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HMRC internal manual

International Manual

UK residents with foreign income or gains: dividends: Underlying tax - imputation systems

Some dividend Articles in double taxation agreements with countries which have an imputation system of company taxation, for example Australia, provide that those countries will pay the UK resident shareholder part of the `tax credit’ to which the shareholder would have been entitled had he been a resident of that other country. Steps 4 to 6 of TIOPA10/S58 and Steps 3 and 4 of S61 provide that where a UK resident shareholder receives such a `tax credit’ in respect of a foreign dividend, the amount of that credit is to be deducted from any underlying tax for which he would have been entitled to tax credit relief either under a double taxation agreement or unilaterally.

This will be calculated by CTIAA Underlying Tax Group. Officers should submit details of the dividend to them under INTM164440.


A UK company controls 10 per cent of the voting power in an Australian company. It is entitled to payment of half of the Australian tax credit (Article 10(4)(b) of the UK/Australia double taxation agreement) and it is entitled to relief for the underlying tax (Article 24(2)(b) of the agreement). It receives a dividend of 1,000 paid out of profits carrying underlying tax at 40%. The Australian tax credit paid is 18/64ths of the dividend (where the Australian corporate income tax rate is 36 per cent). Australian income tax at 5 per cent is payable on the aggregated dividend and tax credit (Article 10(2)(a) of the Agreement).

The company receives

Dividend 1,000
Tax credit 281
Less Australian income tax at 5% 64
Cash received 1,217

Under Article 24(2)(b) the company would be entitled to relief for underlying tax of 667 (1,000 @ 40%). TIOPA10/S57(2) restricts the relief for underlying tax by deducting the Australian tax credit paid from it leaving 386. The UK company is chargeable on 1,667 being the aggregate of the dividend (1,000), the tax credit (281) and the underlying tax as restricted (386) and tax credit relief will be due of 450 (underlying tax 386 and direct tax 64).

The countries where this applies include Australia and New Zealand.