Non-resident companies: double taxation agreements: foreign tax paid by a non-resident company
This example illustrates the differences between allowing any foreign tax paid by the non-resident company as tax credit relief or as a deduction in computing the gain.
- The non-resident company realises a gain of £20,000 computed under the normal Capital Gains Tax rules.
- It has to pay £5,000 tax on this gain in its country of residence.
- 75 per cent of the gain is attributable to a UK resident.
Capital Gains Tax treatment
A TCGA92/S13 charge of £20,000 @ 75 per cent = £15,000 is apportioned to the UK resident. Relief for the tax paid can be claimed in two ways.
- TAX CREDIT RELIEF, SEE CG57382.
Suppose the UK resident is liable to Capital Gains Tax at 40 per cent. The tax payable would be £6,000. The UK resident can claim tax credit relief on the foreign tax of £5,000 paid by the company in the same proportion as the gain is apportioned. £5,000 @ 75 per cent = £3,750. The total tax payable by the UK resident becomes £2,250.
- DEDUCTION IN COMPUTING THE GAIN, SEE CG57383.
The foreign tax paid of £5,000 can be deducted in computing the gain. No indexation allowance is due on this deduction. The gain to be apportioned becomes £20,000 - £5,000 = £15,000. The taxpayer’s share is £15,000 @ 75 per cent = £11,250. At a rate of 40 per cent the tax payable would be £11,250 @ 40 per cent = £4,500.
In this example you would expect the taxpayer to claim tax credit relief.