The UK Government has announced significant changes to the Foreign Branch Exemption (FBE) regime, marking an important shift in the way overseas branch profits and losses are treated for corporation tax purposes.
What is Foreign Branch Exemption?
Under the current rules, UK companies can choose whether to elect into the FBE regime. Companies that make the election can exempt profits and losses from overseas permanent establishments (PEs) from UK corporation tax.
Alternatively, businesses that do not elect into the regime may be able to offset overseas branch losses against UK taxable profits, while overseas profits remain subject to UK tax, with double tax relief often available.
What will change with this reform?
The proposed reform will make the FBE regime mandatory. This means that profits and losses arising from overseas branches will automatically fall outside the scope of UK corporation tax, removing the ability for companies to use foreign branch losses to reduce their UK tax liabilities.
The changes are expected to apply from 1st September 2026 for certain oil and gas activities, and from accounting periods beginning on or after 1 January 2027 for most other UK companies. The Government also plans to introduce anti-avoidance measures to prevent businesses from accelerating or preserving relief for overseas branch losses before the new rules take effect.
How will Foreign Branch Exemption reform affect your business?
For many businesses, the practical impact may be limited. However, multinational groups and companies operating in sectors that typically generate significant overseas losses during investment phases, such as energy and natural resources, could face higher tax costs and may need to revisit their tax planning strategies.
Although draft legislation is still awaited, businesses with overseas permanent establishments should start assessing the potential impact now. Reviewing branch structures, modelling future tax positions and considering the interaction with wider international tax rules, including Pillar Two requirements, will help organisations prepare for the transition.
The reform is intended to simplify the UK’s approach to taxing overseas branch activities, but for some groups it may also reduce flexibility and increase tax liabilities. Early planning will be key to managing the impact of these changes.
As the draft legislation is still awaited, detailed conclusions cannot yet safely be drawn on transitional rules, historic losses, precise scope, or the final anti-avoidance design.
How Ormerod Rutter can help:
If you think that your business may be affected by the changes to the FBE, our international tax team are on hand to help you understand the implications and talk you through next steps.
Contact us today on 01905 777600 or email hello@ormerodrutter.co.uk
