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HMRC internal manual

International Manual

UK residents with foreign income or gains: double taxation relief: ‘Tax spared’ credit

Many countries, particularly developing countries, give under their domestic legislation special reliefs and exemptions from tax which would otherwise have been charged, in order to promote development in those countries. TIOPA10/S4(2)(a) & S20 enables UK residents, who have income arising in those countries which has been relieved in this way, to obtain credit (but not a deduction - see INTM161050) for the tax which would otherwise have been paid (`tax spared’).

For example, a UK company has a branch in Country A which makes a profit of 10,000. Country A tax of 2,500 is wholly relieved under specific Country A law and the agreement provides that this `tax spared’ is available for credit. The UK corporation tax liability is 10,000 at 30 per cent = 3,000 less credit for the `tax spared’ 2,500, giving a net liability of 500. If no credit was given for the `tax spared’ the UK liability would be 3,000, leaving the company with 7,000 instead of 9,500.

Where a claim for relief for tax spared is received the following should be borne in mind.

  1. Unilateral relief is not given for any `tax spared’ in countries with which there is no agreement or where an agreement does not provide for credit for `tax spared’.
  2. The foreign country’s domestic legislation giving the relief must be specified in the credit Article in the agreement. This Article usually also provides that credit may be allowed for any `tax spared’ under substantially similar foreign law enacted after the agreement has been signed. Officers should establish under which foreign legislation the tax has been relieved so that he can check that the agreement allows for it or that it is available for credit because it has been relieved under substantially similar legislation listed in the country section of this guidance. Where a claim is made that foreign tax has been relieved under substantially similar legislation which is not listed, refer the case to Business International, with, if this can be supplied by the claimant, a copy of the relevant legislation.
  3. Credit for `tax spared’ is limited to the amount of tax which would otherwise have been paid under the terms of the agreement. Thus, if a UK resident receives a royalty which, under the foreign country’s specific legislation, is exempted from its domestic withholding tax of 25 per cent, but the royalties Article in the agreement with that country limits the rate of tax to 10 per cent, the credit for the `tax spared’ is 10 per cent, and not 25 per cent of the royalty.
  4. There is normally a limit to the number of years for which credit for `tax spared’ may be allowed and this is set out in the Article.
  5. If the agreement requires the other country to certify the purpose of the tax sparing relief, ensure that the certificate is provided and that it is in accordance with the agreement and with the requirements of Section 20.
  6. It may be appropriate to check that tax has been spared on the correct figure of income. If expenses relating to the overseas activity are understated, or if relevant closing stocks or work in progress are overvalued, the consequence would be a claim for an excessive amount of relief.

There are special provisions dealing with `tax spared’ on certain foreign loan interest. For further details see INTM168080 onwards.