On 21 May 2026, the Chancellor of the Exchequer, Rachel Reeves, gave a speech in Parliament on the Government's economic response to the war in Iran in which she announced a limited number of tax measures, one of which was to make the foreign permanent establishment (PE) exemption compulsory. For most companies this change will apply for accounting periods beginning on or after 1 January 2027. However, for many oil and gas businesses, who were specifically mentioned in the Chancellor’s speech, it will apply from 1 September 2026 (by deeming an accounting period to end on 31 August 2026). Although positioned by the Chancellor in her speech as action to prevent artificial structuring, the legislation that is being changed has been in place for many years and is routinely applied by businesses within its scope.
The measure aims to prevent multinational groups from relieving losses made in overseas branches against other profits (whether other profits of the company with overseas operations or through group relief) to address a perceived imbalance in the branches not paying corporation tax when they become profitable, either because foreign tax credits are available to shelter those profits or the branch is incorporated into an overseas (i.e. non-UK tax resident) subsidiary.
However, the proposal has a general effect rather than being limited to situations where corporation tax is not paid on the profits of the overseas branch. As the exemption is triggered by having an overseas PE, groups planning future overseas operations may still obtain some relief for initial losses from those operations, which may be important for the commercial viability of those operations, but only for so long as they fall below the threshold for a PE. However, that may not be possible, or practical, for many overseas operations and may impact overseas taxation (e.g. where relief may be available overseas for the losses).
