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HMRC internal manual

General Insurance Manual

From
HM Revenue & Customs
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Double taxation relief: underlying tax on dividends referable to an overseas branch: accounting periods beginning before 1 April 2000: restriction of credit under section 802 ICTA 1988

 

The total credit allowable under ICTA88/S802 for any financial year in respect of dividends arising in a particular overseas territory is restricted. Credit is not given on an amount of dividends received from companies resident in the particular territory which is greater than:

  • ‘the relevant fraction’ of the insurance company’s total investment income in that year (including franked investment income and group income) referable to the company’s insurance business chargeable to tax under Case I of Schedule D, less
  • the amount of the dividends referable to that business which are received in the financial year from companies resident in the particular overseas territory and which would, apart from section 802, already be eligible for relief in respect of underlying tax.

Not all dividends received from companies resident in a territory are necessarily referable to the insurance business conducted in that territory. The normal test to be applied is whether, in the event of a sale of the shares in respect of which the dividend is paid, the proceeds of sale would be treated as a trading receipt. For example, if a UK insurance company held shares, directly or indirectly, in a subsidiary company operating in an overseas territory, the dividends derived from those shares would not be regarded as referable to the insurance business for the purposes of Section 802(1). Consequently they would be excluded from both the numerator and the denominator of the fraction. Such dividends would qualify for relief exclusively under ICTA88/S801 as extended by extra-statutory concession ESCC1 (b) (see GIM12150).

The relevant fraction

The ‘relevant fraction’ of the company’s total investment income in relation to any overseas territory is the fraction A/B where

  • A is the ‘local premium income’ (the premium income for the financial year under contracts entered into at or through a branch or agency in the particular territory and made with persons not resident in the United Kingdom)
  • B is the company’s ‘total premium income’ for the financial year.

See the example in GIM12140.

Identification of restricted dividends

Where the dividends are restricted to the limiting figure, the company may select the dividends to be taken as making up the limiting total, out of the dividends which are referable to its business charged to tax under Case I of Schedule D and are received from companies resident in the particular territory.

Reports

A report should be made where, for any year, the total tax credit relief given to a company under section 802 is found to be substantially greater than the credit which would have been allowed if the dividends qualifying for underlying tax relief under section 802 had been limited to dividends which are referable to the insurance business and are received from companies resident in the territory in which the branch or agency was situated.