Richard Thomas, Tax Director, MHA

The UK Government has announced significant changes to how UK‑resident companies are taxed on overseas operations carried out through foreign permanent establishments (PEs).

These reforms will fundamentally alter long-standing rules and may have important implications for groups with international activities.

From 1 January 2027, the UK will move to a mandatory exemption regime for foreign PE profits and losses. Under these new rules:

• Profits from foreign PEs will no longer be subject to UK Corporation Tax, and
• Losses from foreign PEs will no longer be available to offset UK profits.

For UK companies operating foreign PEs in the oil and gas sector, the changes will apply earlier, from 1 September 2026.

Current position

At present, UK companies operating abroad through PEs are generally subject to UK Corporation Tax on foreign PE profits, but can elect into an exemption regime.

This election removes both foreign profits and losses from the UK tax net going forward. The election is irrevocable, and transitional rules can require companies to bring certain profits into charge later.

Where no election is made, foreign losses can often be used to reduce UK taxable profits.

Key features of the new rules

• The optional election will be removed and all UK companies with foreign PEs will automatically fall within the exemption regime from 1 January 2027 (or earlier for oil and gas companies).
• Foreign PE losses will no longer be available to offset UK profits going forward.
• Existing foreign PE losses will not be available to relieve UK profits arising after the new rules take effect.

This represents a significant tightening of the rules compared to the current regime.

New provisions will also be introduced to prevent acceleration of loss utilisation, or planning designed to circumvent the impact of the new rules, and some existing provisions (such as rules relating to “total opening negative amounts”) will be repealed, streamlining the system.

The new rules are set out in the Government’s policy paper. This identifies what the Government considers to be imbalances in the current system, where UK groups may currently use foreign losses to shelter UK profits, but the corresponding foreign profits are often not fully taxed in the UK due, for example, to double tax relief.

Key considerations and next steps

Companies impacted by this change should consider:

• Reviewing group structures - some existing arrangements may no longer deliver expected tax outcomes.
• Forecasting effective tax rates - the inability to use foreign losses in the UK could increase overall tax costs.
• Timing of transactions and investments - businesses may wish to consider the timing of overseas expansion or restructuring before the rules take effect.
• Reviewing their transfer pricing position - HMRC is likely to place greater scrutiny on profit attribution between UK companies and their foreign branches, to ensure an arm’s length position. As a result, transfer pricing for overseas PEs may become a more prominent UK compliance risk, rather than being driven primarily by overseas tax authorities.

Oil and gas groups need to act particularly quickly given the earlier implementation date.

Draft legislation is expected to be published in summer 2026, with final rules to follow.

Companies may wish to seek advice on:

• Impact assessments and modelling
• Review of group structures and overseas operations
• Planning for the transitional rules

It’s becoming clear that businesses should consider reviewing the impact of these changes and seek advice sooner rather than later.

Richard Thomas is a Tax Director at MHA, one of the UK's leading accountancy and business advisory firms. Among its UK locations, MHA has offices in Aberdeen and Edinburgh.