Entity Setup
How UK Businesses Can Prepare for the Foreign Permanent Establishment Exemption from January 2027
A major shift in international tax for UK-resident companies from 1 Jan 2027: foreign permanent establishments (PEs) exemption becomes mandatory. Here’s what businesses must do now to stay compliant and optimise outcomes.
By NomadicTax Research Team • 5-8 min read • June 25, 2026
## What is the Foreign PE Exemption Change?
- From 1 January 2027, **all UK-resident companies** with foreign Permanent Establishments (PEs) will be **required** to exempt both profits *and losses* from UK Corporation Tax—meaning they can no longer offset foreign PE losses against UK profits. For oil & gas companies, this change starts earlier, **from 1 September 2026**. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- The existing regime allowed companies to *elect* into an exemption regime voluntarily; under the new policy, the requirement is mandatory. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
## Implications for Businesses
- **No more loss relief**: Companies with loss-making foreign PEs will lose the ability to offset those losses against domestic profits after the effective date.
- **Effect on oil & gas sector**: Losses from PEs in oil & gas are especially impacted because the earlier start date applies. Must prepare to adjust accounting periods ending around September 2026. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- **Transitional rules**: Losses and attributes from periods **before** the change won’t be available after the effective date. Also, anti-avoidance rules will target arrangements designed to shift losses artificially before the change. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
## What You Should Do Now: Actionable Steps
1. **Identify all foreign PEs**
- Do you operate abroad through branches or permanent establishments rather than separate legal subsidiaries?
- Map accounting periods for each PE relative to the 1 January 2027 (or 1 September 2026 for oil & gas) cutoff.
2. **Assess your loss exposure**
- Estimate current or projected losses in foreign PEs. Quantify what you may lose in relief under the new regime.
3. **Forecast profit shifting**
- If you’re in oil & gas, consider whether shifting assets or structuring should change ahead of September 2026. Beware anti-avoidance penalties.
4. **Update tax strategy**
- Consider how you finance foreign operations—perhaps through subsidiaries rather than PEs if more favourable.
- Revisit your global group’s tax group structure in light of mandatory exemption.
5. **Review documentation and systems**
- Ensure records are clear: dates, source of profits, losses, nature of PE operations are well documented.
- Systems should be updated to separate foreign PE results cleanly for tax reporting.
## Example Scenario
> *Company ABC Ltd* has a PE in Country X that has always made losses of £2 million annually. Under the old election regime, these losses could offset ABC Ltd’s UK profits of £5 million, reducing UK tax. But under the new mandatory exemption, from 1 January 2027, ABC Ltd cannot use those £2 million losses, meaning its UK-taxable profits remain at £5 million.
Meanwhile, *OilCo UK*, operating PEs in oil & gas, will have the change from 1 September 2026—so if it has a loss-making PE for the accounting year ending 30 November 2026, only a part of that year before 1 September will be treatable under the new rules.
## Conclusion
This change to foreign PE taxation represents one of the more substantial international corporate tax shifts in recent years. While aimed at ensuring fairness and preventing erosion of the UK tax base, it also raises significant planning challenges. Companies with foreign PEs—especially in loss-making operations—should act immediately to assess impact, revise structure, and align accounting and operations to the new regime. Timing and documentation will be key.