Quick answer: An exempt foreign permanent establishment is an overseas branch of a UK company whose profits have been elected out of UK corporation tax under section 18A CTA 2009. R&D carried out at or attributable to that branch is generally excluded from a UK R&D tax relief claim, since its profits sit outside the UK tax net entirely.
What is an exempt foreign permanent establishment?
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 does HMRC define an exempt foreign permanent establishment?
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.
What does this look like in practice?
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. Companies with overseas branches can check how this affects their claim using the free eligibility calculator.
Worked example: splitting a claim across UK and overseas activity
A UK-parented SaaS group has £900,000 of group-wide R&D spend, of which £650,000 relates to UK-based engineers and £250,000 to a Dublin branch that has elected exempt foreign permanent establishment treatment. Only the £650,000 of UK-attributable spend enters the UK R&D claim; at the merged scheme’s 20% rate that produces a £130,000 pre-tax credit, against what would have been £180,000 had the whole £900,000 been eligible.
How does this interact with the UK-workforce rules?
The merged scheme’s territoriality rules generally require qualifying staff costs and subcontracted R&D to relate to UK activity, with narrow exceptions for genuinely unavailable overseas conditions. An exempt foreign permanent establishment sits outside the UK tax net entirely, so its R&D is excluded regardless of those exceptions - a stricter position than the general overseas-subcontractor rules. The position is different from ordinary overseas subcontracting, where a narrow set of exceptions can still allow relief; an exempt foreign permanent establishment election removes the branch from the UK tax net altogether, so none of those overseas-subcontractor exceptions are available to bring its R&D back into scope.
Related terms
Frequently asked questions
The exempt foreign permanent establishment election is not made or reversed for R&D purposes alone - it is a general corporation tax election under section 18A, and unwinding it has wider tax consequences that should be reviewed with a specialist adviser before any R&D-driven change of position.
It is an overseas branch of a UK resident company for which an election has been made under section 18A of the Corporation Tax Act 2009 to exclude its profits and losses from UK tax. Because the branch sits outside the UK tax net, R&D activity attributable to it is generally excluded from the UK R&D claim.
No. The merged scheme’s territoriality rules allow narrow exceptions for genuinely unavailable overseas conditions on ordinary overseas subcontracting, but an exempt foreign permanent establishment removes the branch from the UK tax net altogether, so none of those overseas-subcontractor exceptions are available.
No. Even if the overseas branch’s staff are on the UK company’s payroll, their R&D work is excluded from the UK claim if it is carried out at or attributable to a branch that has elected exempt foreign permanent establishment treatment, since the branch’s activity sits outside UK corporation tax.