INTM164190 - UK residents with foreign income or gains: dividends
Underlying tax - imputation systems
ICTA88/S799 (2)
Some dividend Articles in double taxation agreements with
countries which have an imputation system of company taxation, for
example Italy, provide that those countries will pay the United
Kingdom resident shareholder part of the `tax credit' to which the
shareholder would have been entitled had he been a resident of that
other country. ICTA88/S799 (2) provides that where a United Kingdom
resident shareholder receives such a `tax credit' in respect of a
foreign dividend, the amount of that credit is to be deducted from
any underlying tax for which he would have been entitled to tax
credit relief either under a double taxation agreement or
unilaterally.
This will be calculated by the Underlying Tax Group.
Inspectors should submit details of the dividend to them under
INTM164440.
Example
A United Kingdom company controls 10 per cent of the voting power in an Italian company. It is entitled to payment of half of the Italian tax credit (Article 10(4)(b) of the United Kingdom/Italy double taxation agreement) and it is entitled to relief for the underlying tax (Article 24(2)(b) of the agreement). It receives a dividend of 1,000 paid out of profits carrying underlying tax at 40%. The Italian tax credit paid is 18/64ths of the dividend (where the Italian corporate income tax rate is 36 per cent). Italian income tax at 5 per cent is payable on the aggregated dividend and tax credit (Article 10(2)(a) of the Agreement).
The company receives
| £ | |
| Dividend | 1,000 |
| Tax credit | 281 |
| 1,281 | |
| Less Italian income tax at 5% | 64 |
| Cash received | 1,217 |
Under Article 24(2)(b) the company would be entitled to relief
for underlying tax of 667 (1,000 @ 40%). ICTA88/S799 (2) restricts
the relief for underlying tax by deducting the Italian tax credit
paid from it leaving 386. The United Kingdom company is chargeable
on 1,667 being the aggregate of the dividend (1,000), the tax
credit (281) and the underlying tax as restricted (386) and tax
credit relief will be due of 450 (underlying tax 386 and direct tax
64).
The countries where this applies as at 31 January 2002 are
Italy and New Zealand.
