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HMRC internal manual

International Manual

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UK residents with foreign income or gains: dividends: Dividends received by UK companies on or after 31 March 2001 - eligible unrelieved foreign tax - overview

The legislation relating to EUFT was repealed for distributions paid on or after 1 July 2009.

If the mixer cap (see INTM164220 onwards) has been applied, or foreign tax credit has been restricted under ICTA88/S797, then some foreign tax paid cannot be relieved against the dividend coming into the UK.

Some or all of the unrelieved foreign tax may be eligible for relief elsewhere. This is eligible unrelieved foreign tax (EUFT) and is dealt with by ICTA88/S806A and B.

S806A lists the dividends that can give rise to EUFT. These are any dividends EXCEPT:

  • any dividend which is trading income for the purposes of S393 ICTA 1988;
  • any dividend within S393(8)(a) & (b) that would be treated as trading income for the purposes of S393(1);
  • a S801A dividend (certain avoidance schemes);
  • a S803(1)(b) dividend (underlying tax reflecting interest on loans);
  • any dividend where relief is given by deduction under S811 instead of by credit.

Because of the way this is worded, any of these appearing further down a chain of companies will preclude the final dividend from being able to give rise to EUFT.

As dividends can only give rise to EUFT if they are taxed, dividends treated as interest and taxed under the loan relationships regime by virtue of FA96/S91B cannot give rise to EUFT.

S806B sets out how to calculate EUFT. There are two cases:

Case A: the difference between the amount of credit actually allowed and the amount that would be allowed if the rate of corporation tax payable was the ‘upper percentage’, which is 45%, for the purposes of S797; and

Case B: the difference between the amount of credit to be allowed because the mixer cap has been applied and the greater amount that would have been allowed if M in the formula had been the upper percentage.

Both Cases may arise on the same dividend. EUFT up to 45% may arise in respect of underlying tax, and then an additional amount may arise in respect of withholding tax deducted at the point that the dividend is paid into the UK.

For examples of Case A EUFT see INTM164250 and Case B EUFT see INTM164260.

Case A and Case B are differentiated only for the purpose of calculating the amount of EUFT. Once the amount has been quantified these are no longer relevant. For the purposes of allowing EUFT the important distinction is between underlying tax and withholding tax (see INTM164270).