ATXP6 UK
Syllabus A4. Corporation Tax A4e. Group Structure for C.T.

A4eix. Tax treatment of overseas branch

Syllabus A4eix)

Advise on the tax treatment of an overseas branch

Overseas Branch

Taxation for overseas branches

The profits of the branch are subject of UK corporation tax under trading profits.

The presence of the branch does not affect the profits threshold of the UK company.

If the branch makes a loss it can be relieved using the normal loss relief.

If the branch buys plant and machinery capital allowances can be claimed.

  • An overseas branch is simply an extension of the UK trade, and 100% of the branch profits are assessed to UK corporation tax double tax relief (DTR) is then given where the overseas branch’s profits are also taxed overseas. 

    As an alternative to the treatment of overseas branch profits as detailed above, a company can elect to treat the profits of its overseas branches as exempt from UK corporation tax.

    Once made, the election is irrevocable and it applies to all of the company’s overseas branches (existing and future).

    The election must be made before the beginning of an accounting period to which it is to apply.

    An election will not be beneficial if a company has a loss making overseas branch as any trading loss made by that branch would not be relievable when calculating taxable total profits.

    Even if a branch is currently profitable, a company might choose not to make an election if double taxation relief means that there is little or no UK corporation tax liability in respect of the overseas income.

    If no election is made it will also mean that should the branch become loss making in the future, the loss will be relievable in the taxable total profits of the company.

Tax implications of election to exempt profits

  1. Advantages

    If the overseas branch makes profits, then no additional UK corporation tax is payable. Even if the UK corporation tax rate is greater than the foreign rate of corporation tax

  2. Disadvantages

    - If the branch is making losses with the election in place, it is not possible to get relief for the losses made by the overseas branch.

    - The election cannot be cancelled once made.

    - The election applies to all overseas branches.