Skadden
6 Experts
9 Contributions by Skadden Experts
PRACTICE NOTES
A UK tax resident bank should weigh the following tax matters when extending credit to an overseas borrower:
local withholding taxes, including:
the lender’s entitlement to double tax treaty (DTT) relief; and
the procedure required to access DTT relief
UK tax treatment of the loan
stamp, transfer, registration and comparable taxes
value added tax (VAT)
the US Foreign Account Tax Compliance Act (FATCA) and analogous regimes worldwide
bank levies
financial transaction taxes
Local withholding tax and a lender’s ability to claim double tax treaty relief
Local withholding tax
A principal tax point for a UK lender financing a non-UK borrower is whether any overseas withholding will cut the interest actually received and, if so, whether that charge can be
Tax
PRACTICE NOTES
FORTHCOMING CHANGE relating to UK transfer pricing legislation:
Finance Act 2026 (FA 2026) introduces a suite of revisions to the UK’s transfer pricing regime. Effective for accounting periods commencing on or after 1 January 2026, once enacted, the rules will, among other reforms, disapply UK-to-UK transfer pricing (with limited carve-outs to block tax arbitrage), revise the participation condition, and implement a range of updates to the financial transactions provisions so that UK requirements are closely aligned with the OECD Transfer Pricing Guidelines. In parallel, the government also confirmed at Budget 2025 that it will move ahead with an obligation for in-scope multinationals to submit annual information on cross-border related party dealings for accounting periods beginning on or after 1 January 2027—the detailed regulations for the new ‘International Controlled Transactions Schedule’ (ICTS) are anticipated in spring 2026 in due course. For further detail and
Tax
PRACTICE NOTES
Purpose of the regime
The aim of the foreign branch exemption is to remove from UK corporation tax the profits generated by a UK-resident company's permanent establishments (PEs) across the globe, worldwide. While the relief applies to the earnings of PEs, it is commonly known and referred to (albeit not strictly correct) as the 'foreign branch exemption', and this is the terminology we have adopted here...
Tax
PRACTICE NOTES
Why are special rules required to deal with historic losses?
As set out in Practice Note: UK taxation of foreign profits in a UK resident company, a company may utilise losses arising in trades carried on through its permanent establishments (PEs) to lessen UK tax on profits in certain circumstances.
However, where a UK company:
incurs losses in another jurisdiction, and
secures relief in that jurisdiction for those losses (for example, relief in a later year, comparable to the UK carry forward of losses)
in the year the relief is taken, the UK credit for foreign tax would be reduced (and so the amount of UK corporation tax would increase) because the credit is computed only by reference to the profits on which foreign tax is actually suffered (see Practice Note: Effect and limits of credit relief). In this way, under the default
Tax
PRACTICE NOTES
Many UK-resident companies are expected to operate solely within the UK, with their entire customer base and supplier network located here, so that all profits and gains arise from UK activity undertaken domestically within national borders. Nevertheless, this is not universal; for a sizeable proportion of UK companies, overall profits also comprise non-UK amounts earned from activities outside the UK...
Tax
PRACTICE NOTES
Foreign branch exemption—anti-diversion after 1 January 2013
This Practice Note deals only with the anti-diversion aspects of the foreign branch exemption that apply to accounting periods beginning on or after 1 January 2013. The scope of that anti-diversion rule is set out in Practice Note: Foreign branch exemption—anti-diversion after 1 January 2013. For material covering the rules that were in force for periods starting before that date, which are now largely of historical interest, refer to Practice Note: Foreign branch exemption—anti-diversion before 1 January 2013 [Archived]. Broadly aligned with, and derived from, the UK’s CFC rules, the anti-diversion rule reflects many of the same concepts and expressions, and it employs many equivalent operational mechanisms. Its purpose is to deny exemption to profits that have been diverted out of the UK, so that those profits are brought within UK corporation tax, with credit
Tax
PRACTICE NOTES
ARCHIVED
This Practice Note has been archived and is no longer maintained. It deals solely with the anti-diversion rule applying to accounting periods beginning before 1 January 2013. For the rule that applies to periods after that date, see: Foreign branch exemption—anti-diversion after 1 January 2013
Purpose of the anti-diversion rule
The foreign branch exemption is constrained by an anti-avoidance measure intended to prevent a UK resident company from diverting profits away from the UK, ie to stop a UK company arranging for profits to arise in a foreign PE (and thus be exempt) rather than in the UK (where they would be taxable). This is known as the anti-diversion rule. The foreign branch exemption was introduced, alongside interim enhancements to the CFC regime, by Schedule 13 to the Finance Act 2011 (FA 2011)...
Tax
PRACTICE NOTES
As set out in Practice Note: Foreign branch exemption—structure of the foreign branch exemption, the foreign permanent establishments amount (FPEA) is the principal determinant of the extent of profit relieved from UK tax under the foreign branch exemption. This is because, where an election is in force, any profit or loss taken into account in arriving at the FPEA must be ignored for tax purposes—by making the necessary ‘exemption adjustments’—when calculating the company’s taxable total profits.
Exceptions
There are two significant exceptions to these rules, each of which is considered in turn below...
Tax
PRACTICE NOTES
As set out in Practice Note: Foreign branch exemption—foreign permanent establishments amount, specific rules govern how to compute the foreign permanent establishments amount (FPEA), in order to determine exactly what portion of a company’s profits should be relieved from UK tax under the foreign branch exemption, and how those calculations must be applied...
However, a UK company’s election to exclude profits attributable to its overseas permanent establishments (PE) from UK tax could both:
affect the other taxes payable by the UK company; and
be counteracted by existing rules within those other taxes
This Practice Note sets out certain special rules introduced to ensure the tax system, taken as a whole, continues to operate as intended, and summarises their interaction in the following broad areas:
capital gains
intangible fixed assets
capital allowances
other
Tax
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