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HMRC internal manual

International Manual

UK residents with foreign income or gains: double taxation relief: The source rule

Credit is normally allowable only for the tax paid in the country in which the income arises. Where, under UK law, income has its source in the UK, no credit is due for foreign tax charged on that income (see, however, INTM161120 and INTM161130 for exceptions from, and concessions relating to, this rule).

The authority for this rule is in the Elimination of double taxation Article (the “Credit” Article) of a double taxation agreement. These Articles are worded in the same way in most agreements; as, for example, Article 22(1) of the agreement with the Netherlands (SI980/1961) which states `subject to the provisions of the law of the UK regarding the allowance as a credit against UK tax of tax payable in a territory outside the UK … Netherlands tax payable under the laws of the Netherlands and in accordance with this convention … on profits, income or chargeable gains from sources within the Netherlands … shall be allowed as a credit against … UK tax’.

For unilateral relief purposes, the authority is in TIOPA10/S9 (1) which states:

`Credit for tax—

(a) paid under the law of the territory,

(b) calculated by reference to income arising, or any chargeable gain accruing, in the territory, and

(c) corresponding to UK tax,

is to be allowed against any income tax or corporation tax calculated by reference to that income or gain’.

TIOPA10/S9 (2) gives similar authority for Capital Gains Tax.

The source of most types of income is normally clear, for example, rents from property abroad or dividends paid by a foreign company have their sources in the country in which the property is situated or where the foreign company is resident. However, in some cases, the taxation laws of a foreign country may differ from the UK’s laws in determining where the source of income is. INTM161120 paragraph (c) sets out provisions in double taxation agreements for determining the source of income and INTM161130 gives details of extra-statutory concession (ESCs) which the UK gives in connection with certain sources of income.