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HMRC internal manual

International Manual

UK residents with foreign income or gains: double taxation relief: Exceptions to the source rule

Certain exceptions to the source rule (INTM161110) are provided for by statute and under particular agreements as follows:

  1. Isle of Man and Channel Islands. TIOPA10/S9(7) provides that the limitation of unilateral relief to foreign tax on income arising in the foreign country is not to apply where the country concerned is the Isle of Man or any of the Channel Islands. Company dividends and debenture interest are excluded from the scope of the agreements with the Isle of Man (DT9950+), Guernsey (DT8600+) and Jersey (DT10750+) by the credit Articles of those agreements. Unilateral relief is therefore available for Manx and Channel Islands tax on debenture interest and on company dividends wherever such income arises, except where the recipient is a portfolio shareholder (see INTM164010 paragraph (f). See also DT8606, DT9955 and DT10755. The rule that a claimant must also be a resident in the UK is also subject to modification (see INTM161200 paragraph (a)).
  2. Foreign Dividends. TIOPA10/S63 provides that where a UK company controls, or is a subsidiary of a company which controls, not less than 10% of the voting power in a foreign company, any UK or `third’ country tax paid on its profits by that foreign company can be taken into account as underlying tax (INTM164010 paragraph (d) for the purpose of allowing credit to the UK company in respect of dividends received from the foreign company (see INTM167370).
  3. Profits, Income and Capital Gains. Many agreements lay down specific rules for determining the source of income, profits or capital gains for tax credit relief purposes. The provision which is most often used in the credit Article says that, for the purposes of giving tax credit relief, profits, income or capital gains earned by a resident of one country which may be taxed in the other country in accordance with the provisions of the agreement are to be deemed to arise from sources in that other country. The interest, royalties and technical fees Articles in some agreements also provide that interest etc. is deemed to arise in the country where the payer is that state, a political subdivision, a local authority or a resident of that state.

These provisions override the domestic laws of each country for determining the source of profits, income and capital gains. Where income etc. has a UK source under UK law but has been taxed in the other country you should refer to the relevant double taxation agreement to see what provisions there are for determining the country of the source of the profits, income or gains in question.

Where tax credit relief is allowable under a double taxation agreement, where a UK resident carries on a trade, profession or vocation etc. chargeable to either Income or Corporation Tax and earns profits partly in the UK and partly in a foreign country, that part of the profits earned in the foreign country is regarded, for credit purposes, as having a foreign source.

Where tax credit relief is only allowable under the unilateral provisions, TIOPA10/S9(3) states that profits from, or remuneration for, personal or professional services performed in the foreign country are deemed to be income arising in that country. This is more narrowly drawn than the corresponding provision in an agreement (see above). In Yates v GCA International Ltd (64 TC37), where services under a contract were performed partly in Venezuela and partly in the UK, it was held that unilateral credit relief was only allowable for the Venezuelan tax attributable to the fees paid for the services that were performed in Venezuela, limited to the UK tax charged on the profits to which those fees gave rise, after deduction of expenses.