Policy paper

Statement of Practice 12 (1993)

Published 27 July 1993

1. Section 790 Income and Corporation Taxes Act (ICTA) 1988 sets out the basis under which relief (‘unilateral relief’) may be given for foreign tax paid in the absence of a double taxation convention. ICTA 1988 section 790(5)(c) provides that tax credit relief shall not be available for overseas tax on a dividend paid by a company resident in a territory outside the UK unless:

• i) the overseas tax is directly charged on the dividend, whether by charge to tax, deduction of tax at source or otherwise, and the whole of it represents tax which neither the company nor the recipient would have borne if the dividend had not been paid
• ii) the dividend is paid to a company within section 790(6)
• iii) section 802 ICTA 1988 applies (UK insurance companies trading overseas)

2. Section 790(6) ICTA 1988 provides, among other things, that where a dividend is paid by a company resident in a territory outside the UK to a company resident in the UK which either directly or indirectly controls, or is a subsidiary of a company which directly or indirectly controls, not less than 10% of the voting power in the company paying the dividend, any tax in respect of its profits paid under the law of the territory outside the UK by the company paying the dividend shall be taken into account in considering whether any, and if so what, credit is to be allowed in respect of the dividend.

3. There are similar provisions in a number of double taxation conventions, in which case tax credit relief against UK tax on the dividends concerned is available under those conventions and not under section 790. Typically these conventions provide that where a company which is a resident of the other country pays a dividend to a company resident in the UK which controls directly or indirectly at least 10% of the voting power in the company paying the dividend, the credit for foreign tax shall take into account the tax of the other country payable by the company paying the dividend in respect of the profits out of which the dividend is paid.

4. A number of countries outside the UK operate a ‘company tax deducted’ system whereby, when a dividend is paid, tax is accounted for at the standard rate of tax on company profits. In the case of Guernsey, for example, where a company pays a dividend out of profits that will be or have been charged to tax in Guernsey, the company is entitled to deduct tax which it must remit to the tax authorities. That tax is a payment on account of the tax charged or chargeable on the profits and gains of the company; and where the amount of tax charged or chargeable on the company’s profits and gains is less than the amount of tax deducted from the dividend and remitted to the tax authority, the appropriate repayment is made to the company. The tax deducted and accounted for by the company on making the dividend payments is not tax that is additional to the tax on the company’s profits and gains.

5. It has been the practice of HM Revenue and Customs (HMRC), when calculating the tax credit relief due under section 790 ICTA 1988 to a UK company against UK tax on a dividend from a company resident in Guernsey, to allow credit at the rate of ‘company tax deducted’ or at the rate of tax paid by the Guernsey company on its profits (the actual underlying rate), whichever is the greater. A similar practice has operated in respect of dividends received from companies resident in Jersey and, in cases where there is a double taxation convention with a provision along the lines of paragraph 3 above, in respect of dividends received from companies resident in Belize, the Gambia, Malaysia, Malta and Singapore.

6. The matter has been under review and, following further consideration, HMRC have decided that, as regards dividends declared on or after today (27 July 1993), the correct way to give effect to the relief allowable as described in paragraph 2 and 3 above is, subject to the usual rules governing tax credit relief, to allow relief for the amount of the tax actually paid by the overseas company on the particular profits out of which the dividend is paid. Where those profits are not taxed in the other country, no tax credit relief will be available. The amount of overseas tax available for credit relief will be determined not by reference to what is shown on the dividend voucher but by reference to the tax paid in the other country in respect of its profits by the company paying the dividend. This will be ascertained in the usual way by examination of the overseas company’s accounts and tax assessments.

Note: the text of this statement is as it appears in IR 131 Supplement (30 January 2012).