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HMRC internal manual

Double Taxation Relief Manual

Italy: Underlying Tax

(1) Documents needed to support the underlying tax claim

The balance sheet and the profit and loss account for the period in which the profits were made out of which the dividend was made the minutes of the meeting authorising payment of the dividend and the first page of the tax return and the pages showing the ILOR/IRAP and IRPEG payable will be required by the Underlying Tax Group.

If credit is claimed for Imposta Sostitutiva, the relevant tax return extract.

(2) Reserves 

Relevant profits are reduced by transfers to the statutory reserve of 5% of net profit until the reserve contains 20% of the subscribed share capital.

(3) Underlying tax calculation 

Article 10(4)(b) entitles UK companies with 10% control to a half tax credit in respect of Italian dividends, less 5% tax (Article 10(2)(a)) on the dividend and the half tax credit. The half tax credit may not be payable in respect of dividends or part-dividends paid from reserves subject to Substitute Tax (Imposta Sostitutiva).

The underlying tax is reduced by the amount of the tax credit (Section 799(2) ICTA 1988) and an underlying tax rate is calculated for the combined dividend and half tax credit. For example:

Net profit         126  
Transfer to legal reserve         6  
Relevant profit         120  
Tax         100  
          220 45.455%
Dividend         100  
1/2 tax credit (37% tax rate assumed)         29 (100 x 37/63 x 50%)
Underlying tax 100 @ 45.455% 83    
1/2 tax credit       -29    
          184 29.578%*

(4) Late or non payment of the tax credit 

The tax credit should be included in the UK tax computation of the period in which it is received. If the credit is not claimed, only the dividend is taxable and the underlying tax is not reduced by the amount of the unclaimed credit.

(5) Withholding tax/deductions from tax credit 

Relief is also due for withholding tax deducted from the dividend or the amount deducted from the tax credit. The tax office, not the Underlying Tax Group, is responsible for dealing with such claims.