Definition
An exempt foreign permanent establishment is an overseas branch of a UK resident company in respect of which an election has been made under section 18A of the Corporation Tax Act 2009 to exclude its profits and losses from UK tax. R&D activity undertaken at or attributable to an exempt foreign permanent establishment is generally excluded from UK R&D tax relief, since the related profits are outside the UK tax net. From 1 April 2024 the merged scheme contains further UK-workforce rules that interact with this position.
How HMRC defines it
HMRC guidance on exempt foreign permanent establishments is in the International Manual at INTM281000 onwards. The R&D interaction is addressed at CIRD81420 and at CIRD90260 in the context of the merged scheme. The territoriality principles are set out in the 2022 consultation and subsequent Finance Acts.
Practical example
A UK parent with a Dublin branch that has elected exempt foreign permanent establishment treatment cannot include R&D carried out by that Dublin branch in its UK R&D claim, even if the staff are on the UK company's payroll, since the branch's activity is outside UK corporation tax.