INTM209220 - Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax
Creditable tax
Definition - ICTA88/S751(6)
Where the provisions of Chapter IV apply to a controlled foreign company, ICTA88/S747(3) requires that the chargeable profits and creditable tax of the company should be apportioned (see INTM210000). 'Creditable tax' is defined as the aggregate of the following amounts:
- The amount of any double taxation relief for foreign tax which would be available against Corporation Tax on income under the rules in Part XVIII ICTA 1988. This is calculated on the basis of the assumption in ICTA88/SCH24 and as if the controlled foreign company were liable to Corporation Tax on its chargeable profits.
- United Kingdom Income Tax deducted at source from payments (for example, of interest) received by the controlled foreign company which would on the assumption in (a) above be available for set-off against Corporation Tax under ICTA88/S7(2).
- United Kingdom Income or Corporation Tax actually charged in respect of the chargeable profits of the controlled foreign company. This will include Corporation Tax charged in respect of the income from a branch or agency through which the controlled foreign company carries on a trade in the United Kingdom.
Foreign Taxes
For the purposes of computing its chargeable profits and
creditable tax, a controlled foreign company is assumed to be
resident in the United Kingdom ( ICTA88/SCH24/PARA1(1)). The
company thus meets the general condition in ICTA88/S794 that double
taxation relief is available only to persons resident in the United
Kingdom.
Foreign tax eligible for credit under Part XVIII ICTA 1988,
comprises both tax for which relief is due under the provisions of
a double taxation agreement and also tax qualifying for credit
under the unilateral relief provisions of ICTA88/S790. The
definition of creditable tax includes all taxes qualifying for
double taxation relief in respect of income whether imposed under
the laws of the controlled foreign company’s territory of
residence (see
INTM202050) or any third country.
Creditable tax includes taxes levied by political subdivisions of a
country, for example, Swiss cantonal taxes, where these qualify for
double taxation relief against United Kingdom taxes on income under
the normal rules. The Board’s publication “Double
Taxation Relief - Admissible and Inadmissible Taxes” (as
updated by means of Press Releases from time to time) lists the
foreign taxes regarded as qualifying for relief.
Foreign taxes are included in creditable tax subject to the
normal double taxation relief rules applicable to United Kingdom
companies. To the extent that foreign tax on any particular source
of income exceeds the United Kingdom tax that would be due the
creditable tax is therefore restricted under ICTA88/S797. (It
should however be noted that in arriving at net chargeable profits
for the acceptable distribution test there is no limit on the
amount of creditable tax that can be deducted (
INTM204050).
Example
X is a controlled foreign company registered as an Exempt Company in Jersey. It operates through branches in the United Kingdom and France. For the year to 31 March, when the United Kingdom rate of Corporation Tax is 33%, it makes profits of £10,000 at each of its branches and pays United Kingdom and French Corporation Tax of £3,300 and £3,400 respectively. X also has investment income of £100,000 (some in United Kingdom dividends) - most of this bears no tax anywhere but interest of £5,000 from a United Kingdom company has Income Tax of £1,250 deducted at source. X pays flat-rate “Corporation Tax” of £500 to the Jersey authorities.
The creditable tax of X is computed as follows:
|
| £ |
| 3,300 |
| 3,300 |
| 1,250 |
|
| 7,850 |
The dividends from the United Kingdom company are excluded from the computation of its chargeable profits under Section 208. The Jersey Corporation Tax is not a tax on profits and as no relief is available in respect of it under Part XVIII ICTA 1988, it fails to qualify as creditable tax.
Tax Spared
Where the terms of a double taxation agreement provide for credit to be given against United Kingdom tax in respect of tax 'spared' in an overseas territory, any tax 'spared' by the overseas territory in relation to a controlled foreign company should be included in the company’s creditable tax up to the limit specified in the double taxation agreement.
Conversion of Foreign Taxes into Sterling
Where it is necessary to convert foreign taxes into sterling in order to compute creditable tax, the exchange rate to be used is that prevailing at the date on which the foreign taxes became payable (see Greig v Ashton, 36TC581). This rule applies generally for double taxation relief purposes.
Dividends Received from a Controlled Foreign Company - ICTA88/SCH26/PARA4 and 5
Where a controlled foreign company receives a dividend from another controlled foreign company, the dividend will be included in the first company’s chargeable profits as a Case V liability in the normal way. Where however the dividend has been paid out of profits of the second company which have been the subject of a Chapter IV charge, there is potentially a double charge to tax if the first company’s chargeable profits are apportioned and assessed under Chapter IV. However, ICTA88/SCH26/PARA4 and 5 mitigate this double charge by treating the Chapter IV tax assessed in respect of the second company’s chargeable profits as underlying tax which qualifies for double taxation relief. This tax is accordingly included in the first company’s creditable tax. Detailed guidance on the provisions of ICTA88/SCH26/PARA 4 and 5 are given at INTM211130 to INTM211220.
