The UK government is changing the corporation tax treatment of overseas branches of UK companies. For most companies, the change will automatically exclude overseas branch profits and losses from the UK tax computation, although the branch will still be subject to the tax rules of the territory in which it operates.
Background
At present, a UK company is generally within UK corporation tax on its worldwide profits. This can include profits made through overseas branches.
Typically, a UK company with an overseas taxable branch files tax returns in the territory where that branch operates and also includes the branch results in its UK corporation tax computation.
In broad terms, if the branch makes a loss, that loss may be treated as a loss of the UK company. If the branch makes a profit, the UK company may be able to claim credit for foreign tax against UK tax on the same profits, although the rules on what can be offset, and when, are complex.
What is changing?
Since 2011, companies have been able to elect for overseas branch profits and losses to be left out of the UK corporation tax computation. This is known as the foreign branch exemption.
Where the branch exemption applies, branch profits are usually outside UK corporation tax. The same treatment applies to branch losses, so those losses cannot be used to reduce UK taxable profits. The election is irrevocable.
The proposed rule change makes the foreign branch exemption mandatory for most companies for accounting periods beginning on or after 1 January 2027.
Once the new rules apply, overseas branch profits will generally be outside UK corporation tax. Overseas branch losses will also generally be outside the UK computation. The practical effect is that those losses will not usually reduce UK taxable profits.
Why is HMRC driving this change?
HMRC is concerned that the existing rules can allow UK companies to use overseas branch losses against UK profits without the UK collecting a matching amount of tax on later overseas branch profits.
What should companies do?
Businesses with overseas activity should review the position before the new rules apply, because the change may leave some groups with decisions to take rather than a simple compliance update.
For some, the review will confirm that no material action is needed. For others, it may identify steps that could improve the outcome, such as using available losses while they still have UK value, checking the treatment of existing tax attributes, revisiting planned capital expenditure, or deciding whether future overseas activity is better carried on through a branch or subsidiary.
The purpose is to identify whether action is available before the rules change, not after the opportunity has passed.
Companies should also take care when planning any action. The draft legislation includes anti-avoidance rules aimed at non-commercial arrangements designed to accelerate loss use or otherwise reduce the impact of the new regime.
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.
