INTM161120 - UK residents with foreign income or gains: double taxation relief
Exceptions to the source rule
Certain exceptions to the source rule ( INTM161110) are provided for by statute and under particular agreements as follows:
- Isle of Man and Channel Islands. ICTA88/S790 (5)(a) provides
that the limitation of unilateral relief to foreign tax on income
arising in the foreign country is not to apply where the country
concerned is the Isle of Man, Guernsey or Jersey. Company dividends
and debenture interest are excluded from the scope of the
agreements with the Isle of Man (DT9950), Guernsey (DT8600) and
Jersey (DT10750) by the credit Articles of those agreements.
Unilateral relief is therefore available for Manx and Channel
Islands tax on debenture interest and on company dividends wherever
such income arises, except where the recipient is a portfolio
shareholder (see
INTM164010 paragraph (f). See also
DT8606, DT9955 and DT10755. The rule that a claimant must also be a
resident in the United Kingdom is also subject to modification (see
INTM161200 paragraph (a)).
- Foreign Dividends. ICTA88/S801 provides that where a United
Kingdom company controls, or is a subsidiary of a company which
controls, not less than 10% of the voting power in a foreign
company, any United Kingdom or `third' country tax paid on its
profits by that foreign company can be taken into account as
underlying tax (
INTM164010 paragraph (d) for the
purpose of allowing credit to the United Kingdom company in respect
of dividends received from the foreign company (see
INTM167370).
- Profits, Income and Capital Gains. Many agreements lay down specific rules for determining the source of income, profits or capital gains for tax credit relief purposes. The provision which is most often used in the credit Article says that, for the purposes of giving tax credit relief, profits, income or capital gains earned by a resident of one country which may be taxed in the other country in accordance with the provisions of the agreement are to be deemed to arise from sources in that other country. The interest, royalties and technical fees Articles in some agreements also provide that interest etc. is deemed to arise in the country where the payer is that state, a political subdivision, a local authority or a resident of that state.
These provisions override the domestic laws of each country for
determining the source of profits, income and capital gains. Where
income etc. has a United Kingdom source under United Kingdom law
but has been taxed in the other country you should refer to the
relevant double taxation agreement to see what provisions there are
for determining the country of the source of the profits, income or
gains in question.
Where tax credit relief is allowable under a double taxation
agreement, where a United Kingdom resident carries on a trade etc.
chargeable under Case I or II of Schedule D and earns profits
partly in the United Kingdom and partly in a foreign country, that
part of the profits earned in the foreign country is regarded, for
credit purposes, as having a foreign source.
Where tax credit relief is only allowable under the
unilateral provisions, ICTA88/S790 (4) states that profits from, or
remuneration for, personal or professional services performed in
the foreign country are deemed to be income arising in that
country. This is more narrowly drawn than the corresponding
provision in an agreement (see above). In Yates v GCA International
Ltd (64 TC37), where services under a contract were performed
partly in Venezuela and partly in the United Kingdom, it was held
that unilateral credit relief was only allowable for the Venezuelan
tax attributable to the fees paid for the services that were
performed in Venezuela, limited to the United Kingdom tax charged
on the profits to which those fees gave rise, after deduction of
expenses.
