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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Double taxation relief: overseas branch profits: foreign taxes on UK insurers where there is no "permanent establishment": "treaty carve out"


Some of the United Kingdom’s tax treaties - of which the most important are those with Australia and New Zealand - have a “carve-out” for insurance business which gives domestic legislation relating to the taxation of insurance precedence over the “Business Profits” Article of the treaty. One effect of this is that (subject to the general restrictions mentioned above) the UK must give credit for the tax that is due under the domestic law. Other treaties that have a similar “carve-out” provision are those with Barbados, Fiji, Jamaica, Malta and Papua New Guinea.

Australia and New Zealand

In both Australia and New Zealand the profits from any general insurance placed with non- resident insurers or reinsurers are liable to tax on the basis (broadly) that the non-resident has earned a profit equal to 10% of the premiums. Tax charged on this basis qualifies for credit, but in Australia (and also in New Zealand since 1996) a non-resident insurer (but in Australia, not a reinsurer) has the option to be taxed instead on the actual profit derived from the business in question.

It seems probable that in many cases exercise of this option would reduce or eliminate the local tax charge. When any significant amount of credit relief is claimed for Australian or New Zealand tax on general business profits an enquiry should be made as to whether the option has been exercised. If it has not relief should be restricted to the amount of tax that would have been payable had the option been exercised. The point here is that the UK gives credit for foreign tax that is payable under the law of the other state (and that is payable in accordance with the treaty). If the taxpayer has the option to be taxed on the actual profits basis, and this would lead to a lower tax bill, only the lesser amount of tax is payable under the law of the other state because that law provides the taxpayer with the means of escaping from having to pay the excess. This rule has been confirmed in statute in relation to claims for credit made on or after 21 March 2000 in ICTA88/S795A (inserted by FA00/SCH30/PARA6).