Tax Planning
Planning for Foreign Permanent Establishment (PE) Tax Rules in the UK from January 2027
Businesses with operations abroad need to prepare now for the mandatory foreign PE exemption which changes how profits and losses from foreign branches will be taxed.
By NomadicTax Research Team • 5-8 min read • June 24, 2026
## What’s Changing and Why It Matters
The UK Government has announced a new mandatory **Foreign Permanent Establishment (PE) Exemption**. Under this change, profits and losses attributable to a foreign PE will be exempt from UK Corporation Tax (CT) for most UK-resident companies for accounting periods starting on or after **1 January 2027**. For companies in oil and gas extraction or exploration, the change comes earlier: from **1 September 2026**, with accounting periods deemed to end on 31 August 2026.([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
The big impact: losses from foreign operations can no longer be used to offset profits in the UK, removing a potential avenue U.K. businesses used to reduce their CT bill. Previously, companies could elect to exempt foreign PE profits — but this was optional and election-based. Imposing it mandatorily restructures the CT landscape.([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
## Who Will Be Affected?
- **UK-resident companies** with **foreign permanent establishments**, particularly those with large foreign capital allowances or losses. Oil and gas firms are at the forefront since they often hold significant foreign PE losses.([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- Companies doing cross-border business where the foreign PE election was being used strategically to reduce UK CT liabilities.
## Practical Examples
- A UK company with a foreign branch that has been making repeated losses aimed to offset UK profits. Under the new rules, future accounting periods won’t allow that loss offset. That could mean higher UK tax bills.
- An oil-and-gas exploration firm: from 1 September 2026, loses foreign extraction PE losses will immediately lose their ability to shelter UK profits. Important to consider depreciation capital patterns.
## Key Action Steps Before 2027
- **Review accounting periods**: Make sure your financial year-ends are aligned and understand when the new rules kick in for your business type (especially oil & gas).
- **Audit your foreign PEs**: Assess all foreign branches or PEs to calculate historical losses and profits: what losses still exist and could have been used for election, but now will be blocked.
- **Re-calculate CT forecasts** to account for loss of relief; cash flow modelling is essential.
- **Consult cross-border tax counsel**: There may be double taxation relief, treaty nuances, or transitional provisions that can soften the blow.
## Transitional & Compliance Considerations
- The government promises **draft legislation** will be published over the summer to give businesses time to prepare.([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 “other attributes” arising *before* the effective dates will _not_ be usable to relieve UK profits *after* the change.([gov.uk](https://www.gov.uk/government/publications/foreign-permanent-establishment-exemption/foreign-permanent-establishment-exemption-policy-paper?utm_source=openai))
- Anti-avoidance measures will accompany the exemption to prevent artificially accelerating utilisation of losses just ahead of the deadline.
## Bottom Line
If your company has foreign PEs, especially with losses or significant overseas capital allowances, now is the time to get ready. These changes fundamentally shift the balance of profit allocation and could materially raise your effective UK CT rate. Start budgeting accordingly, explore available reliefs, and ensure you understand the timeline for your business sector.