UK companies expanding overseas have often chosen to do so through foreign branches, in part because of the tax reliefs and flexibility they can provide. HMRC’s proposed changes to the foreign branch exemption rules may now prompt some groups to rethink that approach.
The profits and losses of overseas branches of UK companies are currently taxed, and reported for tax purposes, both in the territory in which the branch operates and in the UK as part of the company’s wider UK corporation tax position, unless the company has elected for the foreign branch exemption.
Last week, HMRC announced that the foreign branch exemption will no longer be optional and will instead become mandatory for accounting periods beginning on or after 1 January 2027. For most groups, this means overseas branch profits and losses will sit outside the UK tax net. For certain oil and gas activities, the change will apply earlier from 1 September 2026.
Historically, branch structures could be attractive in the early years of overseas expansion because foreign trading losses – and in some cases significant overseas capital expenditure – could help support the UK tax position.
The proposed changes alter that dynamic. HMRC’s paper specifically references relief for foreign losses and capital allowances as part of the rationale for the reform. As those reliefs fall away, some of the traditional tax advantages of operating through a branch structure may reduce or disappear altogether.
The announcement could also have implications for UK tax incentives. Groups with overseas branches involved in innovation activity may find the UK tax value of that activity is lower than previously expected. Early commentary suggests the reform could reduce the benefit of some UK R&D claims where relevant expenditure is incurred through an overseas permanent establishment.
Although draft legislation has not yet been published, finance teams may want to begin considering the potential impact now – particularly where overseas expansion, branch structures or international R&D activity form part of wider growth plans.
For some groups, the changes may prompt a fresh review of whether a branch structure remains the right long-term fit, or whether operating through a subsidiary could now offer a more effective alternative.
If you would like to discuss how the proposed changes could affect your business or international structure, please contact Andrew Fitton, Corporate and International Tax Partner, or your usual UNW tax contact.
