Statement of Practice 3 (2001)
Published 1 January 2001
© Crown copyright 2001
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General
In addition to tax credit relief for direct foreign tax on a dividend, where the UK resident shareholder is a company controlling directly or indirectly not less than 10% of the voting power in the foreign company paying the dividend, it is entitled to relief for the underlying tax attributable to the dividend. This relief may be due under the terms of a double taxation agreement or, alternatively, on a unilateral basis under Taxes Act (TA)1988 s 790(6).
The amount of underlying tax to be taken into account for credit relief purposes is so much as is ‘properly attributable’ to the proportion of the foreign company’s relevant profits as is represented by the dividend paid to the UK company (TA 1988 s 799(1)).
A. Split rate taxes
Under some foreign tax systems the amount of tax charged on company profits is dependent on how much of the profits is distributed. HM Revenue and Customs (HMRC) view is that in such circumstances the amount of tax to be taken into account in respect of a particular dividend is the actual tax charged on the portion of the profits that the dividend represents. The amount of underlying tax taken into account will therefore reflect the rate charged on the distributed profits and not the average rate of tax paid at that point on all of the relevant profits.
The Underlying Tax Group will accept computations done on either basis for dividends paid to a UK company between 31 March 2000 and 31 December 2001 inclusive.
Example 1
A foreign company has taxable profits of 1,000, and after paying 20% company tax has relevant profits of 800. The company pays a dividend of 400 to a UK resident company. The foreign company pays additional company tax on the dividend at the rate of 10% = 40.
The amount of underlying tax to be taken into account in respect of the dividend of 400 is 140 ((400/800 × 200) + 40).
Example 2
A foreign company has taxable profits of 1,000, and after paying 40% company tax has relevant profits of 600. Distributed profits are taxed at 25% and on payment of a dividend of 300 to a UK resident company the foreign company receives a dividend rebate of 100.
The amount of underlying tax to be taken into account in respect of the dividend of 300 is 100 ((300/600 × 400) - 100). If the remaining 300 relevant profits are distributed there will be a further rebate of 100, giving underlying tax of 100, calculated in the same way.
B. Losses
Where the foreign company that pays a dividend has accumulated losses, HMRC’s view is that the relevant profits are the undistributed profits of the most recent period available at the time that the dividend was paid. The Underlying Tax Group will accept computations prepared in accordance with this or in line with previous practice for dividends paid to a UK recipient between 31 March 2000 and 31 December 2001 inclusive.
Example 1
The accounts for a foreign company show the following results:
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Profits/(losses) | 1,000 | (3,000) | 1,500 |
| Accumulated profits/(losses) | 1,000 | (2,000) | (500) |
After the end of Year 3, it pays a dividend of 2,000 out of unspecified profits.
The relevant profits are 1,500 from Year 3 and 500 from Year 1.
Alternatively, if the company pays a dividend of 500 for Year 1, the relevant profits are Year 1 profits.
Example 2
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Profits/(losses) | 1,000 | (2,000) | 1,500 |
| Accumulated profits/(losses) | 1,000 | (1,000) | (500) |
After the end of Year 3 it pays a dividend of 2,000 out of unspecified profits. The relevant profits are 1,500 from Year 3 and 500 from Year 1.
If the dividend were paid before the end of Year 3, the relevant profits would be 1,000 from Year 1 and 1,000 from the most recent preceding profitable period.