On 13 July 2026 — Legislation Day — HMRC published draft Finance Bill 2026-27 clauses making the foreign permanent establishment (PE) exemption mandatory. For most UK-resident companies, the change bites for accounting periods beginning on or after 1 January 2027. The anti-avoidance rule is already live for arrangements entered into on or after 13 July 2026.
If you still treat the foreign branch exemption as an elective planning tool, update the model. Optionality is ending. The UK is keeping a territorial-style exemption for foreign PE profits — and locking the door on using foreign PE losses to shelter UK profits.
Deloitte’s Business Tax Briefing of 17 July 2026 and its mandatory overseas PE exemption alert put it cleanly: this is no longer a summer policy paper. It is draft statute under technical consultation until 7 September 2026 (comments to foreignpepolicy@hmrc.gov.uk).
What Changes — In Plain English
Under the current Chapter 3A Part 2 CTA 2009 regime, a UK-resident company is taxed on worldwide profits, including foreign PE profits, with double tax relief. It can make an irrevocable election to exempt foreign PE profits and forgo foreign PE loss relief. Many groups never elect, precisely so that foreign PE losses, capital allowances and start-up drag can reduce UK corporation tax.
The government’s 21 May 2026 policy paper is blunt about why that optionality is being killed. Where no election is made, foreign losses can relieve UK profits while corresponding foreign profits often never hit the UK base — either because foreign tax credits wipe the residual charge, or because the PE is subsidiarised once it turns profitable and leaves the UK net without a taxable exit. The Exchequer, in HMRC’s words, ends up “compensating multinational groups for costs/losses incurred overseas” without collecting tax on the upside.
The draft clauses reverse the default:
- Mandatory exemption — profits and losses attributable to foreign PEs are taken out of the UK corporation tax computation for all companies, not just electors.
- Election machinery repealed — section 18F CTA 2009 election procedure goes; the regime applies automatically.
- “Total opening negative amount” clawback repealed — sections 18J to 18O CTA 2009 fall away with the elective architecture.
- Treaty / OECD PE definition locked in — new section 18RA ties “permanent establishment” for Chapter 3A to the applicable double tax convention, or the OECD Model where there is no full treaty territory.
PwC’s UK corporate significant developments tracker records the same architecture and dates. Saffery’s July 2026 corporate tax update correctly flags the measure as one of the core L-Day corporate drafts alongside Pillar Two side-by-side and Securities Transfer Tax.
The Dates That Matter
Do not collapse this into a single “2027 problem”.
- 13 July 2026 — anti-avoidance clause applies to arrangements entered into on or after this date. Purpose includes forestalling: accelerating income, expenditure, profits or losses that would otherwise fall in a post-commencement period.
- 1 September 2026 — earlier start for UK-resident companies with foreign PEs carrying on oil and gas exploration or exploitation activities. The policy paper deems accounting periods to end on 31 August 2026 so post-31 August foreign oil and gas PE losses cannot shelter UK profits.
- 1 January 2027 — general commencement for accounting periods beginning on or after this date.
- Short-period anti-forestalling — if you engineer a short accounting period ending on or after 13 July 2026 and before 1 January 2027, commencement is pulled forward so you do not buy an extra year of loss relief by chopping the period.
December year-ends hit calendar 2027 first; 31 March year-ends from 1 April 2027. Oil and gas is earlier and less forgiving. Model it by legal entity, not group slogan.
Losses: The Real CFO Issue
The political story is “protect the UK base”. The finance-team story is carried-forward attributes.
Schedule 2 of the draft package restricts the ability to carry forward certain income and capital losses relating to a foreign PE into post-commencement periods. The explanatory notes describe a lookback allocation: identify losses carried forward at the start of the first post-commencement period, work backwards through a lookback window, allocate between PE and head office, then restrict the PE-referable slice so it cannot keep sheltering UK profits after the switch.
That is not a footnote. Groups that kept foreign PE losses inside the UK company — market entry, infrastructure build-outs, distressed branches, large foreign capital allowance claims — are rewriting deferred tax, cash tax and covenant headroom.
Also watch capital allowances. Consequential CAA 2001 amendments cover disposal values for PE plant, machinery and mineral extraction assets. Timing mismatches on gains are specifically addressed: if foreign tax relief was already given pre-transition on a disposal that would otherwise become UK-exempt post-transition, the draft can keep that gain in charge.
Anti-Avoidance Is Already Running
Clause 5 is the part boards underestimate because the main regime is “next year”.
It counteracts arrangements meeting three conditions:
- Timing — entered into on or after 13 July 2026.
- Purpose — securing a pre-commencement advantage by bringing forward or anticipating amounts that would otherwise be post-commencement, or securing a broader post-commencement advantage connected with the new rules.
- Abuse — arrangements that circumvent intended commencement/operation or exploit shortcomings, assessed against all circumstances including contrived, abnormal or non-commercial steps.
HMRC can adjust by assessment, modifying assessments, or amending/disallowing claims. If the group is currently discussing:
- accelerating foreign PE loss recognition into 2026,
- pushing profitable PE activity into a short pre-2027 stub,
- hiving a loss-rich PE into a UK profit centre before commencement, or
- re-papering branch vs subsidiary solely to crystallise attributes,
…get tax counsel in the room before the board signs anything. The draft is written for exactly those conversations.
How This Sits With The Rest Of The International Stack
This is not an isolated technical tidy-up. It sits next to:
- the full Finance Bill 2026-27 draft legislation collection, including Pillar Two side-by-side package updates;
- ongoing work on the Multinational and Domestic Top-up Tax amendments;
- transfer pricing documentation pressure via the International Controlled Transactions Schedule from 2027, already flagged in firm briefings and Deloitte’s 23 July ICTS webcast notice;
- the wider post-DPT / UTPP and OECD PE definition alignment enacted earlier in the 2026 package, as tracked by PwC.
If “branch first, subsidiarise later” is still the market-entry playbook, the loss-side benefit is being legislated away. The profit-side exemption remains — competitive — but the asymmetric “losses in, profits out” outcome is the explicit target.
Norton Rose Fulbright’s note on what UK-resident multinationals need to know, and Azets on the end of the optional regime, land the same message: inventory foreign PEs now, quantify loss exposure, and stop treating 2026 forestalling as free.
Eight Practical Actions This Month
- Build a legal-entity PE register — every foreign PE, agency PE risk, construction PE and oil and gas PE, with local GAAP result, UK CT attribution and carried-forward attributes.
- Split oil and gas from the rest — 1 September 2026 is not a modelling convenience; it is a different commencement.
- Quantify PE-referable carried-forward income and capital losses that currently sit against UK profits or group relief capacity.
- Re-forecast cash tax and deferred tax for 2026–2028 under mandatory exemption, including covenant and earn-out sensitivity.
- Stress-test live reorganisations against the 13 July 2026 anti-avoidance start — especially short periods, accelerated loss claims and pre-commencement transfers.
- Revisit branch vs subsidiary policy for new market entry. The old “keep the losses in the UK company” bias is dying.
- Align TP, Pillar Two and PE workstreams — attribution, top-up tax and the exemption now interact more tightly than a 2024 group manual assumes.
- Decide whether to comment by 7 September — if the lookback loss restriction or short-period rule creates genuine commercial rough edges, put evidence to HMRC while the clauses are still draft.
What This Means If You Are The CFO
This is base protection dressed as competitive territoriality. The UK will still exempt foreign PE profits. It will no longer underwrite foreign PE losses against the UK tax base as the price of keeping that option open.
For clean, profitable foreign branches, the operational change may be modest if you would have elected anyway. For loss-making branches, capital-intensive overseas builds, and any structure that deferred election until losses were used, the change is material — and already constrained by anti-forestalling.
You do not need a 60-page opinion this week. You need a one-page board note: PE inventory, loss exposure, oil and gas timing, any live 2026 reorganisations on the wrong side of 13 July, and whether the 2027 cash-tax plan still holds.
If you want a rapid review of foreign PE loss exposure, commencement timing and anti-forestalling risk across a UK group or PE portfolio while the clauses are still in technical consultation, get in touch.
Sources: HMRC draft legislation and explanatory notes on reform of the foreign PE exemption (13 July 2026); HMRC policy paper (21 May 2026); Deloitte, PwC, Saffery, Norton Rose Fulbright and Azets briefings linked above. General commentary only — not advice on any specific structure or accounting period.