Entity Setup
Mandatory PE Exemption: How Corporations Should Adjust for Foreign Losses
From 1 January 2027 UK-resident companies will no longer be able to use foreign permanent establishment losses to reduce their UK profits—unless structured properly—see what it means and how to comply.
By NomadicTax Research Team • 5-8 min read • July 21, 2026
## What is the Foreign Permanent Establishment (PE) Exemption?
This policy mandates that UK-resident corporations with foreign permanent establishments **cannot use profits and losses** attributable to those foreign PEs to affect their UK corporation tax base. Current rules allow those companies, in many cases, to elect to exempt those profits or losses; under the new regime, **exemption becomes mandatory**. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
## Effective dates and sectors
- **From 1 January 2027**: the exemption will apply generally to UK-resident companies in all sectors. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- **From 1 September 2026**: applies sooner to companies with foreign PEs in the **oil and gas extraction/exploration** sector. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
## Why this change matters
- Prevents **losses overseas** from being used to reduce UK profits, which has been a gap exploited by large multinational groups especially in volatile commodities sectors. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- Brings UK rules more in line with **international norms** by giving foreign PE defined under international treaties or OECD models rather than UK domestic definitions. ([gov.uk](https://www.gov.uk/government/publications/reform-of-the-foreign-permanent-establishment-exemption/draft-legislation-accessible-version?utm_source=openai))
## What corporations should do now to prepare
### Review current foreign PE structures
- Identify if you have foreign permanent establishments as defined under the upcoming rules (treaty-or OECD-aligned). Review existing loss carry-forwards tied to those PEs. ([gov.uk](https://www.gov.uk/government/publications/reform-of-the-foreign-permanent-establishment-exemption/draft-legislation-accessible-version?utm_source=openai))
### Adjust accounting periods and forecasts
- For companies in oil and gas: ensure your accounting period crossing 1 September 2026 is prepared to apply the exemption.
- For all others: ensure accounting periods beginning on or after **1 January 2027** properly separate or exclude foreign PE losses from UK tax computations. ([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
### Update tax planning strategies
- Examine whether foreign-sourced losses are being used to offset UK profits. With mandatory exemption, this tactic will no longer reduce UK tax liability.
- Consider using group relief, restructuring foreign operations, or alternative jurisdictions where foreign PE losses are treated differently. Also ensure capital allowances or other incentives are not reliant on loss-offsetting expectations.
### Compliance and documentation
- Maintain documentary evidence of foreign activities, contracts, profit/loss attribution, and accounting period dates.
- Stay alert to guidance from HMRC and publish draft legislation; consultations have been released and there may be transitional rules. ([gov.uk](https://www.gov.uk/government/publications/reform-of-the-foreign-permanent-establishment-exemption/draft-legislation-accessible-version?utm_source=openai))
## Case study
Suppose **GlobalOil Ltd.**, based in the UK with overseas extraction operations in Country A, currently uses losses from Country A’s operations to reduce UK corporation tax. Under the new regime:
- From 1 September 2026, losses from Country A cannot reduce UK taxable profits if GlobalOil is in the oil & gas sector. \(No election; mandatory exemption.)
- If Country A’s operations continue into calendar year 2027, GlobalOil should separate those losses in accounts and exclude them from UK CT computations starting the first accounting period on/after 1 Sep 2026. Failure to do so may mean restated accounts and unexpected tax liabilities.
## Bottom line
This change removes flexibility previously enjoyed by multinationals with foreign PEs to use losses overseas to reduce UK tax liability. Corporations must audit current arrangements, adjust accounting, and tune planning strategies now to avoid costs and compliance risks in 2026–2027.