The UK Government’s recent policy paper on reforming the foreign branch exemption (FBE) signals a significant change in how multinational groups are taxed. Published on 21 May 2026, the proposal moves the UK from a flexible elective system to a mandatory territorial regime, with important implications for both businesses and the UK’s broader investment proposition.

The reform will be introduced from:

• 1 September 2026 for UK-resident companies with foreign permanent establishments (PEs) that carry on activities in connection with the exploration or exploitation of oil & gas (O&G).
• Accounting periods beginning on or after 1 January 2027 for other businesses.

The government has yet to publish the full legislative detail but intends to release draft legislation over the summer.

Overview of the proposed Foreign Branch Exemption (FBE) changes

Under the proposed rules, the UK will make the currently elective FBE compulsory, reflecting concern that foreign PE losses were being used to offset UK profits. This means that both profits and losses of foreign PEs will be excluded from UK corporation tax.

The transitional rules for losses and other attributes arising in, and carried forward from, the years before the exemption takes effect will be changed. Going forward, it will not be possible to use these to relieve UK profits of the company or the wider group arising after the effective date.

Current UK FBE rules and policy intent

The current regime, introduced in 2011, allows companies to elect into the FBE. Without an election, foreign PE profits are taxed in the UK and foreign PE losses can be offset against UK profits.

UK tax may be reduced through double taxation relief. Where the foreign tax rate is equal to or a higher rate than that of the UK, it may fully shelter the UK tax on the same profits. Where the foreign tax rate is lower, there may be additional UK tax to pay.

Where the election is made, foreign PE profits and losses are excluded from UK tax and tax compliance is simplified. The election is irrevocable and applies to all foreign PEs of the UK company. Companies do not get to pick and choose when to apply the exemption.

Currently, where a company’s foreign PEs have losses in the previous six years, the FBE does not take effect until they are matched against subsequent profits. This is intended to mitigate a potential tax advantage companies could otherwise obtain, by taking loss relief and then opting in to the FBE as the business becomes profitable. The rule will be repealed when the FBE becomes mandatory.

The impact of FBE reforms on businesses

Businesses with an existing FBE election

The elective model was designed to enhance the UK’s competitiveness and align PE taxation with the treatment of foreign subsidiaries, whose dividends are generally exempt.

Crucially, the flexibility of the election reflects a policy trade off that allows loss relief to support early-stage overseas investment, whilst offering an exemption to ensure profits are not subject to additional UK tax. Making the FBE mandatory removes this flexibility.

The policy change is expected to have limited impact on companies where an FBE election has already taken effect.

Where the election is deferred due to historic losses, the exemption may take effect sooner because of the change. Depending on the detailed legislation, this could create an asymmetry in favour of these companies, which the original legislation sought to prevent.

Businesses without an FBE election

For companies who have not elected in, the impact should be assessed, including the interaction with any relevant double tax treaties. Groups may revisit their use of PE vs subsidiary structures as the tax distinction narrows.

For companies with overall profitable foreign PEs in higher tax jurisdictions, the exemption should not increase the amount of UK tax paid. However, it may add complexity to the tax compliance process, at least in the short term.

Businesses relying on foreign PE loss relief

The policy will have particular impact for businesses with foreign PEs that are expecting to claim future UK tax relief on their actual or intended investment in the overseas jurisdiction. This impact may be through the exclusion either of future losses or losses brought forward relating to those activities. Affected entities may have been relying on relief to manage their global tax cost and align the tax with the commercial return.

By contrast, some businesses with profitable foreign PEs, that have previously considered electing into the FBE, may have decided not to because it is irrevocable. The UK tax paid by these businesses could reduce as a result of the proposed changes.

FBE changes for oil and gas

The policy will apply to all companies, but the announcement is targeted at O&G companies.

The exploration and production activities of O&G groups in the UK are ring-fenced, meaning these profits cannot be sheltered by foreign PE losses. However, non-ring-fenced activities, such as commodity trading income, can be sheltered by PE losses.

The mid year implementation is likely to increase compliance burdens and may distort tax outcomes across accounting periods. Those affected will only be able to fully assess the implications of the early commencement date once the detailed legislative proposals are published in summer 2026.

Implications of FBE reform for the UK’s investment attractiveness

The reform represents a broader recalibration of the UK’s international tax framework. The move to mandatory exemption simplifies the regime, but at the cost of flexibility that was originally designed to support investment.

The original FBE was introduced to make the UK a more attractive location to do business. Its design recognised that:

• Taxing foreign profits could discourage outward investment.
• Providing relief for early-stage loss relief could encourage higher risk, capital intensive activity to be anchored from the UK.

The latest announcement reflects a shift in government priority from competitiveness and investment promotion, to protecting the UK tax base and addressing perceived imbalances.

For some businesses, this sudden change of direction may reduce the attractiveness of the UK as a base for global expansion. It could also erode trust in the stability of UK tax policy for long-term investment. The ultimate impact will depend on the details of the legislation.

If you would like support in assessing or understanding the impact for your business then please reach out to Andrew Seidler or your usual RSM contact.

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