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HMRC internal manual

International Manual

UK residents with foreign income or gains: double taxation relief: Minimum foreign tax

Credit may only be allowed, whether under an agreement or unilaterally, for foreign tax that is

  • a proper charge under the foreign country’s law and;
  • where there is an agreement, for foreign tax which is payable in accordance with that agreement.

The claimant must take all necessary steps to have his foreign liability reduced to that minimum, for example by claiming all the allowances and reliefs (for example, foreign personal allowances) due to him under the provisions of an agreement.

Example 1

No credit is due for Netherlands tax on Netherlands royalties arising to a resident of the UK not engaged in trade or business in the Netherlands, since the taxpayer can claim exemption from Netherlands tax under Article 12 of the Netherlands agreement and any tax paid on the royalties would not be paid in accordance with the agreement.

Example 2

If a UK resident has withholding tax of 25 per cent deducted from Netherlands dividends, allow credit for 15 per cent (or nil if the recipient is a company controlling directly or indirectly at least 25 per cent of the voting power in the Netherlands company paying the dividend - see, however, INTM164030), since the taxpayer can claim a reduction to this rate under Article 10 of the agreement.

Where the taxpayer does not make a claim to relief from foreign tax under an agreement, allow credit only for what would have been the reduced amount of foreign tax payable if a successful claim had been made. No relief (credit or deduction) should be allowed for the balance of the foreign tax.

Refer to Specialist Personal Tax, PT International (in the case of individuals) and to CSTD Business, Assets & International (in all other cases) any case where

i) the taxpayer makes a claim to relief from foreign tax to the foreign tax authority but the claim is refused for procedural reasons; for example, failure to observe time limits, or the foreign tax authority does not respond to or act upon the claim, or

ii) the foreign country imposes tax on income that does not arise in that country.

The foreign tax that is allowable for credit is the tax that represents the final liability, not tax paid on account or any interest or penalties that may be paid in the other country in respect of the foreign tax. Under TIOPA10/S79, credit relief previously allowed in the UK may be revised if the foreign tax in question is subsequently reduced or increased.

The foreign tax may be reduced, for example, by relief for losses incurred in another period. If a foreign branch makes a loss, a question about the application of the loss in the other country may lead to an adjustment of the credit relief allowed in the UK. See INTM162570 for the time limits that apply for revising credit relief where the amount of foreign tax paid is subsequently reduced or increased although please note that S79 still has a six-year time limit as compared to the now normal four years; and INTM162580 for a taxpayer’s obligation to notify HMRC if an adjustment to an amount of foreign tax paid results in credit relief previously given becoming excessive.

Where credit is available under an agreement, the minimum foreign tax creditable may depend on the dates from which the agreement has effect. If, for example, an agreement has effect for UK income tax from 2009-10 and for foreign tax from 1 January 2010, any exemption from the foreign tax under the agreement will only apply to income arising on or after 1 January 2010.

Where income arises before that date but is assessable to UK income tax for 2009-10, give credit for the full foreign tax chargeable on the income if it is a tax that is covered by the agreement. Information about the reliefs and deductions due from foreign tax is given in:

  1. the text of the double taxation agreement concerned;
  2. the notes on countries.

Both of these can be found at DT2100 (HMRC website) onwards. Texts of the most recent double taxation agreements may be found on the HMRC internet site. More detailed information about foreign countries’ domestic taxation laws may be requested from the International Research and Library team, part of HMRC Library Services.

That information may assist in deciding whether the foreign tax charged is the minimum chargeable under that country’s domestic law. FA2000 put the obligation to minimise tax into statute at ICTA88/S795A, now TIOPA10/S33 (see INTM164140). This was purely a clarification and should not be interpreted as implying there was no previous obligation to minimise tax.