INTM161250 - UK residents with foreign income or gains: double taxation relief
Minimum foreign tax
Credit may only be allowed, whether under an agreement or unilaterally, for foreign tax that is
- a proper charge under the foreign country's law and;
- where there is an agreement, for foreign tax which is payable in accordance with that agreement.
The claimant must take all necessary steps to have his foreign liability reduced to that minimum, for example by claiming all the allowances and reliefs (for example, foreign personal allowances) due to him under the provisions of an agreement.
Example 1
No credit is due for Netherlands tax on Netherlands royalties arising to a resident of the United Kingdom not engaged in trade or business in the Netherlands, since the taxpayer can claim exemption from Netherlands tax under Article 12 of the Netherlands agreement and any tax paid on the royalties would not be paid in accordance with the agreement.
Example 2
If a United Kingdom resident has withholding tax of 25% deducted
from Netherlands dividends, allow credit for 15 per cent (or nil if
the recipient is a company controlling directly or indirectly at
least 25 per cent of the voting power in the Netherlands company
paying the dividend - see, however,
INTM164030), since the taxpayer can
claim a reduction to this rate under Article 10 of the agreement.
Where the taxpayer does not make a claim to relief from foreign tax
under an agreement, allow credit only for what would have been the
reduced amount of foreign tax payable if a successful claim had
been made. No relief (credit or deduction) should be allowed for
the balance of the foreign tax.
Refer to the Offshore Personal Tax Team, part of Charity,
Assets & Residence (in the case of individuals) and to CT &
VAT, International CT (in all other cases)any case where
i) the taxpayer makes a claim to relief from foreign tax to
the foreign tax authority but the claim is refused for procedural
reasons; for example, failure to observe time limits, or the
foreign tax authority does not respond to or act upon the claim, or
ii) the foreign country imposes tax on income that does not
arise in that country.
The foreign tax that is allowable for credit is the tax that
represents the final liability, not tax paid on account or any
interest or penalties that may be paid in the other country in
respect of the foreign tax. Under ICTA88/S806 (2), credit relief
previously allowed in the United Kingdom may be revised if the
foreign tax in question is subsequently reduced or increased. The
foreign tax may be reduced, for example, by relief for losses
incurred in another period. If a foreign branch makes a loss, a
question about the application of the loss in the other country may
lead to an adjustment of the credit relief allowed in the United
Kingdom. See
INTM162110 for the time limits that
apply for revising credit relief where the amount of foreign tax
paid is subsequently reduced or increased; and
INTM162120 for a taxpayer's obligation
to notify HM Revenue & Customs if an adjustment to an amount of
foreign tax paid results in credit relief previously given becoming
excessive. Where credit is available under an agreement, the
minimum foreign tax creditable may depend on the dates from which
the agreement has effect. If, for example, an agreement has effect
for United Kingdom income tax from 1993-94 and for foreign tax from
1 January 1994, any exemption from the foreign tax under the
agreement will only apply to income arising on or after 1 January
1994. Where income arises before that date but is assessable to
United Kingdom income tax for 1993-94, give credit for the full
foreign tax chargeable on the income if it is a tax that is covered
by the agreement. Information about the reliefs and deductions due
from foreign tax is given in:
- the text of the double taxation agreement concerned;
- the notes on countries.
Both of these can be found at DT2100 onwards. Texts of the most recent double taxation agreements may be found on the HM Revenue & Customs internet site. More detailed information about foreign countries' domestic taxation laws may be requested from the International Research and Library team, part of HM Revenue & Customs Library Services. That information may assist in deciding whether the foreign tax charged is the minimum chargeable under that country's domestic law. FA2000 put the obligation to minimise tax into statute at ICTA88\S795A (see INTM164140). This was purely clarificatory and should NOT be interpreted as implying there was no previous obligation to minimise tax.
