A UK resident company can elect under section 18A of the Corporation Tax Act 2009 to leave the profits and losses of all its foreign permanent establishments (branches) out of its corporation tax computation. The election must reach HMRC before the start of the first accounting period it covers, it applies to every foreign branch the company has or later opens, and once that period begins it cannot be revoked. It only falls away if the company stops being UK resident.

What does the foreign branch exemption actually do?

A UK resident company is normally chargeable to corporation tax on all its profits wherever they arise (section 5(1) CTA 2009). Without an election, profits earned by an overseas branch are taxed in the UK and any foreign tax paid on them is relieved by credit, which leaves a UK top up charge whenever the foreign rate is below the UK rate. The main rate of corporation tax for the financial year starting 1 April 2026 is 25%.

Once an election has effect, HMRC describes the result in INTM281010: profits attributable to a foreign permanent establishment are excluded from the corporation tax computation and losses attributable to it are cancelled. The legislation does this through “exemption adjustments” at each stage of the computation, so each head of charge is adjusted separately. If a trading profit and a non trading loan relationship loss are both attributed to a branch, the company’s UK trading profit goes down and its loan relationship result goes up.

The exemption is about branches, not subsidiaries. Profits of a foreign subsidiary are not taxed in the UK unless the controlled foreign company rules apply, and dividends it pays up are covered by the rules on dividends received by companies.

How are the exempt branch profits measured?

Section 18A(6) ties the exempt amount to the profits that would be attributed to the branch when working out double tax credit relief. For a “full treaty territory” the company uses the attribution rules in the actual treaty. For any other territory it assumes a treaty in the terms of the OECD Model Tax Convention. Section 18R defines a full treaty territory as one with double taxation arrangements that contain a non discrimination provision protecting permanent establishments.

Profits for each territory are added together and losses deducted to give the “foreign permanent establishments amount” (section 18A(4)). So the election cannot be used to keep a profitable branch exempt while still deducting losses of a loss making branch elsewhere: both are taken out.

Some items are carved out or treated specially:

  • Small companies. If the company is a micro or small enterprise (as defined in the EU Commission Recommendation 2003/361/EC, which section 18S adopts) at any time in a period, branch profits in a territory that is not a full treaty territory are not exempt (section 18P(1)).
  • Close companies. Chargeable gains of a close company are not exempt unless they come from assets used only for the branch trade (section 18P(2) and (3)).
  • Transactions with UK residents. Profits from a transaction between a UK resident and the branch are left in charge if the UK resident would have had to deduct income tax that is not repayable had it paid a company resident in that territory (section 18D). Banks are excluded from this rule unless avoiding the deduction was a main purpose.
  • Capital allowances. Allowances on assets of an exempt branch are given automatically inside the branch computation (section 18C), so they reduce the exempt profit rather than UK taxable profit.

Why is the election irrevocable, and what does that mean in practice?

Section 18F(1) says an election is irrevocable and applies to all accounting periods beginning on or after the “relevant day”. For a UK resident company that is the day on which, when the election is made, its next accounting period is expected to begin. The company can revoke the election at any time before the relevant day (section 18F(6)). After that the only way out is for the company to cease to be UK resident, which automatically revokes it (section 18F(7)).

HMRC explains in INTM281020 that the relevant day is an objective test based on the company’s normal accounting date, and if the company later changes its accounting date the period straddling the relevant day is split into two (section 18F(3) to (5)). A retrospective change of year end cannot be used to choose a better start date with hindsight.

The practical consequence is that the company gives up relief for branch losses permanently, for all its branches, including ones it has not opened yet. A company that expects to open new branches which will make start up losses, or that operates in territories with higher tax rates than the UK where credit relief already eliminates UK tax, may gain little and lose loss relief.

What happens to branch losses from before the election?

A company cannot run a loss making branch under the normal rules, deduct the losses, and then exempt the profits once the branch turns round. Sections 18J and 18K deal with this. The company aggregates its adjusted foreign permanent establishments amounts for the accounting period in which the election is made and any earlier period ending less than six years before the end of that period. If the running total is negative, that is the “total opening negative amount”. Future branch profits are then not exempt until they have matched that amount.

A company may instead make a streaming election at the same time as the main election, allocating the negative amount to specific territories so that only profits from those territories are used to match it (sections 18L to 18N). The streaming election is also irrevocable, except that it can be revoked before the first relevant accounting period begins.

What is the anti diversion rule?

Because an exempt branch is in effect treated like a foreign subsidiary, the exemption borrows the controlled foreign company test. Under sections 18G and 18H, any “diverted profits” are left out of the exempt amount and so remain taxable. Diverted profits are the profits that would pass through the CFC charge gateway in section 371BB of TIOPA 2010 if the branch were a CFC resident in that territory. The entity level exemptions in Chapters 11 to 14 of Part 9A of TIOPA 2010 (excluded territories, low profits, low profit margin and the tax exemption) apply to the branch as if it were a separate company (section 18I).

How is the election made?

There is no special form or prescribed wording. HMRC guidance at INTM281020 says the election should:

  • be sent to the company’s Customer Compliance Manager if it has one, to the Mid sized Business Customer Support Team for mid sized businesses, or otherwise through the general Corporation Tax Services route;
  • specify the accounting periods it covers, for example “the accounting period commencing on … and all subsequent accounting periods”;
  • be received by HMRC before the start of the first period it relates to;
  • be signed by the proper officer of the company or another person the company has authorised; and
  • optionally name any territories to be streamed.

Non statutory clearance applications on the branch exemption legislation go to HMRC’s Business Assets and International team, but HMRC says in INTM281030 that it will not give clearance on how profits are attributed to a branch; that is a matter for an advance pricing agreement. Exempt branch figures are reported on the supplementary pages CT600B, which cover controlled foreign companies and foreign permanent establishment exemptions, alongside the CT600 return.

How does it work in a simple case?

Illustration only. A UK company draws up accounts to 31 December. It has had a branch in Country A, a full treaty territory, for three years. The branch lost £40,000 in each of its first two years and made £30,000 in the third, so the six year look back produces a total opening negative amount of £50,000. Country A taxes branch profits at 15%.

Year Branch profit Treatment after election
Year 1 after election £35,000 Taxable in the UK, with foreign tax credit. Opening negative amount falls to £15,000.
Year 2 after election £60,000 £15,000 taxable to clear the balance; £45,000 exempt.
Year 3 after election £80,000 Fully exempt, subject to the anti diversion rule.

For the election to apply from the accounting period starting 1 January 2027, HMRC must receive it by 31 December 2026. If the company opens a loss making branch in Country B in 2028, those losses are also outside the UK computation.

What mistakes come up most often?

  • Sending the election late. It must be received before the first period starts; there is no late election.
  • Assuming the election can be limited to one profitable branch. It covers every foreign permanent establishment.
  • Forgetting the opening negative amount, so that the first years of profit are wrongly treated as exempt.
  • Small companies relying on the exemption for branches in territories with no full treaty.
  • Ignoring the anti diversion rule where assets or risks of the branch are really managed from the UK.
  • Confusing a foreign branch with a foreign subsidiary. A subsidiary is a separate company and is dealt with through the CFC rules and the dividend exemption, not section 18A. For the opposite direction, where an overseas business comes to the UK, see setting up in the UK as a branch or subsidiary, and for credit relief where no election is made see foreign tax credit relief.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.