PE domestic law

United Kingdom publishes draft legislation reforming the foreign permanent establishment exemption

On 13 July 2026, His Majesty’s Revenue & Customs (HMRC) published draft legislation reforming the way the United Kingdom (UK) taxes foreign permanent establishments (PEs). Under the current rules, a UK-resident company can elect to exempt the profits and losses of its foreign PEs from UK corporation tax. The draft legislation removes that election and makes the exemption mandatory. The measure follows the government's announcement in May 2026 and is open for consultation until 13 September 2026.

Once the reform takes effect, a UK company will no longer be able choose whether to bring the profits and losses of its foreign PEs into the UK tax base. The meaning of PE for these purposes will be given its international meaning (i.e., determined in accordance with the applicable treaty or the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention), rather than the meaning for domestic Corporation Tax purposes. This aligns with the attribution of profit to the PE for the purposes of the exemption, which already follows the international approach.

The draft legislation includes transitional rules restricting the ability to offset UK profits arising after the reform takes effect with losses and other tax attributes of a foreign PE that arose before the effective date. It also incorporates anti-avoidance rules to counter arrangements designed to accelerate the use of losses or reliefs before the new rules apply, or to delay entry into the regime through short accounting periods. These anti-avoidance provisions can apply to arrangements entered into on or after 13 July 2026, as well as to earlier arrangements formalized on or after that date.

The new rules apply for accounting periods beginning on or after 1 January 2027 for all companies. Previously, the Government had proposed that an earlier commencement date would apply for oil and gas companies, but this does not appear in the draft legislation.

Other PE developments

Netherlands updates hybrid mismatch Decree including treatment of PEs

On 24 July 2026, the Dutch State Secretary of Finance published a new Decree on hybrid mismatches, replacing a hybrid mismatches Decree released in October 2022. Among its new positions, the decree adds guidance on two points pertaining to PEs: disregarded PEs and termination losses.

The Decree provides guidance on the definition of a disregarded PE. A disregarded PE arises where the head office jurisdiction treats a presence in another jurisdiction as a PE, while that other jurisdiction does not. The Decree notes that whether a PE exists must be analyzed under the domestic tax law of both jurisdictions involved. The Decree provides an example based on the Mexican maquiladora regime, under which the Netherlands recognizes a PE but Mexico does not, so a disregarded PE results.

The Decree also addresses the termination loss of a PE. Under the Dutch object exemption, the profits and losses of a foreign PE fall outside the Dutch head office's taxable base. An exception applies if the PE's activities cease and leave a definitive loss, in which case the taxpayer may take that loss into account. A loss qualifies only as definitive to the extent that the other jurisdiction has granted no relief of any kind for it. The Decree notes that such a termination loss does not, as a general rule, give rise to a double deduction, because it covers only final losses that can no longer be set off elsewhere. The position differs if the same loss also leads to a deduction in the other state.