Overseas Trading – Has your company considered a Foreign Branch Exemption Election?

Section 18A of the Corporation Tax Act 2009 states that a UK resident company is entitled to make a Foreign Branch Exemption Election (“FBEE”). If a FBEE is made adjustments are required to be made in the calculation of the company’s total taxable profits. This means that any accounting profits or losses that arise in a foreign permanent establishment (“PE”) will not be included in the profits/losses chargeable to UK Corporate Income Tax (“CIT”).

Before a FBEE is made there are several considerations that a company must take into account. Crucially, a FBEE is an irrevocable election, this means that once it is in place and the accounting period has commenced it cannot be withdrawn and will apply to all future and current overseas PE’s that the company has. A second key point is that a FBEE application must be submitted to HMRC before the effective accounting period begins.

A UK resident company is liable to UK CIT on the entirety of its worldwide income. One of the major benefits of having a FBEE in place is that the profits chargeable to UK CIT are adjusted for the taxable profits that are generated by overseas PE’s.

A UK resident company should be entitled to claim double tax credit relief for any overseas CIT suffered against the UK CIT suffered on the same profits, however such relief is restricted to the lower of the foreign tax suffered and the UK CIT on the same profits. If the overseas rate of CIT suffered is lower than the UK rate of CIT then the UK resident company will be required to pay additional UK CIT on the overseas profits, this is illustrated in example A. With the rate of UK CIT increasing from 1 April 2023 to a maximum rate of 25% it is likely that there will be additional countries that now have a lower rate of CIT than the UK. In instances such as this it can be very beneficial for a company to have a FBEE in place.

AAB have experience in advising clients on FBEE applications and would be happy to hear from you if you think this could be of benefit to your company.

Example

Question

ABC Limited, a UK resident company, has been working in Country X during 2023 and has created a permanent establishment. ABC Limited pays CIT in the UK at a rate of 25% and has made £100 of profit in Country X (Country X has a CIT rate of 20%). What would be the total CIT paid by ABC Limited in the below circumstances:

1. ABC Limited does not have a FBEE
2. ABC Limited does have a FBEE

Answer

	Scenario 1	Scenario 2
Total Taxable Profit in Country X	£100	£100
Country X CIT Liability	£20	£20
UK CIT due	£25	£0
UK Double Tax Credit Relief	(£20)	£0
Total CIT Due	£25	£20
Effective Rate of CIT	25%	20%

 

If you have any questions at all please contact our Corporate Tax team.