Removal of tax relief for overseas losses will increase the cost for UK companies expanding abroad
The government’s plan to make the ‘foreign branch exemption’ mandatory from 2027 will deny companies expanding abroad crucial tax relief for losses of overseas operations, say leading audit, tax and business advisory firm, Blick Rothenberg.
Neil Insull, a partner at the firm, said: “Companies often set up branches when entering new markets because they are straightforward operationally, but those branches can be loss-making for an initial period while the business puts down its roots and builds its customer base. Under the new rules, those foreign losses will no longer be available to reduce taxable profits elsewhere in the company.”
He added: “At present, a company can elect for overseas branch profits and losses to be permanently exempted from UK taxes. This can have an advantage of removing branch profits of a low taxed jurisdiction from UK taxation. But, as the election is for all the branches of a company, it is unlikely to be made if there are branches with tax losses which can be relieved against the company’s profits.”
Neil said: “Under the new rules, effective for companies with periods commencing on or after 1 January 2027, the election is removed and all branch profits and losses will be exempted from UK tax mandatorily. The government have highlighted the advantage of companies in capital intensive sectors (such as oil and gas) claiming capital allowances and creating significant tax losses as the main reason for making the change.”
He added: “Companies and groups which have structured with overseas branches to capture early-year losses will have to rethink and accept an increased tax cost. The distinction between using a branch and a subsidiary will be less pronounced going forward. We may therefore see subsidiaries as the vehicle of choice, particularly if commercial and legal factors are primarily driving the decision.”