Entity Setup
How Foreign Permanent Establishment Exemption Changes Will Affect Multinationals in the UK
From accounting periods beginning in January 2027, UK‐resident multinationals will face tighter rules on losses from foreign permanent establishments—not all foreign losses will offset UK profits any more.
By NomadicTax Research Team • 5-8 min read • August 10, 2026
## Background: What is the Foreign PE Exemption?
A **Permanent Establishment (PE)** refers to a fixed place of business abroad through which a company conducts activity. Historically, UK Corporation Tax rules allowed some profits and losses attributable to foreign PEs to be **exempt or elective**. That could mean using foreign losses to offset UK tax liability or reduce the taxable base. ([questions-statements.parliament.uk](https://questions-statements.parliament.uk/written-statements/detail/2026-07-13/hcws221?utm_source=openai))
## Recent Policy Change: Reform of PE Exemption
The UK government published draft legislation, with effect from **accounting periods beginning on or after 1 January 2027**, to **exempt profits and losses attributable to foreign PEs** from UK Corporation Tax (CT) computation. This precludes using foreign PE losses to reduce UK taxes. The measure includes:
- **Mandatory exclusion** of foreign PE profits and losses from CT computation. ([questions-statements.parliament.uk](https://questions-statements.parliament.uk/written-statements/detail/2026-07-13/hcws221?utm_source=openai))
- Anti-avoidance adjustments for arrangements entered on or after **13 July 2026** with the main purpose of obtaining a tax advantage through this rule. ([questions-statements.parliament.uk](https://questions-statements.parliament.uk/written-statements/detail/2026-07-13/hcws221?utm_source=openai))
## Who Is Affected?
- UK-resident companies operating through foreign PEs that have **losses abroad**—they can no longer use those to reduce UK tax liability.
- Companies with **foreign PEs earning profits** will also see different treatment compared to aggregate netting of profits and losses previously allowed.
- Enterprises engaged in international operations where loss flows are integral to group tax strategy will need to review structures.
## Action Steps for Affected Multinationals
- **Review accounting period starts**—ensure clarity whether your accounting year crosses 1 January 2027.
- Assess foreign PE structure and flow of losses/profits. Loss-making foreign arms must be valued under new treatment.
- Model the tax impact—what increased UK tax liability arises due to inability to offset foreign losses?
- Consider restructuring: shifting loss recognition, group company reallocation, or converting some PEs into subsidiaries where viable.
- Add anti-avoidance rule compliance: arrangements from 13 July 2026 with purpose of leveraging old exemption might trigger adjustments.
## Example Scenario
Company A is UK-resident with a foreign PE in Country X. In 2026, that PE runs at a loss of £2 million. Under old rules, Company A could offset that against UK profits of similar dimension—reducing its UK CT bill. Beginning 1 January 2027, that loss is no longer usable for UK CT. If Company A had arrangements made from 13 July 2026 explicitly to use that loss, those will be subject to adjustment.
## Mitigation Strategies
- Shift loss-making functions into a subsidiary in the foreign jurisdiction.
- Ensure transfer pricing, cost allocations and profit recognition are aligned with the new treatment.
- Re-evaluate routes for relief through double tax treaties. Some jurisdictions permit deductions or credits which may partially compensate.
Understanding this reform now means multinationals can **plan proactively**, avoid surprises and ensure that international tax planning remains robust under the new Corporation Tax regime.