FBE) is a UK corporation tax regime that determines how profits and losses from overseas permanent establishments (PEs); broadly, fixed places of business in another country, are treated in the hands of a UK company.
Under the current rules, the FBE is a choice. UK companies can elect into the regime, which means profits and losses arising from overseas branches sit outside the scope of UK corporation tax entirely. Businesses that choose not to elect can instead offset overseas branch losses against their UK taxable profits, while overseas profits remain subject to UK tax, typically with double tax relief available to avoid being taxed twice on the same income.
What is changing, and when?
The Government has announced that the FBE regime will become mandatory. From the relevant implementation dates, profits and losses from overseas branches will automatically be excluded from UK corporation tax, regardless of whether a company would previously have chosen to elect in or not.
The key dates to be aware of are:
- 1st September 2026 for certain oil and gas activities
- Accounting periods beginning on or after 1st January 2027 for the majority of UK companies
The Government also intends to introduce anti-avoidance provisions to prevent businesses from accelerating loss relief or taking steps to preserve the benefit of overseas branch losses before the new rules come into force.
Draft legislation has not yet been published, so the precise detail, including transitional rules, the treatment of historic losses, and the final shape of the anti-avoidance measures, remains to be confirmed.
Who is most likely to be affected?
For some businesses, the practical impact will be modest. But for others, particularly those in sectors that commonly generate overseas losses during early investment or development phases, such as energy, natural resources, and infrastructure, the removal of the ability to offset those losses against UK profits could result in a meaningfully higher tax cost.
If your business falls into any of the following categories, it is worth taking stock now:
- You are a UK company with one or more overseas permanent establishments
- You are currently using, or expect to use, overseas branch losses to reduce your UK tax liability
- You operate in sectors with significant upfront overseas expenditure
- You are subject to, or approaching the threshold for, the OECD’s Pillar Two global minimum tax rules
What should you be doing now?
Although the detail is still to come, there are practical steps that businesses can be taking in advance of the legislation being published:
- Review your branch structures: understand where you have permanent establishments and how they are currently treated for UK tax purposes
- Model the financial impact: consider what your future tax position might look like if overseas branch losses can no longer be offset against UK profits
- Consider the wider international tax picture: the FBE reform does not sit in isolation; its interaction with transfer pricing rules, tax treaties, and Pillar Two requirements all need to be considered
- Monitor developments: the draft legislation, when published, may contain transitional provisions that could affect the timing and nature of any action required
Early engagement with your advisers will put you in a much stronger position to manage the transition effectively.
How can Ormerod Rutter Fung help?
International tax and accounting is at the heart of what we do. Whether you are a UK business expanding overseas, or an overseas business with operations here in the UK, our team has the specialist knowledge to help you navigate changes like this one with clarity and confidence.
If you think the FBE reform may affect your business, we would be happy to talk it through with you; whether that means assessing your current position, modelling the potential impact, or advising on how to structure your affairs ahead of the new rules taking effect.
Get in touch with our team today on 01905 777600 or email us at hello@ORFung.co.uk