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      On 13 July 2026, HMRC published draft legislation that would make the currently elective Foreign Branch Exemption (FBE) regime mandatory for accounting periods beginning on or after 1 January 2027. This follows the policy paper published on 21 May 2026, but without the earlier start date for oil and gas activities.

      The mandatory FBE will be relevant for UK companies with Permanent Establishments (PEs) that have not already elected into the FBE regime. It applies to a wide range of industries, with only a small number of exceptions including UK property businesses, investment businesses, and basic life assurance and general annuity businesses. It also applies regardless of whether the PE had previously been profitable or loss-making.

      The key points in the draft legislation are:

      • The FBE will become mandatory rather than elective for accounting periods beginning on or after 1 January 2027, such that going forward certain profits and losses of the PEs will be excluded from UK corporation tax;
      • Existing Total Opening Negative Amount (TONA) rules will be repealed; and
      • The definition of a PE for FBE purposes will be aligned with the relevant double tax treaty definition, where applicable, or otherwise the OECD model treaty definition.

      A significant feature of the draft legislation is the introduction of transitional rules replacing the TONA regime, which restrict the carry-forward of certain losses attributable to foreign PEs to periods after the FBE becomes compulsory. The allocation of carried-forward losses to the PE is prescribed, requiring companies to apply a series of steps to identify how much of their carried-forward losses are restricted once the FBE applies.

      Claire Angell
      Claire Angell

      Partner, Head of Energy Tax

      KPMG in the UK

      Damon Lambert
      Damon Lambert

      Tax Partner, Insurance

      KPMG in the UK

      The transitional provisions for capital allowances require companies to identify plant and machinery attributable to their foreign PEs and remove those assets from their capital allowance pools without triggering balancing adjustments. However, balancing adjustments may arise on some assets used in the PE (during a six-year look-back period) that cost more than £5 million (with any consequent loss being restricted).

      To prevent abuse, a new targeted anti-avoidance rule applies from 13 July 2026. It targets arrangements designed to reduce the impact of the new loss restrictions and applies where timing, purpose and abuse conditions are met. Additional anti-avoidance rules prevent companies from delaying implementation by shortening accounting periods before 1 January 2027.

      The new rules may have other tax consequences, depending on the activities of the PE, such as changes to its R&D expenditure credit (RDEC) claims and Patent Box positions, restrictions on its losses and capital allowances, potential loss of treaty relief from withholding taxes on payments received by PEs and potential Pillar Two impacts. Insurance companies with Lloyd’s Corporate Members may also need careful consideration as to whether the overseas taxes arise from PEs or overseas taxation of UK based business.

      There may also be an increased compliance burden, potential restrictions on employee share scheme tax deductions, and an annual review of the FBE’s anti-diversion rules (which are based on the Controlled Foreign Company rules).

      Additionally, from a tax accounting perspective there will be a potential Effective Tax Rate (ETR) and deferred tax impact in the year the legislation is substantively enacted, that may have secondary impact on Pillar Two calculations and safe harbours.

      For further information please contact:

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